Background - EMIR and EMIR Refit
EMIR (European Market Infrastructure Regulation) is an EU regulation aimed at increasing the transparency and stability in over-the-counter (OTC) derivatives markets. Companies with trading activities in the European Economic Area are obligated to comply in a few key areas:
- Reporting: Market participants must report details of their OTC derivative contracts to trade repositories.
- Central Clearing: Certain OTC derivative contracts must be cleared through a central counterparty to reduce counterparty risk.
- Risk Management: Market participants are required to implement robust risk management processes, such as collateral management, to reduce systemic risk.
EMIR Refit
Over time, EMIR’s regulations have become outdated and complex, and mass reporting errors emerged, leading to the launch of the EMIR Refit (Regulatory Fitness and Performance Program) in 2017. The program intends to improve the quality of reporting by simplifying the regulation, including alignment with international standards. An initial round of amendments in 2019 expanded the definition of Financial Counterparties to include more entities posing risk to the financial system, and introduced the concept of Small Financial Counterparties which are exempt from clearing obligations, among many other changes.
ESMA’s Final Report, laying out the program’s next steps, was published in December 2020, endorsed by the European Commission in June 2022 and published into the European Commission Official Journal in October 2022 for implementation in April 2024. This latest publication includes substantial updates to the technical standards associated with EMIR, covering both the regulatory obligations (Regulatory Technical Standards) and the standards, formats, frequency and methods of fulfilling these obligations (Implementing Technical Standards).
What you need to know
EMIR Refit - Latest changes
At a high level, there are three areas of change that you should know about:
Reportable Fields: With the inclusion of 89 new reporting fields and the elimination of 15 previous fields, the total number of reporting fields under EMIR has increased from 129 to 203. For context, this is more than double the number of reportable fields under MIFIR for trade and transaction reporting. Whilst the removal of ‘Beneficiary’ and ‘Trading Capacity’ go some way to simplification, reporting firms’ overall requirements have been made more complex with the addition of challenging fields such as those pertaining to their counterparties, including clearing thresholds, reporting obligations and corporate sectors.
Reporting Lifecycle: EMIR Refit aims to make the lifecycle of a trade more transparent with increased granularity on what action has been taken, including the reporting of modifications or terminations of a contract, as well as a new field, ‘Event Type’, which helps to explain why an action was taken. ‘Event Type’ is to be reported and used in conjunction with ‘Action Type’ - ESMA has provided the matrix below to illustrate when reporting is required and at what level (Transactional, ‘T’, or Positional, ‘P’)
Harmonisation: As part of simplifying EMIR, ESMA has sought to align the regulation with international standards with which firms are already familiar. For example, EMIR Refit aligns closely to the work done by the CPMI-IOSCO Harmonisation Group on critical data elements, directly impacting the generation of Unique Transaction Identifiers. Harmonisation also applies to the formatting of data reports. The fully standardised ISO20022 XML format is widely used elsewhere, and will be the required format of EMIR reporting as of April 2024.
Regulatory Rewrites - EMIR is not alone
Research published In 2021 highlighted that 97% of firms were misreporting under EMIR. With that backdrop, EMIR’s rewrite is no surprise. Similarly, high profile reporting failures and enforcement actions have occurred in the US, and the CFTC implemented an initial round of changes to its swaps reporting rules in December 2022, ahead of plans to implement its second phase in Q4 2023. The Monetary Authority of Singapore also expanded their OTC derivatives trade reporting requirements in 2021, and the Canadian Securities Administrators plan to implement changes to their trade reporting rules in 2024. This is to name just a few. Given this wider context, EMIR Refit can be viewed as one of a long list of regulatory rewrites in the trade and transaction reporting space. And since EMIR Refit is not alone, the actions taken in response to these amendments can go a long way in determining a firm’s preparation for the trials to come.
What you need to do
Data
As a regulation which leans heavily on reporting obligations, EMIR has always represented a data problem for firms. The amendments made through EMIR Refit compound these challenges, with a significant increase in reportable fields and a new required format. For many of the large firms that fall into EMIR’s scope, managing masses of global data will already present an operational challenge, especially if those firms are also operating on legacy systems. Big data consulting and technology industries are experiencing significant growth as firms respond to competitive and regulatory pressures to modernise - of which EMIR Refit is one of the latest. Firms that take the opportunity to clean up their data stores and optimise their data pipelines in preparation for EMIR Refit will find themselves better prepared to respond to the challenges ahead, regulatory or otherwise.
Technology & Expertise
In the same way, firms that view EMIR Refit as a driving force for technology transformation will be better placed for more seamless transitions during future shifts in economic and regulatory conditions. In particular, the use of dynamic and broad solutions, such as platforms, can provide a breadth of operational coverage which means that many of the necessary changes can be made all within one system. Managing these changes with speed and precision requires that the technology partner is equipped with deep subject matter expertise - a commodity that is especially important in the context of a rewrite that comes 10 years after original EMIR implementation. In that time, many firms will likely have lost their internal experts. Trusting an external partner is not always easy, as trust is built not only through expertise and accolades, but also through communication and customer service excellence. This point can easily be missed when the primary focus is technological change, but is a crucial consideration when firms are relying on external partners to address regulatory obligations.
So, to avoid dreading the next regulatory rewrite, choose a technology partner with the capabilities to understand and operationalise your end to end obligations, and who you can trust to guide you through the process with maximum clarity. Most importantly, choose a technology partner with a track record of customer service excellence alongside technical expertise. This combination is the most impactful for successful change.
