Val Wotton, Managing Director of Product Development and Strategy, Repository and Derivatives Services at DTCC examines the issue.
Although the United Kingdom and European Union have gone their separate ways, the Financial Conduct Authority (FCA) and the Bank of England (BoE) have predominantly aligned with the approach taken by the European Securities and Markets Authority (ESMA) when updating their respective market infrastructure legislation. This is particularly true with the European Market Infrastructure Regulation (EMIR) Refit and the UK’s equivalent new draft version, although there are a small number of areas that diverge from ESMA’s proposals.
In terms of the nuts and bolts of the market infrastructure review, the FCA and BoE’s consultation paper, which was launched last year, generally aligned with the blueprint set down in ESMA’s reporting guidelines.
The divergence is more in the way the regulators manage the process of devising a roadmap, transition periods and the timelines for compliance. Also of note is the staggered implementation of the new rules, EU Refit is expected to come into force in April 2024, while UK Refit is anticipated later in the year.
The purpose of the EU EMIR Refit is to address disproportionate compliance costs, transparency issues and insufficient access to clearing for certain counterparties. Its aim is to simplify the rules and reduce regulatory and administrative burdens where possible, especially for non-financial counterparts (NFCs), without compromising the regulatory goal of the original regulation. Additionally, EU EMIR Refit aims to ensure high data quality necessary for the effective monitoring of the systemic risk. This purpose is also adopted for UK EMIR Refit.
One of the fundamental changes proposed in EU EMIR Refit is the adoption of the ISO 20022 XML message format aligning it with the Securities Financing Transaction Regulation (SFTR) introduced in July 2020. The standard was created to provide an industry-wide framework for immutable financial messaging required for areas such as reporting, payments and securities financing and trading.
As with SFTR, the deployment of the standard will enhance the quality of the data and make reporting more efficient. By unifying the submission format between reporting parties and repositories to the XML based ISO 20022 standard, it will make it easier for data to be aggregated by authorities in addition to standardising the inter-TR reconciliation among trade repositories. In addition, this augments the process because reporting firms have less file format differences to contend with when submitting to more than one repository or switching between repositories.
UK EMIR Refit, which has similar aims to its European peer, also proposes adopting ISO20022 XML to ensure consistency of reporting. The country’s regulators also believe that the standardised format will address the well documented challenges in aggregating data in an accurate and complete fashion.
The UK EMIR Refit proposals are also broadly aligned with ESMA’s proposals in relation to Committee on Payments and Markets Infrastructures (CPMI) and the International Organisation of Securities Commissions (IOSCO) critical data elements (CDE) guidance, where appropriate. This allows UK authorities to access a comprehensive derivatives data set and for their counterparts in G20 jurisdictions to monitor systemic risk in a globally consistent manner.
Both UK EMIR Refit and EU EMIR Refit are changing the number of reportable fields. Both regulatory authorities are moving from 129 reportable fields to 203 reportable fields, an increase of 74 new fields. This is making the reporting twice the size of MiFIR Trade and Transaction Reporting combined and is even greater than the requirements under SFTR reporting, however, many of the new fields build on the securities financing regulation.
The additions of new fields cover a broad range of topics including asset class specific economic fields, additional counterparty data like clearing thresholds of counterparties, trade direction and risk indicators. Some fields like ‘Beneficiary’ have been removed.
Reconciliation is another area where both sides are moving in tandem to improve the process, although there are some differences. This continues to be a thorny problem for the industry with the ESMA Data Quality Report in April 2022 showing EU EMIR Pairing rate was around 60% at the end of 2021 and has remained relatively stable throughout the year. Considering pairing for EU EMIR is performed by comparing 3 fields only (Reporting counterparty ID, ID of the other counterparty and trade ID), its current level is not satisfactory. Under EU EMIR Refit, the reconciliation of fields will be introduced in a phased approach with 82 fields being reconciled from the start date of the reporting obligation followed by a further 64 fields two years later. The updated regulation will also introduce a new reconciliation category for valuations fields, alongside the existing reconciliation categories.
Trade repositories (TRs) will also be obliged to provide submitting entities with two reconciliation reports. The immediate feedback reconciliation report details the status of only submissions received over a 24-hour reporting period that are subject to the reconciliation process in the relevant reconciliation cycle. This report is to be provided to submitting entities within 1-hour of the completion of the immediate feedback reconciliation process. The End of day (EoD) reconciliation report details the status of all derivatives submissions in scope of the reconciliation process. This report must be provided to submitting entities 6 hours earlier than the timings under the current EU EMIR regulations.
In the UK, TRs could be subjected to similar but not identical requirements. UK regulators also want to see a significant increase to reconciliation and matching of data between counterparties. TRs to which the same derivatives reports have been submitted would be required to follow a standardised framework for reconciling such reports. However, the FCA and BoE have not included the reconcilable fields and their tolerance levels in the technical standards. The UK regulators and industry will be in further consultations on the approach.
As the industry leader in trade reporting, DTCC’s Global Trade Repository service (GTR) – authorised by both ESMA and the FCA through its locally registered trade repositories – is uniquely positioned to help market participants address their operational and regulatory challenges in this ever-evolving environment. For those that require greater assistance with their trade reporting infrastructure, controls and processes, DTCC Report Hub® offers a highly efficient pre and post trade reporting solution. When Report Hub and GTR services are used together, clients can tap into a robust, single vendor solution that assists with tasks throughout the reporting lifecycle.
Firms can further tap into the breadth and depth of our experience with DTCC Consulting Services to transform their post trade business operations, increase efficiencies, reduce risks, and drive down costs.
Although the timeline for market participants in the UK and the EU may seem long, as with any piece of regulation, the deadline seems to arrive much faster than expected. To be ready, firms must take stock today and assess what tools, processes and resources are needed to adhere to the regulations by their stated compliance dates. As ever, DTCC stands ready to support the industry in their preparations.
