Since August 2012, the European Market Infrastructure Regulation (EMIR) has been a cornerstone of regulation for derivative transactions and their corresponding collateralization, in order to reduce systemic risk in the financial system. The reform included measures such as the obligation of central clearing for OTC derivatives and submission of transaction registries, among others. In the last years, the uniform EMIR framework has been revised under the so called initiative „Regulatory Fitness and Performance Programme“, with EMIR REFIT coming into force on 17th June 2019. Following a phase of consultation a Final Report together with the „Technical Standards on Trade Repositories under EMIR REFIT“ has been published by the ESMA (European Securities and Markets Authority) on 17th December 2020. The ESMA publication now defines precise standards for reporting, registration of Trade Repositories, data quality, reconciliation and validation, elements that will have broad impacts on submission procedures.
Harmonization of reporting frameworks
EMIR REFIT proposals are mainly based on the global guidance developed by the so called „Harmonisation Group“ that is constituted by 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. This takes the form of “Common Data Elements” (CDE) for derivative transactions, in order to provide consistent data across regulators. 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 among the highest standards for data quality worldwide.
It is common sense that this initiative comes not only with harmonised inter-curricular 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. Some main innovations include:
Reporting obligation on behalf of Non-Financial Counterparties - financial counterparties are solely responsible, and legally liable, for reporting on behalf of both counterparties, the details of OTC derivative contracts concluded with a non-financial counterparty as well as for ensuring the correctness of the details reported.
End-to-End reporting in ISO 20022 xml.- xml. schemas developed in line with ISO 20022 methodology are to be used not only for the communication between the TRs and authorities, but also for reporting from TR counterparties, similarly to requirements under the SFTR framework.
Product identification & critical data elements - Unique Product Identifier (UPI) will be introduced as the regulator aims to achieve consistent identification and classification of transactions for aggregation and monitoring purposes. Additionally, the Unique Trade Identifier (UTI) has been classified as a critical data element with revised structure and waterfall approach.
Data format adjustments and increased granularity requirements – increase of reporting data fields (129 vs. 203) and a new table for margin reporting, adjustments in value attributes and data formats for at least 67 existing data field.
Reporting of post trade events - expanded options for existing “action type” and new data field „event type“ will be introduced to further specify the respective Lifecycle Events, requiring sufficient data sources with a high degree of granularity and quality or even new interfaces.
Harmonized data quality requirements across TRs - new technical standards relate to enhanced and harmonized quality requirements for data validation and reconciliation processes that take place at the TRs once derivatives are reported to them. 174 data fields will fall under reconciliation obligation with 26 data fields allowing tolerances in deviations.
Process-related requirements - Setup and document processes that allow for alignment, reconciliation and corresponding monitoring of non-matching transactions, including an Audit log that allows comprehending reporting gaps and specific steps that counterparties initiated to resolve them.
1. UTI Generation: The updated UTI waterfall model considers bilateral agreements as fallbacks. Therefore, existing agreements needs to be amended or rearranged. The timely exchange of UTIs needs to be ensured by both counterparties. It is expected that ESMA will provide guidelines and specify applicable time windows.
2. Reconciliation: According to the reconciliation requirements participant need to implement and agree on processes and procedures 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 counterparties.
3. Reporting on behalf of NFC: New agreements with NFCs concerning the mandatory reporting are necessary. 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 the regulatory requirements.
4. Reporting Logic: The combination of Action and Event Types will lead to a complex reporting logic. Amendments in the existing validation rules in line with the CDE Guidelines, mapping of new data fields and the extension with the new margin table would require a detailed analysis of the source systems since a one 1-1-mapping is not possible in the most cases.
From our experiences, we are convinced that EMIR REFIT revisions will not only lead to implementation efforts such as adjustments of affected interfaces and corresponding specification and conception phases (professional and technical) but is also giving market participants the opportunity to revise and to optimize the efficiency of their transaction reporting regime as a whole. We at LPA have already conducted intense project-work to implement new transaction reporting requirements and messaging formats, as well as harmonising existing interfaces and incorporating new ones. Our consultants mastered success factors within the implementation of transaction reporting such as EMIR, MMSR, MiFIR, SFTR, and T2/T2S consolidation.
Moreover, in addition LPA standard solutions, our AI capabilities can significantly further streamline the implementation efforts. In particular, we see the following use cases generating value in the EMIR REFIT implementation:
AI powered Testing & Test Data Generation: Traditionally redacted/anonymized production data is used to test the system and interface changes. This is usually a sample of several weeks, which is not necessarily a fully representative sample. In turn, this could lead to unexpected issues that need to be fixed post-production. By leveraging Generative Adversarial Neural Nets, we can generate simulated representative test data in much larger quantities and with different extreme scenarios preventing failed matches in reconciliation.
Predictive Reconciliation Inspection: We see a use case for machine learning and predictive analytics in pre- and post-reporting related reconciliation. Correction of failed matches causes manual work and is costly. As such, predictive models can score the likelihood of a failed match and flag it for inspection. Additionally, inspection of a failed match can be enhanced by identifying the most likely reasons for an error and streamline the correction process.