EMIR Refit: ESMA Strikes Back

On 7^th October, EMIR Refit (European Markets Infrastructure Regulation) technical standards were published in the Official Journal of the European Union. This marked a significant milestone in the European Securities and Markets Authority’s (ESMA) quest for greater transparency and standardization of the European derivatives market. The announced changes are substantial: additional reporting fields; a new reporting schema; stricter reconciliation requirements, 6-month initial full load and the adoption of Unique Product Identifiers (UPIs). All this, coupled with a go-live date of 29^th April 2024 (EU), makes for a busy year ahead. EMIR Refit is not merely another episode in ESMA’s ongoing saga for reporting quality. With material change on the horizon, this time ESMA strikes back.

ESMA is not content with the quality of data submitted, which is impacting efforts to monitor derivatives risk and exposure. EMIR Refit is a direct response to ESMA’s concerns and builds on ESMA’s 2022 Data Quality Report¹ by addressing 3 key findings regarding the quality of existing EMIR reporting, summarized below:

Under the existing EMIR requirements, buy-side firms have historically struggled to achieve the levels of data quality demanded by regulators. In Alpha’s recent 2022 Regulatory Reporting Survey², we found that across 14 buy-side asset managers with combined AuM of >£11.5trn, reporting error rates were higher for EMIR Reporting than for comparable regimes. In addition, EMIR Reporting had, on average, the second largest remediation spend and dedicated resource commitment of participants’ primary regulatory reporting regimes over the past year.

EMIR Refit increases the challenge exponentially. Reports with errors will potentially fail new validation rules and reconciliation requirements, and will need to be corrected prior to the reporting deadline.

EMIR Refit not only directly impacts reporting counterparties through the additional reporting requirements summarized below, but stresses the need for buy-side firms to exercise effective oversight of delegated reporting counterparties.

EMIR Refit also introduces requirements for Trade Repositories (TRs) to provide reporting counterparties, in ISO 20022 XML format, information on daily reports and associated trade states, details of reporting rejections, reconciliation details, details of reports with missing or stale valuations, details of reports with missing or stale margins, and details of reports with abnormal notional values.

Buy-side firms will need to ensure they have a scalable operating model that can consume, analyze and address XML reports from Trade Repositories in a timely and transparent manner. Building clear lines of communication with the applicable delegated counterparties and/or trade repositories is critical in facilitating the remediation of reporting errors.

With EU EMIR taking force on 29^th April 2024, it is expected that UK EMIR will go-live three to four months later. For firms with dual-reporting obligations, this creates a significant challenge as firms will need ensure they can accommodate two reporting schemas, with different reporting fields, for this interim period. With the UK EMIR technical standards yet to be formally approved, and the potential for deviation in the specification of reporting fields between the jurisdictions, firms will need to be wary of divergence in technical standards between EU and UK regimes. This, coupled with the requirement to undertake an ‘initial full load’ within 6 months, means firms will likely be in the process of porting current open positions into the new reporting schema on their EU EMIR flow, whilst in parallel, stepping up preparations for UK EMIR go-live. Against the backdrop of increased regulatory scrutiny and regulators becoming ‘data-driven’ institutions, the message has never been clearer to ensure good data quality from the outset.

To ensure an effective implementation of EMIR Refit, firms should think about the following:

The complexity of the reporting requirements, expansion of data provision from trade repositories to reporting counterparties, and the added challenge of divergence between EU and UK EMIR altogether create a daunting 500 days ahead. EMIR Refit may have just landed, but the hard work is only taking off.

If you want further details on how EMIR Refit impacts your organization and how best to address it, get in touch with Alpha’s team of reporting specialists. We support our clients globally with the most complex regulatory reporting advisory, implementation and remediation projects.

¹ https://www.esma.europa.eu/sites/default/files/library/esma74-47-607_2021_emir_and_sftr_dq_report.pdf

² Alpha FMC Regulatory Reporting Survey, 2022