Moving Up on the Compliance Agenda: The EU’s EMIR Refit

Market infrastructure rules affect derivatives counterparties and trade repositories, stress data quality and standardization

Friday, July 21, 2023

By John Hintze


Financial services organizations have grown accustomed to dealing with regulations emanating from the European Union. A looming priority is EMIR Refit – the European Market Infrastructure Regulation’s regulatory fitness and performance program.

The European Securities and Markets Authority (ESMA) initiated a consultation on Refit rules for over-the-counter (OTC) and exchange-traded derivatives, impacting derivatives counterparties and trade repositories, in July 2021, ultimately leading to a final report on guidelines last December.

Firms with legal entities domiciled in the European Union must comply by April 29, 2024. The deadline is five months later in the U.K., whose Financial Conduct Authority went through a parallel process. The lag gives firms operating in both jurisdictions more time to be in compliance, said Tim Hartley, EMIR reporting director at regulatory reporting specialist Kaizen Reporting.

Tim Hartley of Kaizen Reporting

“We’re expecting the U.K. and EU requirements to be identical in terms of content, apart from small differences in terms of specific data fields,” said Andrew Pinnington-Mannan of Quorsus and DTCC Consulting Services.

Pinnington-Mannan is Regulatory Reporting Practice lead at Quorsus, part of Capgemini, which partners with Depository Trust & Clearing Corp.’s consulting unit. The DTCC operates the largest global trade repository, aggregating derivative counterparties’ data for regulatory collection and scrutiny.

“Knock-On Impacts”

As with other Europe-wide policies, ranging from the General Data Protection Regulation (GDPR) to the Markets in Financial Instruments Directive (MiFID) to pending cryptocurrency and artificial intelligence laws, the requirements formally apply within the European Union but require awareness if not outright compliance by organizations elsewhere.

Financial firms in the U.S., though not directly affected by EMIR Refit, may face requests for additional information from European counterparties, said Pinnington-Mannan.

Sam North, executive director of European product management in DTCC’s Repository & Derivatives Services, said in an online article that “most larger firms seem to be on target with their preparations. However, many other entities are just beginning their journey to Refit readiness.” He highlighted “new requirements for trade repositories that will have knock-on impacts for reporting counterparties,” and stressed the importance of trade reporting controls and the need for firms to begin preparations if they had not already done so.

International Harmonization

EMIR Refit is part of a global effort. The U.S. Commodity Futures Trading Commission and Canadian regulators updated derivative reporting requirements last December. Hartley said changes in Singapore, Hong Kong, Australia and Japan will take effect in 2024. The shared objective is to improve and harmonize regulatory-reporting data and align the regulators with the critical data elements (CDEs) established by the Bank for International Settlements’ Committee on Payments and Market Infrastructures and International Organization of Securities Commissions (CPMI-IOSCO).

Differences will remain, because ultimately each jurisdiction has its own flavor of regulation. For example, said Pinnington-Mannan, the CFTC requires only one counterparty to complete the reporting, while the EU requires both to report if they are domiciled in the EU. Nevertheless, there should be some “reusability” of efforts to comply with CFTC rules.

Andrew Pinnington-Mannan of Quorsus and DTCC Consulting Services

In terms of data lineage, tracking the flow of data over time, “Firms should be able to reuse 60% or 70% of what they did in the U.S., but they tend to be bad at documenting what they’ve previously implemented and translating data captured in risk systems into what the regulators want,” he said. His team is advising clients to consider the regulatory changes in different jurisdictions as “one program of work, and to tackle the 70% to 80% that has commonality across jurisdictions first, then the differences.”

Refinements to Come

While the EU and U.K. Refits were finalized last year, technical changes are expected as market participants run across issues in their implementation efforts. In a March comment letter, for example, the International Swaps and Derivatives Association expressed broad support for “draft Validation Rules and XML schemas,” while recommending various improvements.

DTCC’s North pointed to the industry’s “need to make strides towards data quality improvement.” One clear challenge, Pinnington-Mannan said, will be finding the necessary data for 203 reportable fields, up from the current 129, and upgrading their open trades within six months after the Refits go live.

Many of the additional fields, such as for asset-class-specific data, were described by Kaizen Reporting as logical. Some may be relatively more difficult, such as reporting a counterparty’s clearing threshold, reporting obligation and corporate sector.

Pinnington-Mannan said too much time is often spent on thinking about specific data points instead of broader changes to business requirements, such as a new requirement to submit reports in the ISO 20022 XML format, and the increased oversight requirements that the EMIR Refit places on firms, particularly data accuracy and monitoring errors.

He said his “major point” is that firms never spend enough time testing. “We advise [taking] four to six months to test, working backward from the deadline. That means firms should have already completed their impact analysis and should be finishing their technical builds in Q3 and Q4, so there’s sufficient time to test that they meet the requirements.”

Benefit of Standardization

With respect to XML, Hartley noted that when EMIR went live in 2012, ESMA approved six different trade repositories, each with its own technical specifications. For firms using more than one repository, it was hard to compare data sets to see whether their reporting was timely and accurate.

“So the Refit means the way firms report to any of the repositories is the same, which is more efficient,” Hartley said. “It also limits the ability of individual repositories to add on additional proprietary fields,” which should facilitate market participants’ efforts to compare data sets and increase competition among repositories.

Relying on standard unique product identifiers (UPIs) managed by the Derivatives Service Bureau, instead of the variety of existing ID codes, should also improve efficiency and lessen the risk of counterparties’ misidentifying derivative products.

“Market participants are trying to get their heads around the UPI process and how it will work,” Hartley said, ahead of CFTC’s UPI requirement as of next January, followed by the EU in April and the U.K. in September.

Accuracy Upfront

Another big change will involve error correction. The general pattern over the last decade, Pinnington-Mannan said, has been for firms reporting errors to update the latest submission. Under the Refit, they must correct all previous submissions, exponentially increasing the number of corrections. This could lead to changes in processes or even internal agreements with compliance teams.

“Firms should be validating data before sending it, rather than receiving rejections or regulatory inquiries and correcting information after the fact,” he said.

And when reporting issues arise, firms will face stricter requirements around communicating them to their national authority. Today, that decision is based on risk appetite, Pinnington-Mann said, but the Refits define clear thresholds above which those firms, or the firms to which they delegate reporting, must report an issue.

When EMIR was first instituted, there were few guidelines around what to report to regulators, Pinnington-Mannan noted. ESMA has pushed for more frequent and efficient use of regulatory data, thus raising expectations on data quality. Firms relying on proprietary systems or vendors to generate reports must ensure they meet those expectations.

Much time is spent “thinking about financial sanctions,” Pinnington-Mannan pointed out. “What they should really be worried about is the cost of continually remediating issues, which is much higher than the cost of being fined.”


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