Reporting and derivatives transaction settlement. Risco Software systems for the realisation of the requirements of EMIR.

Let us remember: Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (EMIR) introduces, among other things, the obligation to report derivatives transactions to repositories. The obligation to report transactions (Article 9, EMIR) concerns financial and non-financial contractors and CCP, i.e., in practice, any entity that concludes derivatives transactions (including corporate clients). It includes submitting, to a trade repository, information about derivatives contracts entered into by an entity and about any changes of such contracts or their termination. It became effective on February 12, 2014, for all instrument classes, for example, fx forward transactions, currency options, and swaps. The National Depository for Securities (Polish: Krajowy Depozyt Papierów Wartościowych, abbreviated to KDPW S.A.) has opened a trade repository, on November 2, 2012. The second phase of the regulation, which as regards banks, became effective in 2015, introduces the obligation to clear transactions with the use of the so-called “Central Counterparty” (“CCP”), i.e. to submit IRS, FRA, and OIS (interest rate swaps) transactions to be cleared in CCP, whereas the party of a transaction concluded by, for example, two banks, is CCP (in Poland: KDPW_CCP). The entities included in it are subject to the supervision by the Polish Financial Supervision Authority. The authority may impose penalties on them for improper performance of their obligations (on banks – up to PLN 10 mm, on their non-financial clients – up to PLN 1 mm). A review of the market shows that some entities subject to the regulation decide to delegate the reporting to banks-contractors. Big participants of the financial market report their transactions to the repository with the use of reporting tools they have prepared themselves, often consisting in manual data processing and manual reporting (introducing a file with data to the system made available by the National Depository for Securities). That generates operational risk (and we are talking about financial entities subject to current supervision by the Polish Financial Supervision Authority here) and high subsistence costs of the dedicated team. Other financial and non-financial institutions included in the regulation are also subject to the supervision by the Polish Financial Supervision Authority. Investment funds and insurance companies are, in part, the entities that have been delegating reporting to their ‘other party’, most often – banks. The bank manages the technical aspect of submitting the report while the client remains responsible (e.g. for timely and correct reporting). The reporting party reports its valuation, while the other party still bears the responsibility for the correct preparation and reporting of data. What happens when the valuation calculated and reported by the contractor differs from the valuation determined by the client? Such an entity is at the risk of sanctions because it ‘undersigns’ a number the entity has not calculated and which it may not know while neither party is appropriately secured against the consequences of such a mistake. In combination with the requirement, pertaining to financial entities, of reporting everyday a valuation made by an entity itself, the already high risk (of delays and incompatibilities) grows with a large number of transactions.

The Cesarz system, a proprietary product of the Risco Software Company, eliminates all those problems.

It is a complete system, which ensures correct and automatic reporting of derivatives transactions to the repository, and their clearing. It consists of two modules, implemented separately, adequately to the needs of organisations subject to the regulation. The modules are fully compliant with the requirements of KDPW S.A., KDPW_CCP S.A., and of the supervisory authorities of the European Union (ESMA), and Poland (the Polish Financial Supervision Authority). They ensure full control over the reporting process and central transaction clearing. They manage all types of derivatives and various data sources, and are compatible with clients’ internal systems. They ensure the minimisation of the costs of participation in KDPW_TR and KDPW_CCP, and fulfilment of the recommendations of the Polish Financial Supervision Authority. They have a client application for process management, provide a view of the history of transaction processing, and fulfil the audit requirements

The Cesarz_TR module: a system for reporting transactions, valuations, and securities to central trade repositories.
It simplifies the reporting process and is fully compliant with the requirements of two central repositories: KDPW_TR and DTCC (The Depository Trust & Clearing Corporation); it makes it possible to exchange messages between the systems of the reporting entity and the systems of the central trade repositories, in accordance with all the requirements of EMIR.

Wśród istotnych cech modułu Cesarz_TR znajdujemy m.in. automatyczne połączenie w trybie online do repozytorium za pomocą interfejsu A2A, pełne logowanie transakcji oraz obsługę raportowania transakcji za klienta i zmiany jego danych. Moduł zapewnia pełną obsługę raportowania wycen i zabezpieczeń. Automatycznie odbiera odpowiedzi z repozytorium (np. komunikaty o błędach) oraz przetwarza dane wejściowe na dane wynikowe. Ma to niebagatelny wpływ na oszczędność czasu i minimalizację ryzyka operacyjnego. Realizuje walidacje transakcji przychodzących, korektę transakcji i ponowne ich wysłanie oraz rekoncyliację transakcji. Zapewnia wysoki poziom bezpieczeństwa dzięki elastycznemu i skutecznemu modelowi uprawnień.
Some of the important features of the Cesarz_TR module are: automatic online connection with a repository by means of an A2A interface, full logging of outgoing and incoming transactions, the management of transaction reporting for the client, and change of client’s data. The module ensures full management of securities and valuation reporting. It automatically receives answers from a repository (e.g. error messages) and processes input data into output data, which enable significant savings of time and minimisation of operational risk. It realises validations of incoming transactions, the correction of transactions, their re-sending, and reconciliation. It ensures a high level of safety due to an elastic and efficient permission model.

The Cesarz_CCP module – a system for central transaction clearing in CCP clearing houses.
It mediates the process of the so-called derivatives transactions clearing to a Central Counterparty.It enables an exchange of information submitted to clearing between the KDPW_CCP system and client’s central systems and updates information about the current deposit requirements of the clearing house (all in real time). It is prepared for an integration with client’s internal systems, which enables the automation of processes, e.g. submitting transactions to a system of the management of position and risk, generating accounting records, and generating reports. It acts as the central point of the management of transactions after novation. It ensures the intuitive management of auctions and on-demand closing of positions, online control of security deposit statuses and limits – broken down to cash and securities, and lodging and withdrawing of securities in cash and in securities. It manages end-of-day processes, reconciliations, and reports, which enables maximal time savings.

It guarantees the minimisation of operational risk related to the process of OTC transaction clearing by, for example, controlling the influence of potential transactions on the level of securities before the conclusion of a transaction. It also supports both models of access to CCP: the direct one (e.g. Settling Participant of* KDPW_CCP) and the indirect one (e.g. as a clearing broker client, given access to LCH Clearnet).

The Rico Software Company has signed an agreement with the Markit Company for access to resources, documentation, and the client application of the MarkitServ platform, on the same conditions as banks, and agreements with KDPW and KDPW_CCP, which ensure access to testing systems.

The Cesarz system eliminates the errors of manual reporting and transaction clearing, mitigates operational risk, and ensures a significant reduction of costs. The company successfully implements that system in banks and other entities included in EMIR and also ensures strong subject matter support, i.e. a team that is fully trained in the requirements of the regulation.

Marcin Werner, Janusz Szymański