Just as financial institutions are getting a handle on a raft of trade and transactions rewrites including the quite challenging CFTC Rewrite and regime changes for ASIC, JFSA, and MAS, here comes ESMA with a bombshell — EMIR Refit 2024. Like the Rewrite, the Refit necessitates processes and architecture that integrate data, reporting, and analytics into a single platform. Unlike the single-sided reporting used for the Rewrite, the EMIR Refit covers individual entity regulations and technical requirements around XML schema, identifier fields, reconciliation, and validation rules.
And while smaller institutions will definitely have a more difficult time complying with this avalanche of regulatory requirements, larger institutions are not immune to the limitations of their resources to simultaneously contend with so many — the CFTC Rewrite phase 2, EU ESG Taxonomy, and the EMIR Refit. Compliance will be grueling for institutions without the relevant experience, business and maintenance processes, and/or the XML/XSD capabilities — unless they begin planning for roadmaps now.
What does EMIR Refit mean for market participants?
With this update, ESMA clarifies its guidelines for financial and non-financial counterparties (NFC), trade repositories (TRs), and competent authorities to comply with the legal provisions on reporting and data management under the amended EMIR Refit rules. It also covers EMIR technical standards for the harmonization, standardization, and high-data quality necessary for effectively monitoring systemic data-integrity risk and consistent implementation.
ESMA is the first regulator to mandate ISO 20200 XML format and unique product identifier (UPI) code usage/validation against ANNA DSB, alongside strict regulatory technical standards (RTS) changes in a non-phased approach. As a result, even tier-1 parties with significant budgets and resources will need help preparing for an April 2024 go-live that includes:
- A reporting format with 74 additional fields, a UPI mandate, link-ID fields for compression activities and package trades, and new lifecycle events with a revised reporting action type matrix.
- An increased data-quality reconciliation requirement and mandate to actively detect, report, and correct errors and breaches to regulators within seven days, similar to the Rewrite.
- An additional disclosure obligation for delegated and report-submitting entities regarding their reporting quality and status.
What are the technical challenges created by this regulation?
As usual, sourcing core trade-data across platforms and mapping and validating are the key technical challenges. Additional requirements include:
- Completeness in whether relevant fields are correctly populated and reported for the eligible population.
- Consistent data-quality monitoring and risk and control framework specifically designed to address trade and transaction reporting.
Finally, with the new action and event types, data versioning and regulatory rules will be critical, particularly regarding the backloading of outstanding contracts.
Complex Regime and Reporting Requirements
Unlike the single-sided CFTC Rewrite reporting, the EMIR Refit reporting process requires a thorough understanding of each reporting entity’s regulations and revised technical standards and validation rules for EMIR Refit XML messages. There is also the addition of lifecycle events reporting, new fields, and historical and subsequent event and data submissions. As with the Rewrite, firms must upgrade all outstanding derivative contracts to Refit-data quality within first six months of implementation.
Data Quality: Harmonization, Standardization, and Reconciliation
Data quality is essential for ESMA to carry out its supervisory responsibilities to promote stability and transparency in the securities markets. And so it imposes quality and harmonization requirements to ensure that data used for regulatory purposes is accurate, complete, and consistent. To achieve this, it established a new level of data-quality standards to the ISO 20022 – first piloted as part of the SFTR regime – and added most of the critical data elements (CDE, including the UPI) to the EMIR Refit mandate, along with:
- Inter-TR data reconciliation
- Complete and accurate reporting process
- Collateral-field expansion
- Valuation reconciliation
With the EMIR Refit, ESMA ensures that the data it receives meets its high-quality standards, requiring firms swiftly act to identify, report, and correct errors as reflected in the focus on “months vs minutes” in our previous article about the CFTC Rewrite.
Divergent Financial Conduct Authority (FCA) and ESMA Requirements
ISO 20022
Simultaneous ISO 20022, UPI, and CFTC Rewrite Phase 2 Implementation
UPI: A New and Potentially Expensive Mandate
ESMA, the first regime to make the UPI part of the law, has provided clear guidance on where and how it needs to be used. Firms must register, source, and verify the UPI for newly traded derivatives within the t+1 transaction reporting timeline. Unlike with the unique transaction identifier (UTI), where regulators could mandate that counterparties exchange or share reference details, there is no such requirement for UPI; therefore, firms must rely on their broker-dealer counterparts or wait and source details with ANNA-DBS end-of-day files unless they do not subscribe for optional services. This will make the whole process costly or difficult, particularly for small-size firms.
What’s next?
To the naked eye, the EMIR Refit appears to be a whole year away. However, anecdotal evidence shows that most of the institutions that will be impacted are unaware of the challenges that await them. In fact, they must start preparing now by conducting the requisite impact analyses. That preparation would include securing a jurisdiction-agnostic trade and transaction reporting solution that natively supports ISO 20022 and provides UPI handling, reconciliation, and simulation tools.
Furthermore, institutions managing new trade-state, transaction activity, and reconciliation reports will need significant expertise and sophisticated tools to handle reconciliation. They will also need to revise their control frameworks to comply with the EMIR Refit’s regulations.
