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The new European Market Infrastructure (EMIR) Refit technical standards will come into effect on 29 April 2024. Guidelines published in December 2022 aim to further harmonize and standardize reporting under EMIR. What do the Regulation and Guidelines entail and how can you be EMIR Refit ready one year from now?
Background
Since the 2008 financial crisis, the effective monitoring of systemic risk has become a core mission of the European Securities Markets Authority (ESMA). The European Central Bank (ECB) also requires timely access to trading activity on interest rate and forward rate markets to understand investors’ inflation expectations and monitor market-based measures of inflation compensation.
While the compliance burden continues to increase, derivative transactions reporting generates significant costs which are adding up to the other operating costs of market participants.
Primary change
In that context, regulatory technical standards¹ and implementing technical standards² on European Market Infrastructure Regulation reporting (EMIR Refit) were adopted on 10 June 2022. ESMA also published Guidelines³ for reporting under EMIR⁴(EMIR Guidelines) with the objective of further enhancing harmonization and standardization of reporting and to contain costs along the value chain. The EMIR Guidelines provide technical guidance on reporting logic and fields population but also clarifications on delegation and allocation of responsibility for reporting.
Timeline
The EMIR Guidelines were published on 20 December 2022 and are currently being translated. EMIR Refit and EMIR Guidelines will enter into application on 29 April 2024.
All existing open positions (including those traded before the go-live date) must be uplifted to the new reporting standard within six months after the go-live date. Any post-trade events on open positions must also be reported using the new reporting standard.
Key points
The impact of the EMIR Refit is significant and will extend to include:
- Regulatory interpretation and business mapping
- Technological enhancements to your reporting engine
- Additional reference data, including potential need for a client outreach programme
Field-level changes
EMIR Refit increases the number of reportable fields from 129 currently to 203 and brings material changes to the definitions and clarifications of the reportable values of remaining fields. New action types and event types are also added as well as specific rules for combining these.
Reporting format
All messages must comply with ISO 20022. In practice, this means that CSV, FpML and other formats currently supported by Global Trade Repositories (GTRs) will be decommissioned. XML schemas will be required for trade, valuation and margin update reporting.
EMIR Refit also removes the possibility of submitting one report for both parties in the context of delegated reporting. Market participants will have to submit individual entries for each side of the trade where performing delegated reporting.
Additional reference data
Changes to product-level data include:
- Inclusion of a Classification of Financial Instrument (CFI) code pertaining to the instrument on all trades
- ISINs will be required where the instrument is traded on a venue (regulated market, organized trading facility, multilateral trading facility, systematic internalizer)
- A unique product identifier (UPI) will be required
Client-level static data changes include:
- Additional information is required for the client’s corporate sector and reporting obligation
- Thresholds for determining financial counterparties (FCs) as a FC+/FC- will be required going forward
Reconciliation changes
Fields will become reconcilable in two phases, i.e., 85 fields on implementation date and 66 fields two years later. A new valuation reconciliation status is also introduced.
Delegation
In the case of delegation of reporting, the delegating counterparty is responsible for providing the report submitting entity (RSE) with all the details of the derivative contracts and ensuring that those details are complete and accurate. EU delegating counterparties should also carefully assess any compliance risks in case of delegating of reporting to a non-EU RSE. On the other hand, RSEs carry a duty to inform the reporting counterparties and delegating entities about relevant reporting and data quality issues. These include data submitted by subdelegates, all rejections, reconciliation breaks as well as other data quality issues.
Responsibilities regarding the outstanding derivative contracts, at both the points in time when delegation starts and ceases, should be agreed upon by the parties and covered by the delegation agreement.
What is coming next?
Amendments to the EMIR framework will not stop there. On 7 December 2022, the European Commission published a Capital Market Union Clearing Package⁵ , which includes, inter alia, a proposal for a review of EMIR. The overarching objective of this review is to increase the competitiveness of the European central clearing framework, notably vis-à-vis UK central counterparties (CCPs) and to propose adjustments to further improve the functioning of the EMIR framework.
The Commission notably proposes to introduce an obligation for counterparties subject to the clearing obligation to have, directly or indirectly, an active account with an EU CCP and clear at least a proportion of their trades in this EU CCP. The proposal also includes an exemption of the clearing obligation for transactions with a pension scheme established in a third country that is exempted from the clearing obligation under its national law.
The proposed directive would also amend the UCITS Directive⁶ by eliminating counterparty risk limits for all derivative transactions that are centrally cleared by a CCP that is authorized or recognized. At the same time, the proposal would amend IFD⁷ and CRD⁸ to encourage investment firms and credit institutions to systematically address concentration risk arising from their exposures towards CCPs.
The proposal is currently with the European Parliament and the Council. The legislative cycle is expected to last at least one year, starting now.
How EY can help
We have a range of services and tools to assist firms with all aspects of EMIR, leveraging our extensive advisory and implementation experience across the spectrum of impacted firms:
- Regulatory impact and gap assessments
- EMIR reporting implementation and quality reviews
- Margin and collateral process design and implementation
- Clearing broker selection
- Derivate trading operating model redesign
1. Commission Delegated Regulation (EU) No 2022/1855 of 10 June 2022 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards specifying the minimum details of the data to be reported to trade repositories and the type of reports to be used - EUR-Lex - 32022R1855 - EN - EUR-Lex (europa.eu)
2. Commission Implementing Regulation (EU) No 2022/1860 of 10 June 2022 laying down implementing technical standards for the application of Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories, with regard to the standards, formats, frequency and methods and arrangements for reporting and repealing Implementing Regulation (EU) No 1247/2012, as amended - EUR-Lex - 02022R1860-20221007 - EN - EUR-Lex (europa.eu)
3. Final Report, Guidelines for Reporting under EMIR (ESMA, 2022)
4. Regulation (EU) 648/2012 of the European Parliament and Council on OTC derivatives, central counterparties and trade repositories -European Market Infrastructures Regulation, as amended - EUR-Lex - 02012R0648-20220812 - EN - EUR-Lex (europa.eu)
5. Capital markets union: clearing, insolvency and listing package, 7 December 2022
6. Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), as amended EUR-Lex - 02009L0065-20230101 - EN - EUR-Lex (europa.eu)
7. Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firm, as amended EUR-Lex - 02019L2034-20191205 - EN - EUR-Lex (europa.eu)
Summary
In December 2022, the European Securities and Markets Authority (ESMA), published its Guidelines on the amended European Market Infrastructure Regulation reporting (EMIR Refit). The Guidelines aim to further harmonize and standardize reporting under EMIR. As application is planned for 29 April 2024, between now and then, ESMA will continue to engage with market players to clarify any grey areas to support a seamless transition.