In less than one year, new derivatives trade reporting obligations will take effect in Europe under EMIR Refit. The EU’s European Securities and Markets Authority (ESMA) will go live on April 29, 2024, with the UK’s Financial Conduct Authority (FCA) to follow on September 30, 2024.
Our active discussions with the industry, through working groups, webinars and client outreach, have shown that most larger firms seem to be on target with their preparations. However, many other entities are just beginning their journey to Refit readiness.
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Here is a breakdown of important aspects of EMIR Refit and what lies ahead for firms:
Key Challenges of the EMIR Refit
- Transition to ISO 20022 XML Schemas for communications between counterparties and trade repositories to eliminate discrepancies due to inconsistent data. The transition from legacy formats to XML may present challenges but has become the universal
choice for regulators globally to improve data quality and harmonization.
- Reporting issues to National Competent Authorities (NCAs) will require firms to determine if an issue is significant enough to be reported to the NCA — and if a firm reports for a counterparty, they may also need to report to that firm’s NCA. Trade repositories
will be reporting suites of data to NCAs. Firms do not want to find themselves in a situation where an NCA spots an issue before it is self-reported.
- Mandated reporting of Unique Product Identifiers (UPIs) will have firms creating, ingesting, sharing, storing and reporting UPIs into the trade repositories.
- Addition of new reportable fields, eventually bringing the total number to 203.
Impact on Reporting Counterparties
EMIR Refit introduces new requirements for trade repositories that will have knock-on impacts for reporting counterparties.
- Trade state management alters the way trade repositories construct their reporting. Currently, trades submitted are reflected by the latest date submitted by a counterparty, or “latest is greatest.” To address trades reported on T versus T+1, EMIR Refit will
operate a two-day delay based on the event date to improve the probability of reconciling trades. Operational procedures and control frameworks need to be updated to account for this two-day lag.
- Back-reporting impacts corrections to trades that will need to be based on the new “event date” field. Firms will need the correct historic reference data stored to ensure that historic reporting is accurate.
Navigating the Transition Period
ESMA acknowledges reconciliation will be complex during the six-month transition, but the industry will need to make strides towards data quality improvement.
- During the six months following the go-live date, all firms need to upgrade their open trade population to their latest technical standards.
- Trade repositories must also go through a harmonization exercise to align all trade state data in the trade repository dating back to 2014 in order to align all the different technical standards and changes taken place over the years.
Lag Between ESMA and FCA
The fundamental changes prescribed by ESMA and the FCA are largely in line. However, dual-reporting firms will face challenges with the diverging dates. More thorough guidance from the FCA, including technical standards, is crucial for proper planning and implementation.
Due to the extent and volume of changes, firms’ trade reporting controls will be key to successful compliance under EMIR Refit — without them, firms won’t be able to identify issues and remediate and report in a timely manner. While there is still time, firms should begin their preparations now if they have not already.