The European Post Trade Forum said the Commission should set a high priority on addressing the lack of harmonization across multiple post-trade reporting requirements in the region as this hampers investment.
Last year the European Commission set up the European Post Trade Forum (EPTF), an informal expert group from across the market, to look at post-trade issues including collateral markets and derivatives with the aim of supporting the Capital Markets Union. The CMU wants to harmonize capital markets across all the EU member states so the region is more attractive to private capital investment.
The EPTF issued a report this week which listed 12 barriers to harmonization, put five further barriers on a watch list, and prioritized actions that need to be taken to dismantle them.
Werner Frey, managing director of post trade at the Association for Financial Markets in Europe (AFME) said in a statement: “We warmly welcome the publication of the new European Post Trade Forum Report - replacing the Giovannini Barriers - which identifies barriers which have not yet been dismantled, as well as new barriers and bottlenecks which need addressing in order to promote more efficient and resilient market infrastructures in the EU.”
The Giovannini Group of financial market experts was formed in 1996 to advise the European Commission. The group published reports in 2001 and 2003 which identified 15 Giovannini Barriers preventing efficient EU cross-border clearing and settlement. The EPTF said: “Yet, the post-trade landscape in Europe is still characterized by diversities and fragmentation that cause inefficiency and risks.”
The report identified the Giovannini Barriers which are still in place, as well as new barriers and bottlenecks that need to be dismantled for the CMU.
AFME was part of the new forum and said that, in the view of the membership, the following barriers should be given the highest priority for resolution - inefficient withholding tax collection procedures; legal inconsistencies and uncertainties; fragmented corporate actions and general meeting processes; inconsistent application of asset segregation rules; lack of harmonization in registration and investor identification rules and processes; and the complexity of the post-trade reporting structure.
The EPTF agreed that the multiple post-trade reporting requirements increase the cost of reporting and the complexity of data analysis. The forum set a high priority on the European Commission developing a harmonized and simplified reporting package.
The report said the two main issues leading to the high level of complexity for reporting are the lack of a harmonized structure in the relevant legislation/regulation and rules; and the mechanism used for reporting on a daily basis. The EPTF listed some of the regulations that affect reporting - MiFIR, EMIR, SFTR and REMIT and local rules that include, but are not limited to, the ECB’s MMSR and Bank of England’s SMMDC.
The disparate reporting regimes lead to issues such as EMIR, which covers central clearing, requiring the reporting of up to 85 individual data elements, with 23 also reportable under MiFID II. In another example, EMIR requires both sides of a trade to report to an authorised trade repository while MiFID II requires reporting via an Approved Reporting Mechanism (ARM).
“Entities that have multiple reporting obligations may have to build multiple reporting channels,” said the report. “As an example, there is no reuse of data between the MiFID and EMIR intermediary channels or reporting frameworks.”
The complex reporting requirements raise the cost of investing in European markets compared to other jurisdictions. In addition, the absence of harmonized data formats and the lack of standardization of data fields makes it harder to analyse the data without prior ‘cleansing’ and/or normalisation. “Typically, but not exclusively, this will negatively impact the regulatory authorities in carrying out their role in an effective and efficient manner,” said the report.
EPTA also noted that the original Giovannini Barriers focussed on cash securities as derivatives, securities finance activities and collateral management were less developed.
“This has changed,” said the report. “The size and complexity of derivative markets, securities finance activities and collateral management can easily be compared with cash securities markets and CCPs have become critical market infrastructures. In addition, new products, and unfortunately their corollaries, new barriers, have also appeared.”
One of those new products, and barriers, is exchange-traded funds where there is a high degree of fragmentation, in particular in the post-trade space, in Europe. For example, there is a legal issue related to the settlement of Irish ETFs in Germany which leads to the same fund carrying different identification codes depending on the market where it is traded or settled.