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Understanding the EMIR REFIT challenges and solutions

Background to EMIR and the EMIR REFIT

The European Market Infrastructure Regulation (EMIR) requires European financial services firms that trade in derivative contracts to report information for each transaction to their National Competent Authority (e.g. FCA / CBI).

This regulatory framework was introduced in the wake of the 2007-2008 financial crisis to improve market transparency. However, its complex provisions and technical implementation challenges make it challenging for firms to meet the requirements. Given the criticality of EMIR, the regulator has a zero-tolerance policy for poor data quality. Therefore, the significant time and effort required to meet the requirements is likely to increase given the announcement of EMIR REFIT.

EMIR REFIT constitutes the largest change since EMIR’s inception and introduces a wide range of new reporting requirements and control framework enhancements. The regulation goes live 18 months after publication into the EU official journal – this publication is expected imminently, giving firms until Q4 2023 to design, test, and implement the necessary solutions and processes to ensure ongoing compliance.

It is crucial that these requirements are implemented correctly, in good time, to avoid unforeseen issues such as data consumption issues or technical build challenges. Incorrect implementation of previous regulatory reporting requirements has resulted in expensive, time-consuming, and resource-intensive remediation programmes.

In short – getting it right the first time is critical.

As firms start to dissect the regulation ahead of a wide-ranging technical implementation, it is apparent that the provisions within the regulation will be more complex and nuanced than first thought. We’ve outlined some of the key challenges that firms will face during the REFIT process: each specific article in this series will focus on a particular issue created by this new reporting regime.

The Challenges

1. Reporting Fields Changes

There is a significant change to the reportable fields, with the number of fields increasing from 129 to 203. However, this doesn’t mean 74 additional fields – new fields are being added, old fields are being removed and existing fields are changing definitions/format. In total, following the implementation of REFIT, EMIR reporting will be more than twice the size of MiFIR Trade and Transaction combined.

Notable changes include additional reporting requirements for collateral, including pre- and post-haircut reporting, additional product fields for interest rate, commodity and credit derivatives, and changes to how lifecycle events are reported by action type and event type fields.

Understanding how these changes affect the products executed by your business, and their associated reporting flows is essential. As not all fields are changing, firms are also using REFIT as an opportunity to assess their current EMIR reporting to verify that it is accurate.

2. Associated Reporting Rules Changes

In addition to alterations to the reportable fields, EMIR REFIT introduces additional reporting requirements for firms, further increasing the complexity of the regulation.

Although optional fields still exist across the suite of reporting, the regulator has re-confirmed that optional fields must be populated in all scenarios where it is relevant to the product. This requires a review of reporting processes to confirm if this is currently in place and must be factored in when designing requirements for new fields.

Additional requirements are also introduced for the logic to generate the Unique Trade Identifier (UTI), potentially meaning changes in logic and additional data consumption requirements.

Changes to ETD requirements of reporting trade vs position level mean that agreements will be required between counterparties to confirm the appropriate level of reporting. Any delta from existing processes will require additional technology build.

3. Migration to XML reporting

Previously, the regulator permitted reporting to be performed either through an automated solution using XML (an industry-standard messaging language) or manually through a .csv excel file.

This is now changing; all firms will require an automated XML reporting solution using ISO 20022 schema. This is challenging both because a significant mapping exercise is required to determine how to populate the XML message, and because a large technical implementation will be necessary.

In fact, this change is one of the primary reasons why the timeline for proposed changes to be implemented in 18 months rather than 12. Firms are faced with a build vs buy decision for the technical build, but the initial field mapping exercise will be required by all firms.

4. Data Creation and Consumption

Transaction reporting, by its very nature, results in many data consumption requirements.

With the additional fields being added, new data sources will have to be identified and configured to be consumed by firms’ reporting solution. These data fields may be externally or internally sourced.

A key new external data point to consume is the Unique product identifiers (UPIs), used to increase consistency across global derivative reporting in different regimes. This is available at AnnaDSB, an industry utility, however, there are commercial and technical challenges to setting up this relationship due to the cost of license and the data required by firms to query the AnnaDSB database.

Most new fields will require new data sources from internal technology platforms such as Order Management systems, customer static databases and collateral systems. This will involve understanding the data required, mapping it to relevant systems, working with different internal teams and building/enhancing the necessary data feeds – all of which are time-consuming exercises.

5. Back reporting

As well as the new field requirements applying to ongoing transaction reporting, all new data fields must be populated for all open positions at go-live. This creates another challenge of capturing all data required, ensuring it is correct, accurate and complete, and then reporting it to the regulator.

This back reporting exercise needs to be completed within 6 months of implementation; however, firms can plan what is required prior go-live and confirmation of the back reporting population. By understanding the products currently being traded, the new data points that would be required and where they can be consumed from, a reliable plan can be developed.

Although not an urgent requirement in terms of timelines, a well-thought-out back reporting plan can avoid any unintended or unexpected issues later.

6. Control Framework

A transaction reporting function’s control framework is a critical element to get right and is essential to demonstrate to the regulator that the appropriate due diligence and oversight is in place. Additional requirements are now being introduced by the regulator to improve control infrastructures.

Specific requirements for documented reconciliation procedures, alongside daily reports which trade repositories must now make available to market participants, introduce the need to create/enhance processes to identify and remediate any accuracy issues with EMIR reporting. This will bring EMIR into line with MiFID II reporting.

In addition to processes to identify reporting issues, a formal errors and omissions process is being introduced by the regulator. This means engagement with the regulator to articulate reporting issues will become more frequent and a greater internal focus on accurate, complete and timely reporting will be essential.

The Solutions

Novatus Advisory can offer flexible support for any firm getting ready to implement the changes presented by EMIR REFIT. We are the market leaders in EMIR and are already working with our current clients to support their programme planning and execution. What makes us unique is the combination of our RegTech offerings – primarily our Transaction Reporting Analysis (TRA) Tool – which enables us to review 100% of your trade population – combined with our advisory practice which contains market-leading regulatory, industry and clearing house expertise. Therefore, we are best placed to support clients with any or all aspects of their EMIR REFIT programmes.

If you would like to find out more about our solutions, including how our RegTech tools accelerate delivery and support the creation of a robust reporting function please contact Francis Stroudley – fstroudley@novatusadvisory.com.