How Does the DPE Reporting Hierarchy Differ from the Previous SI Regime?

Concept

The transition from the Systematic Internaliser (SI) regime to the Designated Publishing Entity (DPE) model for post-trade transparency represents a fundamental redesign of reporting responsibility in European and UK markets. This evolution addresses operational frictions and complexities that arose from the previous framework. The core of the change is the decoupling of a firm’s market-making status from its obligation to report over-the-counter (OTC) trades. This shift is intended to create a more streamlined and logical allocation of reporting duties, moving away from a system that produced certain unintended consequences.

From Status-Based to Role-Based Reporting

The previous SI regime anchored the responsibility for trade reporting to a firm’s classification as a Systematic Internaliser for a specific financial instrument. An SI is an investment firm which, on an organised, frequent, systematic and substantial basis, deals on own account when executing client orders outside a regulated market, an MTF or an OTF. This created a significant operational burden for market participants, who had to determine, on a trade-by-trade basis, whether their counterparty was an SI for the specific instrument being traded. This instrument-by-instrument determination was a complex and often costly process, relying on privately maintained registers or voluntary disclosures from SIs themselves.

The DPE and DR regimes introduce a clearer, more streamlined approach to post-trade transparency by decoupling reporting obligations from a firm’s SI status.

The introduction of the Designated Publishing Entity (DPE) in the EU and the Designated Reporter (DR) in the UK changes this dynamic entirely. Instead of the reporting obligation being an inherent characteristic of a firm’s trading activity in a particular instrument, it becomes a designated role that a firm can voluntarily adopt. Any investment firm, regardless of its SI status, can register as a DPE or DR.

This transforms the reporting hierarchy from a complex, instrument-level analysis to a simpler, entity-level verification. Market participants now only need to check a public register maintained by the relevant regulator (ESMA in the EU, FCA in the UK) to determine if their counterparty is a DPE or DR.

Addressing Unintended Consequences of the SI Regime

A significant driver for this change was the observation that the SI regime was creating market distortions. Many sell-side firms were opting into the SI regime, even when they did not meet the quantitative thresholds, simply to provide their buy-side clients with the certainty that they would handle the trade reporting. This led to an inflation in the number of registered SIs, which in turn created a misleading picture of the amount of liquidity being provided by these entities. It also imposed unnecessary costs and compliance burdens on firms that were not true SIs but felt compelled to adopt the status for commercial reasons.

The DPE/DR framework is designed to eliminate this artificial incentive. By creating a separate, voluntary registration for reporting, it allows firms to offer trade reporting services to their clients without having to take on the additional regulatory obligations associated with being an SI, such as pre-trade transparency. This is expected to lead to a reduction in the number of firms registered as SIs, resulting in a more accurate representation of market structure.

Strategy

The strategic implications of the shift from the SI-based reporting hierarchy to the DPE/DR model are substantial, impacting operational workflows, counterparty relationships, and the overall market structure. For institutional investors, this change represents a move towards greater clarity and efficiency in post-trade processes. The previous regime’s complexities are replaced by a more predictable and streamlined system, allowing firms to re-evaluate their operational strategies and resource allocation.

Simplifying Counterparty Due Diligence

Under the old SI regime, the process of determining which counterparty was responsible for reporting an OTC trade was a significant operational challenge. A firm would need to verify its counterparty’s SI status for each specific instrument being traded. This often involved subscribing to third-party services that maintained registers of SI status or engaging in a continuous dialogue with counterparties to obtain this information. This created a fragmented and often inefficient due diligence process.

The DPE/DR model simplifies this process considerably. The responsibility for reporting is no longer tied to the instrument being traded but to the registered status of the entity itself. A firm simply needs to check the publicly available registers maintained by ESMA and the FCA to determine if its counterparty is a DPE or DR. This shift from a dynamic, instrument-level inquiry to a static, entity-level verification reduces operational friction and costs.

By simplifying the reporting hierarchy, the DPE/DR regime allows firms to focus on their core trading activities rather than on complex post-trade compliance issues.

This simplification has a cascading effect on a firm’s operational strategy. Resources that were previously dedicated to tracking SI statuses can now be reallocated to other areas. The risk of reporting errors due to incorrect SI determination is also significantly reduced, leading to improved data quality and lower instances of over or under-reporting.

Comparative Analysis of Reporting Regimes

The following table illustrates the key differences between the SI and DPE/DR reporting regimes:

Reshaping Market Structure

The decoupling of reporting from SI status is expected to have a significant impact on the overall market structure. As mentioned, the previous regime incentivized firms to become SIs for reporting purposes, leading to an inflated number of SIs and a distorted view of market liquidity. With the introduction of the DPE/DR model, this incentive is removed. Firms that are not genuinely systematic internalisers are likely to de-register as SIs and instead register as DPEs/DRs if they wish to continue offering reporting services to their clients.

This “right-sizing” of the SI population will provide regulators and market participants with a more accurate picture of where liquidity is concentrated. It will also level the playing field for firms that want to compete on the basis of their execution quality and other services, rather than on their ability to absorb the costs of being an SI.

• For the buy-side ▴ The new regime offers greater clarity and certainty. A buy-side firm can clearly identify which of its counterparties will handle trade reporting, simplifying its own compliance and operational processes.
• For the sell-side ▴ Sell-side firms have more flexibility. They can choose to register as a DPE/DR to offer reporting as a service without having to take on the full regulatory burden of being an SI. This allows for greater specialization and a more efficient allocation of resources.
• For regulators ▴ The DPE/DR model is expected to lead to higher quality and more consistent trade data. By simplifying the reporting process and reducing the instances of over and under-reporting, regulators will have a clearer view of market activity.

Execution

The execution of post-trade reporting under the DPE/DR regime requires a clear understanding of the new reporting hierarchy and the associated operational workflows. While the new model is designed for simplicity, firms must still have robust systems and processes in place to ensure compliance. This section provides a detailed breakdown of the execution process, from identifying the reporting counterparty to the practicalities of data submission.

The DPE/DR Reporting Hierarchy in Practice

The core principle of the new reporting hierarchy is a clear and unambiguous allocation of responsibility. When two counterparties enter into an OTC transaction, the question of who reports the trade is determined by their DPE/DR status. The general rule is that if one counterparty is a DPE/DR and the other is not, the DPE/DR is responsible for reporting the trade. If both or neither are DPEs/DRs, the reporting obligation falls to the seller.

This creates a clear waterfall of responsibility:

1. Is the seller a DPE/DR? If yes, the seller reports.
2. If the seller is not a DPE/DR, is the buyer a DPE/DR? If yes, the buyer reports.
3. If neither party is a DPE/DR? The seller reports.

This simple hierarchy eliminates the need for the complex, instrument-by-instrument analysis that was required under the SI regime. The key to executing this process effectively is having a reliable and up-to-date source for the DPE/DR status of counterparties. This is where the public registers maintained by ESMA and the FCA become critical operational tools.

Effective execution under the DPE/DR regime hinges on the systematic integration of public register data into pre-trade and post-trade workflows.

Operationalizing the Reporting Process

To operationalize the DPE/DR reporting process, firms need to integrate the new hierarchy into their trading and compliance systems. This involves several key steps:

• Counterparty Data Management ▴ Firms must ensure that their counterparty data management systems are capable of ingesting and maintaining DPE/DR status information from the ESMA and FCA registers. This information should be readily accessible to trading and operations teams.
• Pre-Trade Checks ▴ Where possible, the DPE/DR status of a counterparty should be identified pre-trade. This allows for a clear understanding of reporting responsibilities before the trade is executed.
• Post-Trade Reconciliation ▴ After a trade is executed, a final check of the counterparty’s DPE/DR status should be performed to confirm reporting responsibility. This is particularly important in cases where a counterparty’s status may have changed.
• Reporting to an APA ▴ The firm with the reporting obligation must submit the trade report to an Approved Publication Arrangement (APA). APAs are entities that are authorized to publish trade reports on behalf of investment firms. The choice of APA is a key operational decision, and firms should consider factors such as cost, reliability, and the range of services offered.

Key Data Fields for Post-Trade Transparency

The following table provides an overview of some of the key data fields that must be included in a post-trade transparency report. While not exhaustive, it highlights the level of detail required.

The accuracy and timeliness of this data are paramount. The DPE/DR regime, by simplifying the determination of who reports, is intended to improve the overall quality of the data that is submitted to APAs and ultimately made public. This, in turn, should lead to a more transparent and efficient market for all participants.

Reflection

A New Foundation for Market Intelligence

The evolution from the SI regime to the DPE/DR framework is more than a mere technical adjustment to reporting rules. It represents a philosophical shift towards a more logical and efficient market architecture. By simplifying the allocation of reporting responsibilities, regulators have removed a significant source of operational friction and market distortion. This change allows firms to move beyond the complexities of post-trade compliance and focus on their core competencies ▴ generating alpha, managing risk, and providing liquidity.

The true significance of this new regime lies in the quality of the data it is designed to produce. A clearer, more accurate picture of OTC trading activity provides a richer source of market intelligence for all participants. For the discerning investor, this enhanced transparency is not just a regulatory requirement; it is a strategic asset.

It provides a more solid foundation upon which to build trading strategies, assess market sentiment, and ultimately, make more informed investment decisions. The question for firms now is how they will leverage this improved data landscape to create a durable competitive advantage.