This article was originally published by Thomson Reuters on September 12, 2024.
The update earlier this year of the European Market Infrastructure Regulation (EMIR) derivative transactions reporting rules, known as the EU EMIR Refit, was a pivotal step in enhancing transparency and data standardisation within the European financial sector. The UK is set to follow suit on September 30.
While the UK EMIR Refit diverges from the European reporting regime, creating unique challenges for those reporting in both jurisdictions, firms preparing for the UK mandate can draw critical lessons from the EU's experience to help them navigate the changes.
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Proactive Testing and Collaboration
One of the most crucial lessons from the EU EMIR Refit is the importance of early and rigorous testing. Firms that engaged and began their testing preparations early, especially around the adoption of the ISO XML 20022 standard, were better positioned to comply with the new regulations.
Under the EU EMIR Refit, European firms needed to adopt the new ISO XML 20022 standard, which is necessary for incoming and outgoing messages to a trade repository. For some companies still working with CSV, FpML and other legacy formats, this required last-minute adjustments to existing infrastructure.
As the September deadline for UK firms approaches, proactive engagement is vital to avoid some of the challenges faced by EU firms during the adoption of ISO XML 20022. This includes not only testing internal systems but also coordinating with trade repositories, regulators and counterparties to ensure that all aspects of the reporting process are aligned with the new requirements.
Doing so will help firms meet the specific nuances of the UK regulations prior to going live, such as conducting a gap analysis and assessing current data to identify data points for each specific field. Leveraging existing infrastructure can help firms maintain operational continuity and stability to enable a swift transition to the new regulatory standards on the implementation date.
Leveraging Existing Infrastructure
UK firms can benefit from reusing and adapting components and processes previously established during the EU EMIR Refit, significantly reducing the time and resources needed to achieve compliance.
As an example, firms allocated significant resources to establish robust reporting systems that were designed to comply with the EU EMIR Refit requirements. These systems can be further adapted to meet the specific requirements of the UK EMIR Refit, providing firms with a head start in the implementation process.
Furthermore, in response to the enhanced EU EMIR Refit requirements that went live earlier this year, firms invested in upgrading their data validation and reconciliation processes to ensure compliance with increased data accuracy standards.
With the UK deadline just a month away, firms that fall under the remit of this mandate should consider what existing data validation and reconciliation capabilities can be leveraged for compliance in the UK. Not only will this save time and resources, but it will also help ensure that data submitted under the UK rules meets the high standards of accuracy required by regulators.
Jurisdictional Differences
Although the UK and EU EMIR Refits overlap significantly, it is important to note key differences. These include different fields and validation rules due to the differing mandates of the Financial Conduct Authority (FCA), the Bank of England and HM Treasury versus the European Securities and Markets Authority (ESMA). For example, the UK EMIR Refit has an additional field called "execution agent" that allows firms to report entities that transact on behalf of counterparties.
UK firms should prioritise fine-tuning their existing systems or investing in automated trade reporting solutions that facilitate the management of complexities of requirements across jurisdictions. A strong control framework minimises the burden of updating reporting processes to stay current with changing mandates across jurisdictions. It provides a resilient, scalable and intuitive technology to help firms master their pre- and post-reporting assurance tasks.
Adapting to Regulatory Evolution
The EMIR Refit provides an opportunity for firms to enhance their operational efficiencies for the future — to support current compliance needs as well as future regulatory developments as they evolve.
UK firms must remain agile and responsive to these changes, drawing lessons from recent regulatory updates, such as the FCA's amendments to method specifications in May 2024 and ongoing updates to the Securities Financing Transactions Regulation (SFTR) and the Markets in Financial Instruments Directive (MiFID). Looking ahead, Phase 2 of the EMIR Refit is scheduled for 2026. It will introduce 66 new reconcilable fields and a new "valuation reconciliation status" field that requires counterparties to reconcile mark-to-market valuations.
The ability to adapt quickly to regulatory reforms will be a significant determinant of success in the post-EMIR Refit landscape. Firms should foster effective communication with regulators and, where possible, automate processes that allow for continuous monitoring of regulatory developments and the latest specifications.
Industry Collaboration, Early engagement
The UK EMIR Refit is an important step in the journey toward a more transparent, standardised and resilient financial ecosystem. As the regulatory landscape continues to develop, industry collaboration and early engagement will be essential to achieving compliance.
The lessons learned from the EU EMIR Refit should serve as a guide for firms as they update their systems and processes in accordance with the latest specifications and validation rules.
With the UK EMIR Refit right around the corner, firms should be collaborating and testing now.