OTC Derivative Regulatory Reporting

Following the selection of Strate as South Africa’s first Trade Repository in November 2024, the Financial Sector Conduct Authority (FSCA) and the Prudential Authority (PA) are moving rapidly to implement the country’s G20 commitment to reform its over R45 trillion over-the-counter (OTC) derivatives market. (1, 2) The trade repository will aim to boost market transparency, particularly regarding systemic risk—a significant weakness exposed during the Global Financial Crisis of 2008/2009.

By as early as 1 March 2027, OTC derivative providers (ODPs) will be mandated to report 169 different data elements for each of their derivative transactions, across various asset types and instruments. The final data requirements are still being finalised. Importantly, Strate’s trade repository implementation is largely aligned with the principles introduced under Europe’s 2014 European Market Infrastructure Regulation (EMIR) and its 2024 Regulatory Fitness and Performance Programme (EMIR Refit).

Data Challenges

The Financial Markets Act (FMA) Conduct Standard 3 of 2018 outlines the reporting obligations for OTC derivative transactions in South Africa and currently prescribes 100 required data fields. These were determined to be unsuitable for effective reporting and subsequently the trade repository requirements have been expanded by Strate to include 169 data fields aligned to Europe’s EMIR Refit. Given the number of fields required and the breadth of asset classes and instruments covered under the reporting requirements, the necessary data for most financial institutions is likely to be fragmented across various market systems, processes, and functions.

Data availability presents a further challenge for ODPs, as some required fields are not typically captured by financial institutions. One such field is the mandatory Legal Entity Identifier (LEI)—essential for uniquely identifying legal entities in local and international financial transactions—which is often not captured and stored by South African ODPs. Monocle has observed that up to 80% of LEI data is missing or outdated at large South African banks. In this case, firms will need to begin engaging with clients to source and capture this information, and other necessary information.

To avoid developing a tactical reporting solution burdened by manual adjustments, weak controls, and inadequate oversight—ultimately a drain on time and effort of specialised stakeholders—ODPs should push towards designing and implementing a structured, automated reporting solution. Additionally, solution programmes should endeavor to establish a preventive control and governance framework that considers verification checks, data lineage, data ownership processes as well as escalation and change management processes.

Critically, the South African reporting requirements are set to be distributed as machine executable code through ISDA’s Digital Regulatory Reporting solution leveraging the FINOS Common Domain Model. This will allow reporting entities to deploy a standardised, gold-source reporting solution that caters for OTC derivative data modelling, rule set and trade events/lifecycle interpretation as well as ISO 20022 mapping and reporting. This initiative will be invaluable to firms that decide to develop an in-house reporting solution.

Operational Complexity

While these reporting requirements are novel for South African stakeholders, Europe’s 2014 and 2024 implementation of EMIR and EMIR Refit offers insights into the complexity and challenges related to OTC derivative reporting.

Key alignments with EMIR REFIT (5)

The South African implementation maintains alignment with EMIR REFIT in the following key areas:

• Message structures: Adoption of the same ISO 20022 message formats

• Lifecycle reporting: Implementation of the same action types (New, Modify, Correct, etc.) and event types (Trade, Clearing, Exercise, etc.)

• Field definitions: Consistent field definitions and formats

• Validation approach: Similar technical and business validation methodology

• Reconciliation process: Adoption of the same reconciliation principles and tolerances

Given the South African implementation is heavily aligned with European standards, it would be prudent to assess the successes and challenges faced in the past. Several challenges were raised post the go-live deadline for both EMIR and EMIR Refit including:

• ISO 20022 XML errors: Nearly a quarter of rejected messages in the first few weeks of EU EMIR Refit were due to technical errors related to schema errors and misalignment to the required messaging standard. (4) Firms must consider their existing ISO 20022 XML reporting capabilities and consider the need for an XML converter tool.

• Unique identifiers: Both the Unique Transaction Identifier (UTI) and Legal Entity Identifier are critical data elements as part of the trade repository reporting. UTI generation, in adherence with ISO 23897:2020, is essential for transaction matching but introduces complexity regarding which counterparty is responsible for generation and then distribution. Strate will provide an optional UTI generation service.

• Lifecycle event complexity: Firms are required to report the lifecycle of each transaction, from creation to a change in its state, or its ongoing status (valuation or margin). Europe’s EMIR Refit was initially hampered by a higher volume of rejected lifecycle status issues. The logic and determination of these events will be addressed by the ISDA DRR solution.

With the go-live deadline fast approaching and reporting requirements becoming clearer, firms must begin planning their implementation efforts. This is particularly important considering the challenges around sourcing data, establishing a structured reporting solution and tackling identified areas of complexity.

How Monocle Can Assist

As “markets people”, Monocle has been extensively involved in risk, trading, operations, compliance, and pre- and post-trade functions, while bringing a technology-agnostic approach to designing and delivering client-aligned solutions in Global Markets.

To assist clients in meeting the reporting requirements of Conduct Standard 3 and the business requirements specified by Strate, Monocle has developed both an Initial Assessment and Gap Questionnaire, as well as a comprehensive Data Assessment for all 169 fields.

These tools, alongside the extensive expertise of Monocle’s markets and trading consultants, allow our reporting obligated clients to quickly understand their OTC derivative data and reporting ecosystem and then formulate an implementation programme. With experience across strategic advisory, business and systems analysis, programme management, data management, data mondelling and engineering, and hands-on solution delivery, Monocle can assist end-to-end across the entire OTC derivative reporting implementation programmes.