Consulting | Regulatory
Written by Christopher Garner
May 26, 2021
The initial EMIR framework has been in force since August 2012. Ever since European derivative markets and its active stakeholders are required to comply with the supervisory EMIR framework, this remains to be a cornerstone within the regulation of derivatives transactions and the corresponding collateralization mechanism. Less than a decade later the uniform EMIR framework has been revised under the so called initiative „Regulatory Fitness and Performance Programme“. Without taking into account any transitional timeline, „EMIR REFIT“ came into force on June 17th , 2019. Following a phase of consultation a Final Report together with the „Technical Standards on Trade Repositories under EMIR REFIT“ have been published by the ESMA (European Securities and Markets Authority) on December 17th, 2020.
In this post, our LPA experts are sharing insights on how ESMA´s final report and technical standards will expose affected market participants to necessary adjustments within their related reporting processes and what challenges we see as most significant for our client’s future EMIR transaction reporting regime.
HARMONISATION OF REPORTING FRAMEWORKS: CHANCE OR RISK?
ESMA´s final report on technical standards (RTS and ITS) under the EMIR REFIT regulation covers data reporting to trade repositories (TRs), data reconciliation & validation procedures, data access by the relevant authorities and registration of the TRs.
The focus, therefore, lays on further harmonization of the reporting requirements as well as enhancements in the counterparties’ and TRs’ procedures on ensuring data quality.
EMIR REFIT proposals are mainly based on the global guidance developed by the so called „Harmonisation Group“ that is constituted by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO). Mandated with the standardisation of derivatives reporting requirements the CPMI/IOSCO group expects the fostered alignment to be a major factor in supporting the reconciliation rates of bilateral reporting. Steven Maijoor, former ESMA board Chair, said that, as a result, the final report is to be seen as an important milestone towards ensuring full alignment of EU derivatives reporting with globally agreed recommendations and in establishing the highest standards for data quality worldwide,.
It is easy to understand that a globally harmonised approach to derivatives reporting might ensure that regulators have the information they need to support their supervisory and financial stability objectives. However, on the contrary it is common sense that this initiative comes not only with harmonised intercurricular reporting requirements, but also with significant data landscape & implementation related challenges for affected market participants. Stakeholders can surely benefit from aligned reporting rules and harmonised data sources but achieving this requires a full stack approach from business & technical analysis to strategic and tactical IT implementation.
KEY CHANGES TO THE EMIR REPORTING
ARE YOU EMIR REFIT READY?
Following the legal procedure, the draft technical standards have been submitted to the European Commission. The proposed timeline for implementation of the technical standards by affected counterparties and TRs in the Union is 18 months from the date of their publication in the Official Journal which is expected to be done until Q3 2021.
According to ESMA, the authority aims to provide the industry with the relevant guidance and documentation sufficiently ahead of the reporting start date to ensure a smooth transition to the reporting under the revised rules. Therefore, the requirement to report after EMIR REFIT RTS/ITS is likely to be valid per end of 2022. In the meantime, ESMA will commence working on the guidelines on reporting under EMIR REFIT as well as on the technical documentation, including xml. schemas and validation rules.
The following aspects represent significant challenges under the EMIR REFIT framework:
1. UTI Generation
The updated UTI waterfall model considers bilateral agreements as fallbacks. Therefore, existing agreements need to be amended or rearranged. In addition, the timely exchange of UTIs need to be ensured by both counterparties. It is expected that ESMA will provide guidelines and specify applicable time windows.
According to the reconciliation requirements participants are urged to not only implement, but also to agree on processes and procedures which are suitable in order to resolve reconciliation breaks in a timely manner. An additional reconciliation log that includes all relevant activities to resolve these breaks requires aligned processes with each of the participant’s counterparts.
3. Reporting on behalf of NFC
It will become necessary to implement new agreements (both, professionally and technically) with NFCs regarding the mandatory reporting. In case an NFC+ is reconsidered as an NFC- or vice versa, the contractual agreements and processual steps need to be clarified and implemented to allow the FC to comply with regulatory requirements.
4. Reporting Logic
Affected stakeholders will be required to consider new parameters, some of which with similarities (ie. Action- and Event Type). This might lead to increased interpretation efforts and a complex reporting logic. In addition, 1:1-mapping is expected to be a massive challenge due to various reasons. Amendments within existing validation rules in line with the CDE Guidelines, mapping of new data fields as well as the extension regarding a new margin table will require a detailed analysis of source systems.
Market participants that will be affected by EMIR REFIT requirements are encouraged to kick-off with a deep dive analysis into those data sources and processes that they have built their current transaction reporting on. Topics to be covered within the deep dive are availability, quality, and granularity within the data landscape, but also technical issues in terms of connectivity, interface setup & adjustments, messaging routing, to name a few.
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