We have been seeing a lot of discussion and interest concerning a blog I penned in March last year under the title of “Beware the Ides of March - A Drama of FX Swaps Reporting”.
This March, we had a Consultation from ESMA, nattily entitled, “MiFID II/MiFIR review report on the transparency regime for non-equity instruments and the trading obligation for derivatives”, which may equally be causing this issue to be re-visited.
The consultation identifies problems with data quality and prompts the following comment from ESMA -
“Nevertheless, the data reported revealed that the trading volume in FX derivatives appears to be rather high, which puts into question the current status of FX derivatives as not having a liquid market. ESMA will closely monitor developments in the trading of FX derivatives and address the data quality issues identified. Should ESMA come during that process to the conclusion that the liquidity status of FX derivatives should be amended, ESMA would propose an amendment of RTS 2 in that respect.”………… “Such amendment should in ESMA’s view also consider FX derivatives, which are currently considered as illiquid mainly because of continuing data quality issues preventing ESMA to conduct the necessary analysis.”
RTS 2 is the transparency requirements for trading venues and investment firms and would prove onerous for the industry if FX was brought into scope; if that is even practical. For FX Swaps, the current debate still seems to revolve around the naming convention for an FX Swap as posited in my Ides blog referred to above.
Should “FX Swaps” in the old terminology be booked as multi-leg transactions? If so, what should the naming convention be to stay within current regulation? For instance, Asset Managers tend to favour booking two linked trades with separate ISINs and using the “FX Package” label. For Corporates it seems the booking preference is for FX Swap as in the EMIR regulations as these deals are not usually concluded on an MTF. However, many banks use “FX Strats” and have wording, to overcome the issue with corporate trades, in their T&C’s along the lines of –
- “FX swaps are defined as “physically settled OTC derivative contracts that solely involve an exchange of two different currencies on a specific date at a fixed rate that is agreed on the trade date of the contract covering the exchange, and a reverse exchange of the two currencies at a later date and at a fixed rate that is also agreed on the trade date of the contract covering the exchange” and in line with applicable guidance should be reported as a FX Swap;
- An FX strategy, in this context would represent a simultaneous and contingent execution of two FX transactions, which if they both comprised FX forwards would be reported as linked FX forward transactions;……………….
Bank’s general practice in relation to reporting of FX transactions under European regulation has changed to reflect the above delineation and guidance. The effect of this is that most transactions colloquially termed “FX Swaps” will now be reported as a FX Strategy (FX Strat), unless the Bank executes an FX Swap (as defined above, a single transaction) with a customer; and where a FX strategy comprises one or more FX spot transactions, only transactions which constitute FX forwards shall be reported. Bank’s assumption will be that where customers have reporting obligations of their own, they will follow similar practices in relation to their reporting of such transactions.”
Accordingly we have the FX industry using the full gamut of how to name the instrument(s). This is obviously causing reporting problems and also confirmation problems.
So following on from the Ides of March theme in my first blog, Ovid contends that the month of May is named for the maiores (Latin for "elders), and perhaps what we need is for the “elders” of the FX market to reach consensus on what to call an FX Swap! It is certainly on the agenda for one of my next committee meetings and trade associations are, no doubt, trying to form an agreed position. In the words of Robert Hughes “It's not a task achieved by groups or by movements. It's done by individuals, each person mediating in some way between a sense of history and an experience of the world.”
While on the subject of Regulatory Reporting it has been announced that the CME is closing NEX Regulatory Reporting and the Abide Transaction Reporting services. Under EMIR’s rules, CME clients will need to port all positions, not just open ones, to a new TR/ARM.