What issues do operations teams usually face when building EMIR reconciliations?

As a respected client often says to me, “Rob, you're going to need to wrap a cold towel around your head for this one”!

In short, EMIR requires funds to reconcile their portfolios regularly (depending on volumes) and ensure trade economics are reported correctly to a transaction repository. Most have delegated the reporting process to their prime brokers but unfortunately one cannot delegate responsibility for actually reconciling the data. If you’ve decided not to try on the basis of plausible deniability or perhaps because only Merrill Lynch has been fined so far (to the tune of £34.5 million in 2017), maybe it’s time to look again at what offerings are out there.

The main pain-points in the process are: 

1. Getting hold of EMIR data from DTCC’s GTR
2. The datasets are large and complex
3. Security identification is tricky, especially with OTC
4. Locating missing trades requires additional reports to be requested
5. Password reset every 6 months via Putty
6. Missing audit trail due to lack of cancel/amends
7. Frequency of reconciliation

What problem is your EMIR reconciliation as a service addressing and what opportunities does this provide for users?

Most funds we speak to realize this is a gap they need addressing and opt to reconcile at a position/market value level only. It’s a start but fails to ensure that the relevant economics are being verified which is the whole point of the regulation. It is, therefore, necessary to pull in the transactional reports to ensure the accuracy of (usually) you’re delegated reporter. 

We make this straightforward with our extensive capabilities in data normalisation and visualisation and a direct connection with DTCC for sourcing files. 

We also manage the generations of synthetic reversals to ensure that from an account perspective, the change in position is justified by the underlying activity. 

What issues are you seeing across your existing client base that uses this reconciliation?

For Equity Swaps, instead of reporting each individual trade for a given contract, the Prime Brokers are instead reporting the new net position at the new net price. To further complicate matters, they will often re-report the same trade multiple times within each day as the quantity changes. This results in a ton of noise inside the activity files that has to be filtered out.

There are also non-economic updates made which can create further noise in the rec unless you have the tools and know-how to exclude it.

We have also noticed a flaw in the DTCC reports; namely that they will not provide millisecond precision on the Reporting Timestamp despite having this level of detail in their repository. When the Prime Broker reports multiple quantities for the same trade within the same second, it is not possible to tell which quantity is the last state of that trade, without referring to the Trade State report.

Can you give an overview of the new offering from Watson Wheatley?

The service is a cloud-based solution to eliminate the pain of IT. We source your DTCC data on your behalf and run it through our templates and match engine. You provide your PMS extracts over SFTP. The source data gets imported into iRecs each day, the match engine triggers and the discrepancies are displayed. We provide both position and transaction-level reconciliations that are integrated so that data integrity issues (e.g. missing reversals) can be properly identified and accounted for. 

What else is Watson Wheatley working on?

We recently released iRecsWeb which has been well received by our clients and made working from home during the lockdown simpler.

We also released our Checklist tool for tracking recurring tasks and lifecycle events. There have also been major upgrades to our dashboards and reporting capabilities, re-architecting of the database to improve performance, and a host of other improvements to our suite of applications.

For more information, please follow this link.

 

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