The European Market Infrastructure Regulation’s regulatory fitness and performance program (EMIR Refit) will mandate significant changes to the way firms report their derivatives transactions to the European Securities and Markets Authority (ESMA) in the EU and the Financial Conduct Authority (FCA) in the UK. Scheduled for implementation as early as Q4 2023, rule makers hope to bring greater transparency to the derivatives markets by adopting standardized data requirements, increasing alignment across global regimes and jurisdictions.
DTCC Connection spoke with Sam North, DTCC Director, Repository and Derivatives Services (RDS) Product Management, to get an update on EMIR Refit and how firms can start preparing for implementation today.
Related: DTCC's Chris Childs on Upcoming Trade Reporting Rewrites and Refits
DC: What are some of the biggest changes being introduced under EMIR Refit?
SN: It is clear from the industry Consultation Papers – issued by both ESMA and the FCA – that EMIR Refit will place a continued, and even enhanced, focus on data quality. With more stringent requirements to report Significant Issues to the respective competent authorities, trade reporting firms may want to take additional action to ensure successful reporting. Plus, EMIR Refit will require trade repositories to provide users with a new suite of ISO 20022 XML reports, offering ‘Submitters’ and the ‘Entity Responsible for Reporting’ access to more data, highlighting any data quality issues.
The introduction of new data elements and identifier fields under EMIR Refit will create 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 accounted for in firms’ reporting systems. When it comes to linking trades, the new fields and data elements will need to be applied differently for both existing trades that are open at the point EMIR Refit goes live and for new trades executed post the application of 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).
DC: Will EMIR Refit include revised reconciliation obligations?
SN: ESMA will significantly increase the number of reconcilable fields under EMIR Refit using a phased approach. The first phase, including 85 fields, will go live with the overall EMIR Refit rules implementation and the second phase, two years later, will add another 66 fields and introduce a new Valuation Reconciliation Status to reflect the outcome of reconciling Mark to Market Valuations between counterparties.
As outlined in their Consultation Paper, ESMA is also considering different approaches to their reconciliation logic. The current proposal is to run reconciliation at a two-day lag utilizing the new Event Date field (i.e., the report will be based upon the Event Date minus 2 business days) to account for counterparties reporting on trade date versus T+1.
The FCA for its part, intends to consult on both the fields subject to reconciliation and the associated tolerances in late 2022.
DC: What concerns are you hearing from clients as they begin to evaluate their readiness for EMIR Refit?
SN: Initially, the biggest concern was around the move to the ISO 20022 XML message format, but we are now hearing those operational elements – like the regulatory divergence between ESMA and the FCA – are at the forefront of client’s minds.
Another concern is around upgrading all open trades into the latest technical standards during the six-month transition window provided by both ESMA and the FCA. This raises questions about sourcing the new data elements, but it also poses both technical (i.e., submitting and receiving responses in XML) and operational considerations (i.e., ensuring you are adequately resourced to complete the task). The Intra and Inter-Trade Repository Reconciliation may experience some data quality challenges during these six months. Firms will also need to align with reporting counterparties as modifying trades to the latest technical standards at different times will inherently impact data quality.
DC: How will ISO 20022 and UPI requirements impact a firm's preparation for compliance with EMIR Refit?
SN: From an ISO 20022 perspective, the primary decision a submitting firm needs to make is whether they build a solution to create, transmit and ingest XML reports or they utilize a vendor solution to do this, such as DTCC Report Hub®. Making this decision as early as possible can help a smooth transition to the new reporting format. 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 within the reporting deadlines (this is true for self-reporting and any submissions on behalf of other entities). This becomes even more critical under EMIR Refit as both ESMA and FCA have indicated that competent authorities must be notified of ‘Significant Issues’.
When it comes to the UPI, both the timeline and approach have recently been adjusted to ensure that the launch dates align with the regulatory timeline. Specifically, the Derivatives Service Bureau has committed to making user acceptance testing (UAT) available nine months prior, and Production three months prior, to any regulatory go-live.
DC: What is DTCC doing to help educate and prepare clients for reporting readiness?
SN: From a Global Trade Repository service (GTR) perspective, we are hosting a series of client events focused on the more operational details of EMIR Refit alongside opening our UAT environment six months ahead of implementation to facilitate early testing. In addition, we will continue to partner with the industry either directly or via trade associations to help clients with implementation and address challenges. As a market utility, we see this as a fundamental part of our service to the industry.
DTCC Consulting Services experts can help with a range of services to help you prepare for EMIR Refit and other regulatory regime changes across the globe. These services include, but are not limited to impact analysis, requirements documentation and rule interpretation, control framework health check, accuracy checks, test case development, test strategy, test execution, and program management.
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