Established in 2012, the European Market Infrastructure Regulation (EU) no.648/2012 (“EMIR”), is a European regulation that was adopted across the EU to increase transparency and reduce systemic risk in the Over-the-Counter (“OTC”) derivatives market. EMIR also includes reporting requirements for derivative contracts and uniform requirements for the performance of activities of Central Clearing Counterparties (“CCPs”) and Trade Repositories (“TRs”).
EMIR applies not only to Financial Counterparties (“FC”) as regulated entities, but it also extends the supervisory remit of Central Banks to Non-Financial Counterparties (“NFC”), with which the vast majority of NFCs had no previous interaction before the introduction of EMIR.
The reporting requirements under EMIR include:
• Reporting of all derivative contracts (including exchange traded derivatives) to TRs;
• Clearing those OTC derivatives subject to the mandatory clearing obligation;
• Risk mitigation techniques for non–centrally cleared derivatives; and
• Setting out requirements for both CCPs and TRs.
Since its inception, the reporting requirements mandated by EMIR have undergone continuous adjustments and expansions, driven by modifications to the Regulatory Technical Standards (“RTS”), Implementing Technical Standards (“ITS”), and Validation Rules.
In 2019, the reporting obligations under EMIR underwent revision and were modified through Regulation (EU) No. 2019/834, commonly known as “EMIR Refit”. EMIR Refit aims to improve the transaction reporting on derivatives, address disproportionate compliance costs and strengthen reconciliation requirements in the derivatives market.
The most notable changes implemented under EMIR Refit include significant changes to the transaction reporting requirements for the derivatives market. These amendments have been completed by new RTS and ITS, which have been published by the EU Commission on 7 October 2022 in the European Union official journal (Commission delegated regulation (EU) 2022/1855 and Commission implementing regulation (EU) 2022/1860).
Furthermore, on 14 December 2022, the European Securities and Market Authority (“ESMA”) published guidelines on the updated reporting and validation rules required for compliance with EMIR Refit. Entities in scope will be required to comply with these new reporting standards by 29 April 2024.
Key Changes to Existing Reporting Rules
• The number of reporting fields;
• Unique Product Identifiers (“UPIs”) and Unique Transaction Identifiers (“UTIs”) reporting requirements;
• Updated pairing and matching requirements
• Life cycle reporting;
• Upgrade to ISO 20022 XML messaging format; and
• Responsibilities.
Reporting Fields
The recent amendments introduced by EMIR Refit have significantly impacted the reporting landscape. Specifically, the number of reporting fields has undergone a substantial increase, growing from 129 to 203. This shift represents a pivotal change within the EMIR framework. Among these revised fields, a total of 160 are either entirely new or have been modified to enhance reporting accuracy and transparency. As market participants adapt to these adjustments, they must navigate the expanded set of data points, ensuring compliance with the updated requirements.
Unique Product Identifiers (UPI) and Unique Transaction Identifiers (UTI)
The EMIR Refit has introduced a requirement for Counterparties (“CPs”) to provide UPIs, which will change the existing UTI generation logic and waterfall-based approach.
The UTI is an alphanumeric code that allows each reported trade under EMIR to be uniquely identified. The primary purpose of the UTI is to uniquely identify individual transactions which are reported to a TR. They are also used to pair each unique transaction between the trading parties. CPs should use a specific UTI for one single derivative transaction, and the UTI must be identical in the reports of both CPs.
Changes to UTIs mean CPs are no longer allowed to determine UTI generation responsibility through bilateral agreements as the first option of the waterfall. Additionally, there will be a new step in the waterfall process under EMIR Refit, which will check for cross-jurisdictional transactions. In-scope entities must monitor regulatory updates from the EU Commission to determine how to report on cross-jurisdictional transactions.
The UPIs are a new and more detailed form of code which allow regulators to understand which underlying product the derivative tracks, without being limited to an asset class or sub-product details, which is the case now with the current International Securities Identification Number. UPIs are issued by the Derivatives Service Bureau and will be recognised on a global basis.
Updated Pairing and Matching
The pairing and matching requirements required under the EMIR Refit will be more stringent than before. TRs will now be required to pair two trades through the UTI. Furthermore, the TRs will then be required to reconcile the underlying reporting fields to identify any potential differences in the CPs’ reporting. The TRs review of the trade reporting will be available to download by the reporting parties to identify any errors / omissions that may have been made.
Ultimately, the enhancements to the pairing and matching rules will lead to an increase in the number of matching fields on the report from 47 to 87. These fields are expected to increase even further to 148 by 2026.
Life Cycle Reporting
EMIR Refit brings further updates to the current reporting of action types to provide for additional scenarios concerning the trade’s life cycle. Updates in the reporting logic will be needed to account for these changes. Supporting documentation containing the correct data will be required between reporting parties.
In addition to this, the reporting of event types will be introduced alongside action types. This will result in approximately 34 action or event types. CPs should look to map all action or event type scenarios to business events for all asset classes while integrating these into their reporting systems.
Upgrade To ISO 20022 XML
ISO 20022 is a global standard that helps different financial organisations such as banks and market infrastructures communicate effectively by using a common language for their messages. The upgrade to ISO 20022 messaging format looks to standardise submission and response formats across the TRs, which will assist the National Competent Authority’s (“NCA”) reconciliations. While this allows for richer and more structured data, implementation will be challenging for companies still working with CSV, FpML and other legacy formats.
ESMA has stated that it will provide in-scope entities with a 6-month period in order to adopt ISO 20022 into their reporting systems. This six-month period will end on 1 October 2024.
Responsibilities
Under Article 9(1e) of EMIR Refit, CPs will be required to calculate the significance of any errors or omissions in their reports to the NCA. The onus to notify the NCA of these breaches lies with the entity responsible for reporting. The NCA must be notified of any reporting obstacles preventing the report submitting entity from sending reports to a trade repository within the deadline referred to in Article 9(1) of EMIR. Additionally, the NCA must be notified of any significant issue resulting in reporting errors that would not cause rejection by a trade repository.
Conclusion
On 23 October 2023, ESMA released its guidelines for reporting under EMIR Refit. In-scope entities will be required to adopt the enhanced updates in order to comply by 29 April 2024. The complexities brought forth by EMIR Refit’s new reporting logic as well as the latest reporting format are expected to be challenging for businesses. As such, many firms are choosing to delegate the reporting requirements to third party entities.
