CESR published guidance to report transactions on OTC derivative instruments
08 October 2010
CESR decided that only transactions on securities derivatives whose underlying instrument is traded on a regulated market should be exchanged. This excludes indices or baskets of securities, apart from derivatives where all the underlying securities are issued by the same entity.
In line with the above, CESR decided to exchange transactions on the following OTC derivatives:
1. Options
2. Warrants
3. Futures
4. Contract for Difference and Total Return Swap
5. Spreadbets
6. Swaps (except CfDs, TRS and CDS)
7. Credit Default Swap
8. Complex derivatives
CESR decided to go for a more comprehensive approach where derivatives that would not fall within plain-vanilla general categories would still be reported under a common “complex derivatives” label. The boundaries between “plain-vanilla” and “complex” derivatives will be further defined. This guidance sets out common standards for consistent collection of data from investment firms. It defines and explains, for each derivative instrument type, how the fields of transaction reports should be populated to represent in a harmonised manner the execution of a transaction on such instrument.
The following examples are provided to help clarify the types of OTC derivatives that will become reportable by investment firms. It should be noted that the ultimate underlying instrument of the OTC derivative is a key element that determines whether a derivative is reportable or not. Essentially, if the value of the OTC derivative is dependent upon the performance of a single security or the risk of a single issuer, any transaction in that instrument by an investment firm is reportable.
Transactions on the following instruments are reportable:
- a credit default swap on single issuer;
- a swap between the performance of an index at a given date and the performance of a single stock (although the derivatives refers to a multi-component index, it also refers to a single-name;
- a swap between the performance of two different stock;
- debt swap; and
- a dividend swa.
Transactions on the following instruments are not reportable:
- a future or option on an index;
- a future or option on a basket (with at least two securities;
- a swap between two indices;
- a future, forward or option on a commodity, interest rate or foreign exchange rate;
- a swap between two interest rates;
- a volatility swa; and
- a CDS with no reference entity admitted to trading on a regulated market (e.g. CDS on a loan).
Some structured products that are not admitted to trading on a EU regulated market (and thus not reportable, like Euro Medium Term Notes) are designed in practice through combining different derivatives transactions, some of them OTC. It is expected that the underlying OTC contracts will be reported, for so far these contracts meet the requirements for reporting OTC derivative transactions. A transaction on a derivative that is solely admitted to trading on a MTF or platform and not on a regulated market is not subject to reporting as an OTC derivative.
© CESR - Committee of European Securities Regulators