The publication of the final guidelines for the EMIR Refit, which will place an increased focus on data quality, has prompted firms to begin to make their preparations for its implementation, scheduled for some time in 2024. To best prepare, firm must first ensure they have a full understanding of the regulations, address any challenges the changes may present, make the necessary adjustments, and ensure testing with their service providers to promote compliance.
Related: Breaking Down EMIR Refit Preparations with DTCC's Sam North
Whilst the EMIR reporting regime has been in place for several years, it is evident from the final guidelines that the changes within the EMIR Refit are likely to be significant and will place an even greater focus on data quality. From new messaging formats and the introduction of new data fields, to changes to reporting and reconciliation requirements, firms must begin their assessment and preparations now. While the FCA is currently consulting on its version of the EMIR Refit – likely to be implemented some months after the EU EMIR Refit -- it is expected to closely follow the guidelines approved by ESMA. Let’s explore some of the most significant changes that are anticipated in the EMIR Refit.
Leveraging the ISO standard
The EMIR Refit will require trade repositories to provide users with a new set of ISO 20022 XML reports, offering ‘Counterparties’, ‘Submitters’ and the ‘Entity Responsible for Reporting’ access to more data. This change will enable them to more readily identify data quality issues, which is important as the new rules place more emphasis on reporting ‘Significant Issues’ to the respective national competent authorities (NCAs). From an ISO 20022 perspective, firms will need to either build a solution to create, transmit and ingest XML reports or use a service provider to do this. It is recommended that this decision be made as early as possible to ensure a smooth transition to the new reporting format. At the same time, when the new rules are implemented, trade repositories will have an additional layer of verification to the Validation Rules. If a firm receives a rejection message due to an invalid schema, then it is incumbent on the Submitter to remediate and resubmit the report within the reporting deadlines (this is true for self-reporting and any submissions on behalf of other entities).
Incorporating new data fields
Firms will also be required to adopt new data fields. The introduction of new data elements and identifier fields under the EMIR Refit will introduce significant changes to the way firms report. For example, how and when the new Unique Product Identifier (UPI) field is used and how UPI usage differs across global reporting regimes will need to be considered across reporting systems. When linking trades, the new fields and data elements will need to be applied for both existing trades that are open when the EMIR Refit goes live as well as for new trades executed after the application of the EMIR Refit’s provisions.
These new linking fields include Prior Unique Transaction Identifier (where the UTI of the preceding transaction that has given rise to the reported transaction must be populated), Subsequent Position ID (the identifier of the new trades when a trade is terminated due to its inclusion in a position) and the Post Trade Risk Reduction (PTRR) ID (i.e., the identifier generated by the PTRR service provider to connect all derivatives entering a given PTRR event such as compression).
Providing greater reconciliation detail
ESMA is also expected to significantly increase the number of reconcilable fields under the EMIR Refit using a phased approach. The first phase, including 85 fields, will go live with the overall EMIR Refit implementation and the second phase, projected for two years after, will add another 66 fields and introduce a new Valuation Reconciliation Status to reflect the outcome of reconciling Mark to Market Valuations between counterparties.
Firms will need to upgrade all open trades into the latest technical standards during the six-month transition window provided by both ESMA and the FCA as well as align with reporting counterparties. This raises questions about sourcing the new data elements, as well as poses both technical – for example, submitting and receiving responses in XML – and operational considerations - for example, ensuring adequate resources to complete the requisite tasks. The Intra and Inter-Trade Repository Reconciliation may experience some data quality challenges during these six months.
The industry now has approximately 24 months until the implementation of the new technical standards under EMIR Refit. Firms must make the most of this time to ensure they are fully aware of the changes, have operational solutions in place and are testing to ensure readiness. We have seen that industry forums, trade associations and learning materials have significantly improved firms’ understanding of the regulation and the changes they will need to make. Firms must continue to make the most of every opportunity to collaborate and learn from key stakeholders to ensure a successful implementation. Failure to comply with these changes not only means potential fines and penalties, but also falls short of the derivatives transparency goals set out by the G20 to reduce risks to financial stability. The time to prepare is now.
This article was originally published to Thomson Reuters Regulatory Intelligence on July 27, 2022.