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Swords Drawn Over ISDA/FOA Delegated Reporting Agreement

During an AIMA briefing on EMIR reporting held on 16 January 2013, the recently published ISDA/FOA EMIR Reporting Delegation Agreement was panned by buy-side firms, their advisors and representatives of the CME.  The main criticisms focussed on limitations of liability, the amount of discretion retained by the reporting party, its ability to delegate to a third party and the lack of commitment either to the quality of, or even the fact of, reporting.  On a brighter note, The FCA confirmed that it was broadly fine with the agreement, although would have preferred to see firms which were delegating their reporting have the ability to check the accuracy of reported data.

It was generally acknowledged that the double-sided reporting requirements of EMIR creates particular operational difficulties, a situation made worse by a continuing lack of detail emanating from ESMA.  As a result, most firms rightly expect a significant degree of misreporting to occur, particularly in the period immediately after 12 February.  In light of the genuine difficulties that will affect the entire industry and the fluid nature of the situation, is it reasonable to expect a sell-side firm, at least where it provides a delegated reporting service free of charge, to bind itself to a process that may turn out to be flawed or to accept responsibility for a legal requirement which the EU has, rightly or wrongly, seen fit to place on the end-user?

During the briefing, the CME highlighted the fact that it undertakes delegated reporting for its clients free of charge.  Given its criticism of the ISDA/FOA agreement, it is instructive to look at the restrictions it places on liability in providing this service.  Whilst it appears as though the CME “Delegated Reporting Service Registration Form (for European Markets)” is not yet available, its mirror agreement facilitating EMIR reporting for US Markets states that “Any EU Reporting Client…acknowledges and agrees that…[it]…will remain responsible for its own compliance with the requirements of EMIR…[and]…agrees that it shall not hold CME liable by reason of any action performed pursuant to the Service”.  As such, the allocation of liability under the CME agreement is really not so different to that under the ISDA/FOA document under which, broadly, the reporting party accepts liability for its own negligence (or perhaps gross negligence depending on the result of legal negotiations).  Mark Twain said that there are two sides to every story, and then there’s the truth.  The ISDA/FOA agreement isn’t perfect, but neither is it unfair in the way that some would have you believe.  Its few vices are outweighed by its many virtues and it is a valuable contribution to assisting industry compliance.

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