EMIR Refit Reporting

Written by Alvin Mehmeti, Senior Consultant. 

The revised reporting requirements for derivatives under EMIR as of April 2024 are outlined below.

A set of requirements known as European Market Infrastructure Regulation (EMIR) took effect on August 16, 2012, with the intention of enhancing the transparency and reducing the risks in the OTC derivatives markets. Any organization that is a counterparty to a derivative contract is subject to this regulation. Examples include but are not limited to: forward contracts for foreign exchange, interest rate swaps (IRS), other swaps, futures and options on securities and commodities, regardless of whether they are traded bilaterally or on trading exchanges, and regardless of the volume.

The EMIR has subsequently been several times amended to improve data quality and align EU legislation with IOSCO standards.

There are two categories of counterparties in EMIR:

• Financial Counterparties (FC), including banks, investment managers, insurance providers, and CSDs. `
• Any entities that are neither central counterparties nor financial counterparties are referred to as non-financial. A further distinction for nonfinancial counterparties is based on whether their OTC positions above (NFC+) or below (NFC-) a designated clearing threshold.

In accordance with the EMIR framework, CCPs that have been authorized (for European CCPs) or recognized (for non-EU CCPs) must clear specific classes of OTC derivatives.

EMIR envisions two potential methods for determining the pertinent types of OTC derivatives:

• According to EMIR Article 5(2), the determination of the classes to be subject to the clearing duty will be made based on the classes that have previously been cleared by authorized or recognized CCPs. This method is known as the "bottom-up" approach.
• According to EMIR Article 5(3), with which ESMA will independently identify classes that ought to be subject to the clearing obligation but for which no CCP has yet been granted authorization. This method is outlined as "top-down" approach.

The EMIR will be enhanced by new technical standards that will be in effect as of April 29, 2024, as well as guidelines regarding the reporting of derivatives as required by Article 9 of EMIR that was made available on ESMA’s website.

These guidelines consist of:

1. The final report on the EMIR reporting guidelines.
2. The EMIR validation requirements that trade repositories must follow, as well as the templates for notifying NCAs of serious reporting errors.
3. The XML EMIR Report XSD schemas from Trade Repositories (incoming and outgoing)

To ensure consistency of the language and format throughout the whole reporting chain, XML schemas will now be necessary for communication between reporting entities, trade repositories, and authorities. This corresponds to the SFTR reporting requirement. XML ISO 20022's end-to-end reporting is anticipated to significantly improve data quality and uniformity by decreasing the requirement for data cleansing and normalization and facilitating their use for both authorities and reporting entities. To comply with this new criterion, report-submitting entities that utilize formats other than ISO 20022 XML will need to redesign their reporting process.

In addition to the format changes, the report's content has also been altered. In particular, the global guidance created by CPMI-IOSCO on the definition, format, and usage of key OTC derivatives data elements reported to trade repositories, including the Unique Transaction Identifier (UTI), the Unique Product Identifier (UPI), and other crucial data elements, is what has led to most of the changes. The validation rules and the annexes to the RTS 2022/1855 and ITS 2022/1860 provide for:

• Changes in the format of the reports that must be submitted, which now include three tables with the third table focusing on reports related to collaterals, show how important it is to provide accurate and timely information on collateral exchanges between counterparties in order to reduce the risk associated with derivative contracts.
• A derivative must be recognized using ISO 23897 Unique Transaction Identification (UTI) when it is reported at the transactional level or the positional level, respectively. The LEI (Legal Entity Identifier) of the entity that generated the UTI must be included in the UTI, followed by a code of up to 32 characters that is exclusive to the level of the generating entity. Unique Trade Identifier is what UTI stands for. It designates a certain trade and is produced in accordance with guidelines offered by ESMA. This is necessary to guarantee that reported deals are correctly identified by both counterparties.
• Several additional data fields related to lifecycle events, i.e., fields “Event type” and “Event date” as well as enabling report linking with fields “Prior UTI” and “Subsequent position UTI”.
• Changes to the values that must be disclosed in a number of data fields, such as "Collateralization category," in order to make the contents of the derivative contracts more understandable.

Due to the considerable modifications made as well as the effort required to synchronize the IT infrastructure, the revised Technical Standards will be in force as of 29 April 2024. All reports that counterparties submit to trade repositories after that date must therefore adhere to the modified standards. This is applicable to any changes and terminations reported on existing derivatives after the new reporting start date, regardless of when the modified or terminated derivative was concluded. It also applies to reports on derivatives concluded after that date.

However, outstanding contracts that were submitted to the trade repositories before April 29, 2024, and which do not call for any modifications or termination reports, will be given an extended transition period of 180 calendar days. It's not necessary to update derivative contracts that mature during this transition period.

In accordance with ITS 2022/1860's Article 9(1), enterprises in charge of reporting are now required to alert the appropriate authorities in the event of notable reporting problems. The rules specify the conditions under which a problem is regarded significant and is required to be reported to the NCAs.

Moreover, ESMA has made available a template for NCAs that have chosen to use it for filing these notices part of the validation rules excel that is provided in ESMA’s website.

All involved stakeholders are expected to make sure that they are prepared to:

1. Quickly Identify any reporting issues
2. Determine whether these reporting issues fall under the purview of Article 9(1) of ITS 2022/1860 and are in accordance with the guidelines
3. Promptly carry out the necessary notification

At a first glance, EMIR Refit appears to be a full year away. Nonetheless, anecdotal data reveals that most of the institutions affected are not aware of the difficulties that lie ahead of them. In fact, they need to start getting ready right away by performing the necessary impact evaluations. As part of that preparation, a trade and transaction reporting solution is needed that is independent of jurisdictions, natively supports ISO 20022, and has capabilities for managing, resolving, and simulating UPI transactions. Institutions in charge of new trade-state, transaction activity, and reconciliation reports will also require a high level of expertise and specialized instruments to manage reconciliation. To comply with the Refit standards, they will also need to update their control frameworks.

For ESMA to fulfill its oversight duties and advance stability and transparency in the securities markets, high-quality data is a requirement. It therefore establishes quality and harmonization standards to guarantee the consistency, accuracy, and completeness of data utilized for regulatory purposes.

Finalyse’s goal is to provide our customers with the opportunity to be EMIR compliant with the least amount of expense and effort while still utilizing our knowledge of reporting under European regulatory standards. We have a lot of previous experience assisting institutions with meeting reporting-related standards.

For more information about our services please visit Finalyse Reporting Services.