To rewrite or not to rewrite is no longer the question
27 July 2022
deltaconX’s Paul Rennison discusses the ongoing changes to EMIR and the impact for reporting companies and their providers
Image: sailorr/stock.adobe.com
The wait is nearly over, and hard work and planning can eventually start. A slew of major global regulations, lining up to undertake fundamental changes over the next two years, aim to bring harmonisation and standardisation to the financial market, coupled with the goal of improving the quality and data interoperability across all jurisdictions.
The main reason for the delay was not COVID-19 — of course, this did not help. However, it was more the desire to accommodate global standards, primarily driven by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO).
It was the aim of regulators and commissions to receive globally harmonised aggregated reporting across jurisdictions, with national competent authorities (NCAs), having to balance introducing implementation timeframes as soon as possible, against the benefits of delaying go-lives to accommodate harmonised requirements and data attributes.
This swathe of REWRITES will now kick off with the Commodity Futures Trading Commission (CFTC) in December of this year, and encompasses the European Market Infrastructure Regulation (EMIR) in the EU and UK, before this cycle is completed sometime in 2024 when the Australian Securities and Investments Commission, the Monetary Authority of Singapore, and the Hong Kong Monetary Authority are expected to be included.
What will the impact be for reporting companies and their providers?
Firstly, there is a move to incorporate the guidance developed by CPMI-IOSCO regarding the definition, format, and usage of key over-the-counter (OTC) derivatives, which should have massive benefit for those with multi-jurisdictional reporting; it should also reduce the burden of keeping data sets up-to-date as each regulation evolves over time — in theory.
There will be a move to standardise the format the data is transmitted in, defined as ISO 20022 XML format.
This will be mandated for the reporting of the report’s entire lifecycle (not just from market participants to third-party repositories, but also for the transmission of data between third-party repositories to NCAs and any combination of the above).
Anything that increases the efficiency of interoperability between market participants, third-party entities and regulators will be beneficial in reducing the cost of operation and increasing the efficiency in data collection for all those involved.
This set of REWRITES is also planned to include the much-anticipated unique product identifier (UPI), which is designed to facilitate effective aggregation of OTC derivatives transaction reports on a global basis.
The role of the UPI is to uniquely identify the product involved in an OTC derivatives transaction, whether it will work in conjunction with unique transaction identifiers (UTIs), and critical data elements (CDE), which are also expected to be reportable to global regulatory authorities.
The timetable for implementation and adoption is still to be fully defined and, given the amount of work required by market participants to incorporate this reference data into multiple systems, it does not look likely to debut in this year’s CFTC rewrite.
EMIR REFIT
So closer to home, in addition to what has previously been discussed, what will the next phase of EMIR REFIT require from those market participants under the regime?
At time of writing, the Final Report has not yet been published by the Commission in the Official Journal, so we still do not know the official implementation date, but is expected to be Q2 2024.
However, when it does drop, the main focus will be on data quality and interoperability, as the European Securities and Markets Authority (ESMA) review for EMIR and Securities Financing Transactions Regulation (SFTR) data quality report in 2021 brought sharply into focus, there is, from the regulator’s point of view, much work to be done.
What will be in focus?
Huge changes to reportable fields
The number of reportable fields will increase markedly, increasing from 129 to 203, with the addition of 89 new fields and the withdrawal of 15.
This is twice the size of Markets in Financial Instruments Regulation trade and transaction reporting combined, and even more than the weighty SFTR reporting.
In addition, there will be updates to the definition and format of nearly every field.
It is likely that while this may cause a substantial amount of reworking and planning, it will remove some of the ambiguity around certain fields, and lead to higher matching rates and less intervention needed by market participants to reconcile trades with their counterparties.
Addition of event types
It will also require a more two-dimensional concept to the reporting of lifecycle events, currently they are defined by their action type only.
To provide more granularity, a concept of event type is being added. The event types describe more details of the underlying action and include events of a corporate event, exercise, allocation and early termination, so each action type has specific events that can be applied to it.
Increasing number and complexity of reconcilable fields
This is an aspect of the new regulation to plan carefully around, as the number of reconcilable fields is increasing three-fold over a two-year period from the go-live date. Currently there are 56 reconcilable fields, at go-live this will increase to 82, and two years down the line it is expected to increase again by a further 67 fields, bringing the total reconcilable fields to an impressive 149 (out of 203 in total).
This will also grow more complex as it will include repeatable, dynamic and valuation fields.
Changes in the UTI waterfall
Currently the counterparties agree between themselves on who, where, why and how the UTI is created and disseminated. New, more prescriptive rules will mandate who creates and disseminates the UTI, so that the approach is standardised across the market and not simply by local agreement.
Changes to the inter trade repository reconciliations
One of the main aims is to promote the harmonisation of data quality (mandated use of ISO 20022 XML) across trade repositories (TRs), as well as more rigorous requirements for data validation and data reconciliation processes, that take place at the TRs once derivatives are reported. This is seen as a major measure to improve the currently low matching and pairing rates on reported transactions.
Greater responsibility for the delegated party
The level of communication between the delegated party and client will have to increase in timeliness and efficiency as part of the changes, both in terms of more counterparty specific data that needs to be reported. There will also be new responsibility on the delegated party to inform their clients whenever data quality issues occur.
This is a significant departure from the current delegated reporting model, which relies on clients raising issues to their brokers, service providers and counterparties. This is likely to require significant investment from the delegated party (mainly sell-side firms) as they will need to operate a quasi-reporting service to their clients.
EU and UK divergence
The European Commission has committed to an 18-month implementation date from when EMIR REFIT is approved and the UK Financial Conduct Authority (FCA) is expected to align closely to their timeframe.
The biggest concern regarding EMIR REFIT is the possibility that we will see divergence in requirements between ESMA and the FCA.
In the first big test since Brexit, if the FCA decides on even minor changes from the ESMA requirements, firms will need to split their operating model with an inevitable increase in risk and cost.
Currently it would appear that for this round, technical divergence will not be the main issue, however the possible introduction of the UK changes will require adherance to separate regimes for a period of time.
Coming together
Like buses, all of these REWRITES are now coming along together and in a rather concentrated timeframe. However, timing was paramount here. Waiting until the external standards were agreed and established was absolutely key in achieving the underlying goal of standardisation and harmonisation — without pushing too much additional operational burden and expense of further implementation phases on to reporting firms, reporting providers and TRs.
This is all while long delays to compliance dates continue to restrict the ability of the regulators to efficiently monitor systemic risk in the markets.
The move to standardisation and data harmonisation is a sensible idea and will aid both regulators and reporting firms, especially those with a global exposure, to manage their compliance more efficiently across multiple jurisdictions, enabling the provision of more accurate and timely data, and reducing the ongoing cost of maintaining and managing multiple data sources and formats.
That is the goal and in theory it is absolutely the right way to go.
However, given the complex and differing sets of rule books that need to be incorporated, there is a considerable amount of work to be done before Nirvana can be reached.
So, once the starting guns are fired, a juggernaut of regulatory change programmes will be unleashed, and this will continue for the next few years, at least.
For those firms who made the decision to implement tactical, rather than strategic solutions for their regulatory programmes when the regulations were originally implemented — and who have made do and mended with each subsequent iteration — it may be time to review how best to comply in the world of REWRITES.
Ask yourself: "Do I want to do it all over again and again and again?”
The main reason for the delay was not COVID-19 — of course, this did not help. However, it was more the desire to accommodate global standards, primarily driven by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO).
It was the aim of regulators and commissions to receive globally harmonised aggregated reporting across jurisdictions, with national competent authorities (NCAs), having to balance introducing implementation timeframes as soon as possible, against the benefits of delaying go-lives to accommodate harmonised requirements and data attributes.
This swathe of REWRITES will now kick off with the Commodity Futures Trading Commission (CFTC) in December of this year, and encompasses the European Market Infrastructure Regulation (EMIR) in the EU and UK, before this cycle is completed sometime in 2024 when the Australian Securities and Investments Commission, the Monetary Authority of Singapore, and the Hong Kong Monetary Authority are expected to be included.
What will the impact be for reporting companies and their providers?
Firstly, there is a move to incorporate the guidance developed by CPMI-IOSCO regarding the definition, format, and usage of key over-the-counter (OTC) derivatives, which should have massive benefit for those with multi-jurisdictional reporting; it should also reduce the burden of keeping data sets up-to-date as each regulation evolves over time — in theory.
There will be a move to standardise the format the data is transmitted in, defined as ISO 20022 XML format.
This will be mandated for the reporting of the report’s entire lifecycle (not just from market participants to third-party repositories, but also for the transmission of data between third-party repositories to NCAs and any combination of the above).
Anything that increases the efficiency of interoperability between market participants, third-party entities and regulators will be beneficial in reducing the cost of operation and increasing the efficiency in data collection for all those involved.
This set of REWRITES is also planned to include the much-anticipated unique product identifier (UPI), which is designed to facilitate effective aggregation of OTC derivatives transaction reports on a global basis.
The role of the UPI is to uniquely identify the product involved in an OTC derivatives transaction, whether it will work in conjunction with unique transaction identifiers (UTIs), and critical data elements (CDE), which are also expected to be reportable to global regulatory authorities.
The timetable for implementation and adoption is still to be fully defined and, given the amount of work required by market participants to incorporate this reference data into multiple systems, it does not look likely to debut in this year’s CFTC rewrite.
EMIR REFIT
So closer to home, in addition to what has previously been discussed, what will the next phase of EMIR REFIT require from those market participants under the regime?
At time of writing, the Final Report has not yet been published by the Commission in the Official Journal, so we still do not know the official implementation date, but is expected to be Q2 2024.
However, when it does drop, the main focus will be on data quality and interoperability, as the European Securities and Markets Authority (ESMA) review for EMIR and Securities Financing Transactions Regulation (SFTR) data quality report in 2021 brought sharply into focus, there is, from the regulator’s point of view, much work to be done.
What will be in focus?
Huge changes to reportable fields
The number of reportable fields will increase markedly, increasing from 129 to 203, with the addition of 89 new fields and the withdrawal of 15.
This is twice the size of Markets in Financial Instruments Regulation trade and transaction reporting combined, and even more than the weighty SFTR reporting.
In addition, there will be updates to the definition and format of nearly every field.
It is likely that while this may cause a substantial amount of reworking and planning, it will remove some of the ambiguity around certain fields, and lead to higher matching rates and less intervention needed by market participants to reconcile trades with their counterparties.
Addition of event types
It will also require a more two-dimensional concept to the reporting of lifecycle events, currently they are defined by their action type only.
To provide more granularity, a concept of event type is being added. The event types describe more details of the underlying action and include events of a corporate event, exercise, allocation and early termination, so each action type has specific events that can be applied to it.
Increasing number and complexity of reconcilable fields
This is an aspect of the new regulation to plan carefully around, as the number of reconcilable fields is increasing three-fold over a two-year period from the go-live date. Currently there are 56 reconcilable fields, at go-live this will increase to 82, and two years down the line it is expected to increase again by a further 67 fields, bringing the total reconcilable fields to an impressive 149 (out of 203 in total).
This will also grow more complex as it will include repeatable, dynamic and valuation fields.
Changes in the UTI waterfall
Currently the counterparties agree between themselves on who, where, why and how the UTI is created and disseminated. New, more prescriptive rules will mandate who creates and disseminates the UTI, so that the approach is standardised across the market and not simply by local agreement.
Changes to the inter trade repository reconciliations
One of the main aims is to promote the harmonisation of data quality (mandated use of ISO 20022 XML) across trade repositories (TRs), as well as more rigorous requirements for data validation and data reconciliation processes, that take place at the TRs once derivatives are reported. This is seen as a major measure to improve the currently low matching and pairing rates on reported transactions.
Greater responsibility for the delegated party
The level of communication between the delegated party and client will have to increase in timeliness and efficiency as part of the changes, both in terms of more counterparty specific data that needs to be reported. There will also be new responsibility on the delegated party to inform their clients whenever data quality issues occur.
This is a significant departure from the current delegated reporting model, which relies on clients raising issues to their brokers, service providers and counterparties. This is likely to require significant investment from the delegated party (mainly sell-side firms) as they will need to operate a quasi-reporting service to their clients.
EU and UK divergence
The European Commission has committed to an 18-month implementation date from when EMIR REFIT is approved and the UK Financial Conduct Authority (FCA) is expected to align closely to their timeframe.
The biggest concern regarding EMIR REFIT is the possibility that we will see divergence in requirements between ESMA and the FCA.
In the first big test since Brexit, if the FCA decides on even minor changes from the ESMA requirements, firms will need to split their operating model with an inevitable increase in risk and cost.
Currently it would appear that for this round, technical divergence will not be the main issue, however the possible introduction of the UK changes will require adherance to separate regimes for a period of time.
Coming together
Like buses, all of these REWRITES are now coming along together and in a rather concentrated timeframe. However, timing was paramount here. Waiting until the external standards were agreed and established was absolutely key in achieving the underlying goal of standardisation and harmonisation — without pushing too much additional operational burden and expense of further implementation phases on to reporting firms, reporting providers and TRs.
This is all while long delays to compliance dates continue to restrict the ability of the regulators to efficiently monitor systemic risk in the markets.
The move to standardisation and data harmonisation is a sensible idea and will aid both regulators and reporting firms, especially those with a global exposure, to manage their compliance more efficiently across multiple jurisdictions, enabling the provision of more accurate and timely data, and reducing the ongoing cost of maintaining and managing multiple data sources and formats.
That is the goal and in theory it is absolutely the right way to go.
However, given the complex and differing sets of rule books that need to be incorporated, there is a considerable amount of work to be done before Nirvana can be reached.
So, once the starting guns are fired, a juggernaut of regulatory change programmes will be unleashed, and this will continue for the next few years, at least.
For those firms who made the decision to implement tactical, rather than strategic solutions for their regulatory programmes when the regulations were originally implemented — and who have made do and mended with each subsequent iteration — it may be time to review how best to comply in the world of REWRITES.
Ask yourself: "Do I want to do it all over again and again and again?”
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