Interest Rates and Their Effect on Transaction Reporting

Why are Interest Rates Important for Transaction Reporting

Interest rate movements impact the pricing and risk profile of a wide range of financial instruments, particularly derivatives and fixed-income products. Fluctuations can have a significant impact on interest rate derivatives such as swaps, options and forward rate agreements.

These changes can affect:

• • • The value of the trade
    • Collateral requirements and margin calls
    • Lifecycle events and mark-to-market updates

Due to the complexity of these changes, interest rate volatility can lead to increased levels of transaction reporting requirements in terms of frequency and complexity.

How Interest Rate Changes Affect Reporting

Interest rate fluctuations can drive several changes and regulators expect firms to report these changes accurately. Regulatory regimes such as EMIR, MiFIR, SFTR and CSDR have unique requirements for how to accurately reflect the specific impacts of interest rate changes.

European Market Infrastructure Regulation (EMIR)

Under EMIR, interest rate changes directly impact:

• • • Valuation reporting: counterparties are required to report updated valuations daily, which is important for interest rate derivatives where valuations fluctuate with market rates
    • Specific interest rate fields: EMIR requires detailed reporting for interest rate derivatives, including specific fields for fixed rates, floating rates and payment frequencies
    • Lifecycle event reporting: fluctuating interest rates can often trigger lifecycle events and these should always be reported, including instances of modifications to interest rate terms

Markets in Financial Instruments Regulation (MiFIR)

MiFIR reporting is significantly affected by interest rate changes, particularly through financial instrument reference data reporting using the Financial Instruments Reference Data System (FIRDS), in the following ways:

• • • Interest rate classification: FIRDS specifies that interest rate-related instruments require particular attention in data field reporting, outlining specific requirements as such
    • Maturity and expiration dates: accurate reporting of maturity and expiration dates is important for interest-rate sensitive instruments to ensure market transparency

Securities Financing Transactions Regulation (SFTR)

The SFTR framework is particularly sensitive to interest rate changes as they directly impact securities financing transactions:

• • • Reporting of interest rate information: SFTR requires detailed reporting of interest rates in various fields, including fixed rates, floating rates and their respective spread values
    • Collateral valuation updates: interest rate shifts can also affect the value of any collateral posted, making it highly time-sensitive and requiring timely updates in reporting
    • Market value reporting: daily updates are required under SFTR to reflect how interest rate changes affect the current market value of securities involved in financing transactions

The ESMA guidelines on SFTR reporting emphasise the importance of accurate data reporting to maintain transparency in securities financial markets, particularly during periods of interest rate volatility.

Central Securities Depositories Regulation (CSDR)

Within the CSDR framework, interest rate fluctuations can impact:

• • • Settlement discipline: interest rate volatility can increase the possibility of settlement failures, triggering the CSDR penalty mechanism
    • Cash penalties calculation: the interest component in cash penalty calculations may be affected by rate changes
    • Settlement efficiency monitoring: central securities depositories (CSDs) must factor in how interest rate environments contribute to settlement behaviour patterns for forecasting purposes

ESMA’s guidelines on settlement fails reporting highlight the need for accurate reporting of fails that may be linked to interest rate-driven market conditions.

Conclusion

Interest rate changes can create complex reporting obligations across the EU regulatory landscape. Firms must maintain robust systems and processes to ensure compliance with the relevant regulations and capture these changes effectively within the transaction reporting frameworks. Effective management of interest rate change impacts on transaction reporting also contributes to the transparency and stability of EU financial markets.

For assistance with your transaction reporting obligations get in touch today and one of our experts will be happy to help.