The devil’s in the detail
July 2023
Cappitech’s Ron Finberg outlines EMIR REFIT’s most significant challenges
Image: patpitchaya/stock.adobe.com
With new technical standards being incorporated into the EMIR REFIT, reporting firms are facing many challenges in preparation for the new regulation, which goes live next year.
As we get closer to the go-live dates — 23 April 2024 for the EU and 30 September 2024 for the UK — preparations which once entailed general queries are now laced with more detailed questions.
Counterparty data gathering
Part of the expansion of reportable EMIR fields, from 129 to 203, includes new Counterparty 2 data that needs to be reported.
Mandatory fields of the following are to be added:
Counterparty 2 identifier type (field 8)
Nature of counterparty 2 (field 11)
Corporate sector of counterparty 2 (field 12)
Clearing threshold of counterparty 2 (field 13)
Reporting obligation of counterparty 2 (field 14)
Reporting firms are obligated to include this information in their EMIR REFIT submissions. Firms must connect with current customers and trading partners to gather this information and store it within existing counterparty-static data. In addition, updated data will be required for open positions for counterparties who are no longer trading.
Some firms with large counterparty lists face the challenge of knowing how and when to collect this information. In addition, firms need to initiate a process to store it while allowing for updates — particularly if a counterparty’s clearing threshold status changes.
Which entity is responsible for reporting?
Another new field causing confusion is the ‘entity responsible for reporting’. When providing mandatory delegated reporting for customers, such as for non-financial counterparties, the reporting entity is the entity responsible for reporting.
However, there are instances where a financial counterparty (FC) is reporting for its FC customers. In addition, ManCos are designating asset management firms to report on behalf of their underlying fund clients. In these cases, the responsible entity may not be the reporting party.
As firms have progressed with their due diligence, many have encountered edge cases — requiring the careful reading of ESMA’s EMIR REFIT Final Reports, to correctly define which entity should be the responsible party.
Do I update all positions on day one?
Firms are also trying to find the best way to update information on existing positions before the REFIT go-live. From its go-live date, the regulation allows firms 180 days to submit these updates. However, just because you have extra time doesn’t mean you should wait.
On the one hand, firms can take the staggered approach by focusing on ‘day one’ reporting of new transactions with the updated standards. Once that is accomplished, updates of existing positions can be applied at a later stage.
On the other hand, there is the ‘big bang’ approach. This means updating positions and new transactions on day one, ensuring that all positions are covered without having to manage separate loads.
Which lifecycle events are relevant to me?
Another significant change under the REFIT technical standards is the enhancement of lifecycle event information that is reported. Currently, firms report an ‘action type’ and ‘level of trade’, either as a transaction or position. 'Event type' is a new field being introduced, which defines what triggered the action.
The most common event type values are trade, early termination, clearing and inclusion in a position. These are expected to cover the vast majority of all report submissions. Also included are event type values for corporate events, exercise, credit events and allocations.
As firms continue to map out their transaction data to meet REFIT fields, many are finding that all of their relevant event type examples aren’t being captured in their source data. This creates a challenge when determining if the event type data exists in any internal records.
If it does exist, how can it be downstreamed for reporting? In cases where events such as corporate actions aren’t being captured at all, a reevaluation is required to determine how best to document these details and use them for reporting.
FCA and ESMA divergence go-live
In February 2023, the UK Financial Conduct Authority announced that the UK would go live with the REFIT technical standards on 30 September 2024. The UK’s version is very much aligned with the EU’s. However, with dual go-live dates for similar reporting, it creates its own challenges.
Firms with reporting obligations in both the EU and the UK do not have a designated mechanism to support submissions of the current and new formats between the separate go-live dates.
One option to mitigate this issue is to prepare to report for the REFIT format for both jurisdictions in time for the initial 29 April 2024 deadline — ‘turning on’ the reporting of UK submissions in the new standards from the September implementation date.
Firms providing delegated reporting need to evaluate how they will handle cross-jurisdiction reporting.
For UK firms reporting on behalf of EU counterparts, this means reporting to the new standards in April 2024, and not waiting until September.
Conversely, EU firms will need to continue to submit their reports in the old format for their UK counterparties.
As we get closer to the go-live dates — 23 April 2024 for the EU and 30 September 2024 for the UK — preparations which once entailed general queries are now laced with more detailed questions.
Counterparty data gathering
Part of the expansion of reportable EMIR fields, from 129 to 203, includes new Counterparty 2 data that needs to be reported.
Mandatory fields of the following are to be added:
Counterparty 2 identifier type (field 8)
Nature of counterparty 2 (field 11)
Corporate sector of counterparty 2 (field 12)
Clearing threshold of counterparty 2 (field 13)
Reporting obligation of counterparty 2 (field 14)
Reporting firms are obligated to include this information in their EMIR REFIT submissions. Firms must connect with current customers and trading partners to gather this information and store it within existing counterparty-static data. In addition, updated data will be required for open positions for counterparties who are no longer trading.
Some firms with large counterparty lists face the challenge of knowing how and when to collect this information. In addition, firms need to initiate a process to store it while allowing for updates — particularly if a counterparty’s clearing threshold status changes.
Which entity is responsible for reporting?
Another new field causing confusion is the ‘entity responsible for reporting’. When providing mandatory delegated reporting for customers, such as for non-financial counterparties, the reporting entity is the entity responsible for reporting.
However, there are instances where a financial counterparty (FC) is reporting for its FC customers. In addition, ManCos are designating asset management firms to report on behalf of their underlying fund clients. In these cases, the responsible entity may not be the reporting party.
As firms have progressed with their due diligence, many have encountered edge cases — requiring the careful reading of ESMA’s EMIR REFIT Final Reports, to correctly define which entity should be the responsible party.
Do I update all positions on day one?
Firms are also trying to find the best way to update information on existing positions before the REFIT go-live. From its go-live date, the regulation allows firms 180 days to submit these updates. However, just because you have extra time doesn’t mean you should wait.
On the one hand, firms can take the staggered approach by focusing on ‘day one’ reporting of new transactions with the updated standards. Once that is accomplished, updates of existing positions can be applied at a later stage.
On the other hand, there is the ‘big bang’ approach. This means updating positions and new transactions on day one, ensuring that all positions are covered without having to manage separate loads.
Which lifecycle events are relevant to me?
Another significant change under the REFIT technical standards is the enhancement of lifecycle event information that is reported. Currently, firms report an ‘action type’ and ‘level of trade’, either as a transaction or position. 'Event type' is a new field being introduced, which defines what triggered the action.
The most common event type values are trade, early termination, clearing and inclusion in a position. These are expected to cover the vast majority of all report submissions. Also included are event type values for corporate events, exercise, credit events and allocations.
As firms continue to map out their transaction data to meet REFIT fields, many are finding that all of their relevant event type examples aren’t being captured in their source data. This creates a challenge when determining if the event type data exists in any internal records.
If it does exist, how can it be downstreamed for reporting? In cases where events such as corporate actions aren’t being captured at all, a reevaluation is required to determine how best to document these details and use them for reporting.
FCA and ESMA divergence go-live
In February 2023, the UK Financial Conduct Authority announced that the UK would go live with the REFIT technical standards on 30 September 2024. The UK’s version is very much aligned with the EU’s. However, with dual go-live dates for similar reporting, it creates its own challenges.
Firms with reporting obligations in both the EU and the UK do not have a designated mechanism to support submissions of the current and new formats between the separate go-live dates.
One option to mitigate this issue is to prepare to report for the REFIT format for both jurisdictions in time for the initial 29 April 2024 deadline — ‘turning on’ the reporting of UK submissions in the new standards from the September implementation date.
Firms providing delegated reporting need to evaluate how they will handle cross-jurisdiction reporting.
For UK firms reporting on behalf of EU counterparts, this means reporting to the new standards in April 2024, and not waiting until September.
Conversely, EU firms will need to continue to submit their reports in the old format for their UK counterparties.
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