/Is Crypto Post-Trade Reporting on the Horizon?

Is Crypto Post-Trade Reporting on the Horizon?

Financial reporting requirements around trading instruments are crucial for compliance. However, when it comes to cryptocurrencies, this becomes complex.

Post-trade reporting requires a timebound publication of all trade-related data to regulators. The methods and technicality vary with asset classes. For Europe, these reporting requirements were defined under the EMIR and MiFIR regimes.

However, cryptocurrencies are an oddball to this system. These instruments came into existence a little more than a decade ago but have caught mainstream attention in recent years. Despite the global popularity of cryptocurrencies, regulations around them are still murky.

The lack of a proper definition of cryptocurrencies and its clarification have kept the requirement of their post-trade reporting out of the regulatory jurisdiction. However, the same does not apply to crypto derivatives, the instruments which are now listed on several mainstream trading venues.

Ron Finberg

Ron Finberg, Director of Global Regulatory Reporting Solutions at IHS Markit

“The main post-trade regulatory reporting requirements are for crypto derivatives that fall under existing derivative reporting regulation such as EMIR in the EU/UK,  CFTC 
CFTC

The 1974 Commodity Exchange Act (CEA) in the United States created the Commodity Futures Trading Commission (CFTC). The Commission protects and regulates market activities against manipulation, fraud, and abuse trade practices and promotes fairness in futures contracts. The CEA also included the Sad-Johnson Agreement, which defined the authority and responsibilities for the monitoring of financial contracts between the Commodity Futures Trading Commission and the Securities and Exchange Commission. These are today the largest regulators and authorities in the United States. The Commission works to guarantee that trading on the U.S. futures exchanges are fair and honest and maintain integrity in the marketplace. There are 11 U.S. Futures Exchanges. The Commission is outside of the political realm and is not controlled by any party. To ensure this at no time can more than three members represent the same political party.The CFTC has recently given the go-ahead to a startup exchange that wants to attract individual traders to the risky world of futures. The Small Exchange, headed by a former executive of T.D. Ameritrade Holding Corp., won approval from the Commodity Futures Trading Commission on in 2020 to become the newest U.S. futures exchange. The current exchanges in the U.S. under the regulatory authority of the CFTC include the following: Chicago Board Options Exchange (CBOE) CME Group International Monetary Market (IMM) Chicago Board of Trade (CBOT) Chicago Mercantile Exchange (CME / GLOBEX) New York Mercantile Exchange (NYMEX) and (COMEX) Kansas City Board of Trade (KCBT) NEX Group plc (NXG.L) Intercontinental Exchange (ICE) International Petroleum Exchange (IPE) 2001 New York Board of Trade (NYBOT) 2005 Winnipeg Commodity Exchange (WCE) 2007 TSX Group’s Natural Gas Exchange Partnership 2008 European Climate Exchange 2010 Chicago Climate Exchange (CCE) 2010 NYSE 2013 London International Financial Futures and Options Exchange (LIFFE) Minneapolis Grain Exchange (MGEX) Nadex (formerly HedgeStreet) OneChicago (Single-stock futures (SSF’s) and Futures on ETFs) Nasdaq Futures Exchange (NFX)

The 1974 Commodity Exchange Act (CEA) in the United States created the Commodity Futures Trading Commission (CFTC). The Commission protects and regulates market activities against manipulation, fraud, and abuse trade practices and promotes fairness in futures contracts. The CEA also included the Sad-Johnson Agreement, which defined the authority and responsibilities for the monitoring of financial contracts between the Commodity Futures Trading Commission and the Securities and Exchange Commission. These are today the largest regulators and authorities in the United States. The Commission works to guarantee that trading on the U.S. futures exchanges are fair and honest and maintain integrity in the marketplace. There are 11 U.S. Futures Exchanges. The Commission is outside of the political realm and is not controlled by any party. To ensure this at no time can more than three members represent the same political party.The CFTC has recently given the go-ahead to a startup exchange that wants to attract individual traders to the risky world of futures. The Small Exchange, headed by a former executive of T.D. Ameritrade Holding Corp., won approval from the Commodity Futures Trading Commission on in 2020 to become the newest U.S. futures exchange. The current exchanges in the U.S. under the regulatory authority of the CFTC include the following: Chicago Board Options Exchange (CBOE) CME Group International Monetary Market (IMM) Chicago Board of Trade (CBOT) Chicago Mercantile Exchange (CME / GLOBEX) New York Mercantile Exchange (NYMEX) and (COMEX) Kansas City Board of Trade (KCBT) NEX Group plc (NXG.L) Intercontinental Exchange (ICE) International Petroleum Exchange (IPE) 2001 New York Board of Trade (NYBOT) 2005 Winnipeg Commodity Exchange (WCE) 2007 TSX Group’s Natural Gas Exchange Partnership 2008 European Climate Exchange 2010 Chicago Climate Exchange (CCE) 2010 NYSE 2013 London International Financial Futures and Options Exchange (LIFFE) Minneapolis Grain Exchange (MGEX) Nadex (formerly HedgeStreet) OneChicago (Single-stock futures (SSF’s) and Futures on ETFs) Nasdaq Futures Exchange (NFX)
Read this Term
Dodd-Frank in the US and MAS and ASIC OTC Derivative Reporting rules on Singapore and Australia,” Ron Finberg, the Director of Global Regulatory Reporting Solutions at IHS Markit, explained to Finance Magnates.

In Europe, the European Securities and Markets Authority ( ESMA 
ESMA

European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of the EU financial system by ensuring the integrity, transparency, efficiency, and orderly functioning of securities markets, as well as enhancing investor protection. ESMA fosters supervisory convergence among securities regulators and financial sectors through its work with other EU supervisory authorities. ESMA is independent; there is full accountability towards the European Parliament, where it appears before the Economic and Monetary Affairs Committee, at their request for formal hearings. What Functions Does ESMA Perform?The purpose of assessing risks to investors, markets, and financial stability is to spot emerging trends, threats, and vulnerabilities, and where possible opportunities in a timely fashion so that they can be responded to. ESMA uses its unique position to identify market developments that threaten financial stability, investor protection, or the orderly functioning of financial markets. ESMA’s risk assessments build on and complement risk assessments made by others. The purpose of compiling a single rulebook for European financial markets is to enhance the EU Single Market by creating a level playing field for investors and issuers across the EU. ESMA’s four activities are linked. Insights gained from risk assessment feed into the work on the single rulebook, supervisory convergence, and direct supervision, and vice versa.

European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of the EU financial system by ensuring the integrity, transparency, efficiency, and orderly functioning of securities markets, as well as enhancing investor protection. ESMA fosters supervisory convergence among securities regulators and financial sectors through its work with other EU supervisory authorities. ESMA is independent; there is full accountability towards the European Parliament, where it appears before the Economic and Monetary Affairs Committee, at their request for formal hearings. What Functions Does ESMA Perform?The purpose of assessing risks to investors, markets, and financial stability is to spot emerging trends, threats, and vulnerabilities, and where possible opportunities in a timely fashion so that they can be responded to. ESMA uses its unique position to identify market developments that threaten financial stability, investor protection, or the orderly functioning of financial markets. ESMA’s risk assessments build on and complement risk assessments made by others. The purpose of compiling a single rulebook for European financial markets is to enhance the EU Single Market by creating a level playing field for investors and issuers across the EU. ESMA’s four activities are linked. Insights gained from risk assessment feed into the work on the single rulebook, supervisory convergence, and direct supervision, and vice versa.
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) is yet to come up with a clear post-trade reporting regime for cryptocurrencies. However, a guideline issued by the pan-European agency in January 2019 still remains the only available reporting guidance.

The regulator then stated: “Our survey of NCAs highlighted that some crypto-assets may qualify as MiFID financial instruments, in which case the full set of EU financial rules would apply. However, because the existing rules were not designed with these instruments in mind, NCAs face challenges in interpreting the existing requirements, and certain requirements are not adapted to the specific characteristics of crypto-assets.”

The guidance does not through a clear picture of the crypto post-trade reporting regime, but it still is the basis of cryptocurrency post-trade reporting to date. However, the scope of it is only limited to crypto derivatives and not the underlying crypto assets.

For non-EEA and non-UK listed crypto derivative products, the post-trade reporting should be done under EMIR. The non-listed cryptocurrency derivatives, like crypto contracts for differences (CFDs), also need to be reported under the same regime.

Though there is a reporting requirement for UK and EEA-listed cryptocurrency derivatives, these products do not exist yet. Exchange-listed crypto derivatives are currently available on only two United States-based exchanges, Cboe and CME.

quinn-perrott-jpeg

Quinn Perrott, Co-CEO of TRAction Fintech

“Due to the fact the EMIR Reporting Rules were not designed with these instruments in mind, there isn’t a category that perfectly fits a cryptocurrency, and, therefore, some interpretation is required in order to report these instruments,” Quinn Perrott, the Co-CEO and Founder of TRAction, explained an earlier.

“At this stage, the wider derivative industry and Trade Repositories suggest reporting under the commodity asset class as a cryptocurrency does not have an ISO standard currency code, which is required for it to be reported as a currency.”

Crypto Reporting Requirements Are Coming?

The growing size of the cryptocurrency market and the increasing demand on both the retail and institutional fronts have also spurred the demand for bringing cryptocurrency post-trade reporting, not only with derivatives but also with the trading of assets.

Additionally, a survey conducted by IHS Markit (now a part of the S&P Global) revealed that 51 percent of the participants are expecting cryptocurrency post-trade reporting regulations in the coming three years.

The participants of the survey include banks, asset managers and brokers along with various financial and non-financial institutions. Many of them see these regulations to be implemented in the United States, European Union, the United Kingdom, Switzerland and even Singapore.

Moreover, the expectation of the financial industry companies for crypto post-trade reporting was fueled by the listing of the digital asset investment instruments on mainstream platforms. The first Bitcoin ETF was launched by Purpose Investments in Canada in February 2021 and Proshares followed it with the first US launch in October.

“Cryptocurrencies remain largely unregulated around the world, but if their importance continues to grow at the pace they are sure to attract regulatory scrutiny,” the IHS Markit report stated.

Further, the recent collapse of the stablecoin project, Terra, is pushing the regulators to expedite their efforts to bring crypto regulations. The regulators in the United States and the United Kingdom are among the ones who are evaluating the market situation after the crash of the project.

“At the moment the SEC and CFTC are assessing the underlying cryptocurrencies and whether they fall under the designation as a security or derivative and would be under the scope for existing reporting regulations in the US,” Finberg added.

“Of specific interest to many is whether stablecoins will be designated as derivatives. If yes, as an OTC product it would trigger any transactions in them to fall under CFTC reporting, which will be a big challenge for firms to comply with.”

But How?

Despite the willingness of the regulators, implementing crypto regulatory regimes are not easy. The decentralized nature of the assets makes it hard to enforce controls. Also, the debate around properly classifying crypto assets remains.

“There is plenty of existing reporting regulation that regulators can lean on to use for cryptos, and there is no need to ‘reinvent the wheel’ for cryptos,” Finberg said. “But, what is needed are clear examples from regulators on how to report crypto transactions within the existing framework. For example, clear guidance if they fall under the commodity or FX asset class. If the latter, how should currency codes be entered since cryptocurrencies don’t have an approved ISO 4217 currency code.”

The introduction of crypto regulations now looks imminent. The only question that remains is how the regulators would implement the regulation in an industry that is decentralized. Furthermore, the requirement of post-trade reporting on crypto assets (not derivatives) would also address the issue of wash trading on exchanges, making the industry more transparent.

Financial reporting requirements around trading instruments are crucial for compliance. However, when it comes to cryptocurrencies, this becomes complex.

Post-trade reporting requires a timebound publication of all trade-related data to regulators. The methods and technicality vary with asset classes. For Europe, these reporting requirements were defined under the EMIR and MiFIR regimes.

However, cryptocurrencies are an oddball to this system. These instruments came into existence a little more than a decade ago but have caught mainstream attention in recent years. Despite the global popularity of cryptocurrencies, regulations around them are still murky.

The lack of a proper definition of cryptocurrencies and its clarification have kept the requirement of their post-trade reporting out of the regulatory jurisdiction. However, the same does not apply to crypto derivatives, the instruments which are now listed on several mainstream trading venues.

Ron Finberg

Ron Finberg, Director of Global Regulatory Reporting Solutions at IHS Markit

“The main post-trade regulatory reporting requirements are for crypto derivatives that fall under existing derivative reporting regulation such as EMIR in the EU/UK,  CFTC 
CFTC

The 1974 Commodity Exchange Act (CEA) in the United States created the Commodity Futures Trading Commission (CFTC). The Commission protects and regulates market activities against manipulation, fraud, and abuse trade practices and promotes fairness in futures contracts. The CEA also included the Sad-Johnson Agreement, which defined the authority and responsibilities for the monitoring of financial contracts between the Commodity Futures Trading Commission and the Securities and Exchange Commission. These are today the largest regulators and authorities in the United States. The Commission works to guarantee that trading on the U.S. futures exchanges are fair and honest and maintain integrity in the marketplace. There are 11 U.S. Futures Exchanges. The Commission is outside of the political realm and is not controlled by any party. To ensure this at no time can more than three members represent the same political party.The CFTC has recently given the go-ahead to a startup exchange that wants to attract individual traders to the risky world of futures. The Small Exchange, headed by a former executive of T.D. Ameritrade Holding Corp., won approval from the Commodity Futures Trading Commission on in 2020 to become the newest U.S. futures exchange. The current exchanges in the U.S. under the regulatory authority of the CFTC include the following: Chicago Board Options Exchange (CBOE) CME Group International Monetary Market (IMM) Chicago Board of Trade (CBOT) Chicago Mercantile Exchange (CME / GLOBEX) New York Mercantile Exchange (NYMEX) and (COMEX) Kansas City Board of Trade (KCBT) NEX Group plc (NXG.L) Intercontinental Exchange (ICE) International Petroleum Exchange (IPE) 2001 New York Board of Trade (NYBOT) 2005 Winnipeg Commodity Exchange (WCE) 2007 TSX Group’s Natural Gas Exchange Partnership 2008 European Climate Exchange 2010 Chicago Climate Exchange (CCE) 2010 NYSE 2013 London International Financial Futures and Options Exchange (LIFFE) Minneapolis Grain Exchange (MGEX) Nadex (formerly HedgeStreet) OneChicago (Single-stock futures (SSF’s) and Futures on ETFs) Nasdaq Futures Exchange (NFX)

The 1974 Commodity Exchange Act (CEA) in the United States created the Commodity Futures Trading Commission (CFTC). The Commission protects and regulates market activities against manipulation, fraud, and abuse trade practices and promotes fairness in futures contracts. The CEA also included the Sad-Johnson Agreement, which defined the authority and responsibilities for the monitoring of financial contracts between the Commodity Futures Trading Commission and the Securities and Exchange Commission. These are today the largest regulators and authorities in the United States. The Commission works to guarantee that trading on the U.S. futures exchanges are fair and honest and maintain integrity in the marketplace. There are 11 U.S. Futures Exchanges. The Commission is outside of the political realm and is not controlled by any party. To ensure this at no time can more than three members represent the same political party.The CFTC has recently given the go-ahead to a startup exchange that wants to attract individual traders to the risky world of futures. The Small Exchange, headed by a former executive of T.D. Ameritrade Holding Corp., won approval from the Commodity Futures Trading Commission on in 2020 to become the newest U.S. futures exchange. The current exchanges in the U.S. under the regulatory authority of the CFTC include the following: Chicago Board Options Exchange (CBOE) CME Group International Monetary Market (IMM) Chicago Board of Trade (CBOT) Chicago Mercantile Exchange (CME / GLOBEX) New York Mercantile Exchange (NYMEX) and (COMEX) Kansas City Board of Trade (KCBT) NEX Group plc (NXG.L) Intercontinental Exchange (ICE) International Petroleum Exchange (IPE) 2001 New York Board of Trade (NYBOT) 2005 Winnipeg Commodity Exchange (WCE) 2007 TSX Group’s Natural Gas Exchange Partnership 2008 European Climate Exchange 2010 Chicago Climate Exchange (CCE) 2010 NYSE 2013 London International Financial Futures and Options Exchange (LIFFE) Minneapolis Grain Exchange (MGEX) Nadex (formerly HedgeStreet) OneChicago (Single-stock futures (SSF’s) and Futures on ETFs) Nasdaq Futures Exchange (NFX)
Read this Term
Dodd-Frank in the US and MAS and ASIC OTC Derivative Reporting rules on Singapore and Australia,” Ron Finberg, the Director of Global Regulatory Reporting Solutions at IHS Markit, explained to Finance Magnates.

In Europe, the European Securities and Markets Authority ( ESMA 
ESMA

European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of the EU financial system by ensuring the integrity, transparency, efficiency, and orderly functioning of securities markets, as well as enhancing investor protection. ESMA fosters supervisory convergence among securities regulators and financial sectors through its work with other EU supervisory authorities. ESMA is independent; there is full accountability towards the European Parliament, where it appears before the Economic and Monetary Affairs Committee, at their request for formal hearings. What Functions Does ESMA Perform?The purpose of assessing risks to investors, markets, and financial stability is to spot emerging trends, threats, and vulnerabilities, and where possible opportunities in a timely fashion so that they can be responded to. ESMA uses its unique position to identify market developments that threaten financial stability, investor protection, or the orderly functioning of financial markets. ESMA’s risk assessments build on and complement risk assessments made by others. The purpose of compiling a single rulebook for European financial markets is to enhance the EU Single Market by creating a level playing field for investors and issuers across the EU. ESMA’s four activities are linked. Insights gained from risk assessment feed into the work on the single rulebook, supervisory convergence, and direct supervision, and vice versa.

European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of the EU financial system by ensuring the integrity, transparency, efficiency, and orderly functioning of securities markets, as well as enhancing investor protection. ESMA fosters supervisory convergence among securities regulators and financial sectors through its work with other EU supervisory authorities. ESMA is independent; there is full accountability towards the European Parliament, where it appears before the Economic and Monetary Affairs Committee, at their request for formal hearings. What Functions Does ESMA Perform?The purpose of assessing risks to investors, markets, and financial stability is to spot emerging trends, threats, and vulnerabilities, and where possible opportunities in a timely fashion so that they can be responded to. ESMA uses its unique position to identify market developments that threaten financial stability, investor protection, or the orderly functioning of financial markets. ESMA’s risk assessments build on and complement risk assessments made by others. The purpose of compiling a single rulebook for European financial markets is to enhance the EU Single Market by creating a level playing field for investors and issuers across the EU. ESMA’s four activities are linked. Insights gained from risk assessment feed into the work on the single rulebook, supervisory convergence, and direct supervision, and vice versa.
Read this Term
) is yet to come up with a clear post-trade reporting regime for cryptocurrencies. However, a guideline issued by the pan-European agency in January 2019 still remains the only available reporting guidance.

The regulator then stated: “Our survey of NCAs highlighted that some crypto-assets may qualify as MiFID financial instruments, in which case the full set of EU financial rules would apply. However, because the existing rules were not designed with these instruments in mind, NCAs face challenges in interpreting the existing requirements, and certain requirements are not adapted to the specific characteristics of crypto-assets.”

The guidance does not through a clear picture of the crypto post-trade reporting regime, but it still is the basis of cryptocurrency post-trade reporting to date. However, the scope of it is only limited to crypto derivatives and not the underlying crypto assets.

For non-EEA and non-UK listed crypto derivative products, the post-trade reporting should be done under EMIR. The non-listed cryptocurrency derivatives, like crypto contracts for differences (CFDs), also need to be reported under the same regime.

Though there is a reporting requirement for UK and EEA-listed cryptocurrency derivatives, these products do not exist yet. Exchange-listed crypto derivatives are currently available on only two United States-based exchanges, Cboe and CME.

quinn-perrott-jpeg

Quinn Perrott, Co-CEO of TRAction Fintech

“Due to the fact the EMIR Reporting Rules were not designed with these instruments in mind, there isn’t a category that perfectly fits a cryptocurrency, and, therefore, some interpretation is required in order to report these instruments,” Quinn Perrott, the Co-CEO and Founder of TRAction, explained an earlier.

“At this stage, the wider derivative industry and Trade Repositories suggest reporting under the commodity asset class as a cryptocurrency does not have an ISO standard currency code, which is required for it to be reported as a currency.”

Crypto Reporting Requirements Are Coming?

The growing size of the cryptocurrency market and the increasing demand on both the retail and institutional fronts have also spurred the demand for bringing cryptocurrency post-trade reporting, not only with derivatives but also with the trading of assets.

Additionally, a survey conducted by IHS Markit (now a part of the S&P Global) revealed that 51 percent of the participants are expecting cryptocurrency post-trade reporting regulations in the coming three years.

The participants of the survey include banks, asset managers and brokers along with various financial and non-financial institutions. Many of them see these regulations to be implemented in the United States, European Union, the United Kingdom, Switzerland and even Singapore.

Moreover, the expectation of the financial industry companies for crypto post-trade reporting was fueled by the listing of the digital asset investment instruments on mainstream platforms. The first Bitcoin ETF was launched by Purpose Investments in Canada in February 2021 and Proshares followed it with the first US launch in October.

“Cryptocurrencies remain largely unregulated around the world, but if their importance continues to grow at the pace they are sure to attract regulatory scrutiny,” the IHS Markit report stated.

Further, the recent collapse of the stablecoin project, Terra, is pushing the regulators to expedite their efforts to bring crypto regulations. The regulators in the United States and the United Kingdom are among the ones who are evaluating the market situation after the crash of the project.

“At the moment the SEC and CFTC are assessing the underlying cryptocurrencies and whether they fall under the designation as a security or derivative and would be under the scope for existing reporting regulations in the US,” Finberg added.

“Of specific interest to many is whether stablecoins will be designated as derivatives. If yes, as an OTC product it would trigger any transactions in them to fall under CFTC reporting, which will be a big challenge for firms to comply with.”

But How?

Despite the willingness of the regulators, implementing crypto regulatory regimes are not easy. The decentralized nature of the assets makes it hard to enforce controls. Also, the debate around properly classifying crypto assets remains.

“There is plenty of existing reporting regulation that regulators can lean on to use for cryptos, and there is no need to ‘reinvent the wheel’ for cryptos,” Finberg said. “But, what is needed are clear examples from regulators on how to report crypto transactions within the existing framework. For example, clear guidance if they fall under the commodity or FX asset class. If the latter, how should currency codes be entered since cryptocurrencies don’t have an approved ISO 4217 currency code.”

The introduction of crypto regulations now looks imminent. The only question that remains is how the regulators would implement the regulation in an industry that is decentralized. Furthermore, the requirement of post-trade reporting on crypto assets (not derivatives) would also address the issue of wash trading on exchanges, making the industry more transparent.

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