With the April 2024 EMIR Refit deadline approaching, Droit’s Walther Navarrete (Regulatory Insight Lead) and Tom Morris (Regulatory Reporting Business Development Manager) answer typical questions to help understanding and provide guidance on EMIR Refit:
What is the purpose of EMIR Refit?
Walther: “EMIR refers to European Market Infrastructure Regulation, an EU regulation that has been in place since 2012 to monitor over-the-counter (OTC) derivatives markets.
The EMIR Regulatory Fitness and Performance program, or EMIR Refit for short, is in place to review the effectiveness of EMIR across organizations.
Launched in 2017 and published in 2019, its origins can be traced back to the 2009 G20 Pittsburgh summit and the pledge to reform OTC derivatives markets.
EMIR Refit’s objectives focus on reducing systemic risk, increasing transparency, and improving risk mitigation – for example, in the case of counterparty credit risk by introducing mandatory clearing of certain derivative contracts.
In broad terms, the overall aim of EMIR Refit is to improve transparency and reduce risks for all parties involved in OTC transactions. Within this, there is emphasis on lowering costs and the administrative burden for counterparties. Ultimately this will manifest into the harmonization of the regulatory framework across EU territories and better quality reporting data.”
How are organizations preparing for EMIR Refit?
Walther: “Given the April 2024 deadline, many organizations should already be well progressed with their EMIR Refit programs to ensure that what needs to be reported by their organization, how, and in which format, will be in place in time.
Program activity will concentrate on the reporting obligations and technical specifications that are core to EMIR Refit. These are respectively categorized as Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS), both of which describe the protocols used to implement EU financial regulations.
Under these new standards, the number of reportable fields will rise from 129 to 203, and those subject to reconciliation will triple. Ensuring these fields are incorporated into existing reporting infrastructure will be a major part of preparations. Organizations must also review and update their trade reconciliation (recon) processes.”
What are the key challenges to being EMIR Refit ready?
Walther: “The most significant challenge for reporting organizations is the alignment of global reporting requirements and subsequent need for harmonization of data elements.
This has its origins in a global regulatory agreement to standardize reporting field requirements using CDE (Critical Data Elements) as per the CPMI-IOSCO (Committee on Payments and Markets Infrastructures and International Organization of Securities Commissions) standard. Although field names are similar, they may differ across regulatory jurisdictions.
The adoption of global standards includes convergence of reporting format to ISO 20022 XML and the use of UPI (Unique Product Identifier) to classify instrument-specific data elements. In so doing, EMIR joins MiFiR Transaction Reporting and SFTR as some of the first reporting regulations to require ISO 20022 XML.
It should be noted that many organizations will continue to use legacy reporting formats such as FpML or CSV, further adding to the effort required to update their reporting systems, testing, and control processes.
Despite the conscious intent to converge, regulators may apply different rules, definitions, or requirements for the same “standard” field. This variance is difficult to fully address through a CPMI-IOSCO CDE framework absent a detailed understanding of each local regulatory interpretation.
For example, with EMIR, which covers both ETDs and OTC derivative contracts, the UPI is required if the trade does not have an ISIN, but for CFTC, the UPI will always be required.
Underpinning the success of an EMIR Refit program is an optimized data architecture that facilitates harmonization while dynamically responding to regulatory change. The typical challenge here stems from endemic data inconsistency and opacity, usually due to an organization’s reliance on a myriad of fragmented data sources.
The solution requires warehousing and normalization of data sourced from the systems of record (trading systems), legal entity data, and product reference data. Building a clean, standardized data set that spans jurisdictions and product lines creates a necessary foundation for generating well-structured outbound reports. This must be combined with regulatory logic that can be rapidly updated and has a clear relationship to this foundational data. Without this approach, organizations may struggle to leverage their systems as efficiently as possible to meet the new reporting requirements highlighted by EMIR Refit.
Organizations need to maintain legacy reporting infrastructure while updating their EMIR reporting capabilities in parallel. This stems from differing go-live EMIR Refit dates for the UK (subject to the FCA) and the EU (subject to ESMA). The effort and coordination required to do this consistently over time should not be underestimated. It would be prudent to factor this unique challenge into any EMIR Refit program.
Effective execution of EMIR Refit will be closely related to the level of expertise, both internally and externally sourced, that can be brought to bear on the problem.
Many organizations find that their original in-house expertise has eroded through “churn” and organizational change over the decade since EMIR launched. This surfaces the challenge of securing the right external resource and technology support to bridge this gap and deliver an effective EMIR Refit program.”
What help and advice can Droit offer for EMIR Refit preparation?
Tom: “Many organizations have legacy reporting formats such as FpML or CSV so it will require a significant amount of effort for them to update their reporting systems, along with their testing and control processes, to meet the required ISO 20022 standard.
Therefore in the short term, organizations should address the three main areas of reporting that are most relevant to meeting the 2024 EMIR deadline: eligibility, validation, and generation.
Droit has products that can help on each of these fronts, complementing an organization’s existing reporting infrastructure and systems. For example, Droit’s Transaction Reporting can be used either as part of a primary reporting flow or as a secondary QA check.
Given that there is virtually no change in the eligibility criteria since EMIR Refit legislation Level 1 went live in 2019, most of the changes apply to reportable fields. Droit’s report validation and generation solutions are perfectly positioned to help organizations to be EMIR Refit ready.
With report validation, Droit’s technology can assess a submission report in ISO 20022 XML format and confirm the report meets all regulatory (ESMA and FCA) and repository requirements for submission. It can also check to ensure the presence of required and conditionally required fields, enforce cardinality, validate types, and apply specific business rules and reference data validations.
With report generation, Droit’s technology can take an input message using Droit’s data model and transform it into a report ready to submit to the TR/ARM in XML or CSV depending upon the jurisdiction, and JSON if applicable.”
As highlighted by Walther already, managing data needs for EMIR regulatory reporting requirements is a basic EMIR Refit success factor and brings its own unique challenge.
The best way to address this is through a data lake. However, if this is not practical or possible, then at the very least, normalizing data from the SOR systems into a standard data model should be a priority. This will make it easier for the reporting system to pull the data for the reports and adapt to the changes to existing fields or new fields that EMIR Refit requires.”
What else should organizations be aware of as part of their EMIR Refit preparations?
Tom: “Organizations already have systems, processes, and of course, existing technology to help them meet their reporting obligations.
But despite this, misreporting remains an issue and cuts across different regulatory regimes.
Some reporting failures can be attributed to the logistical challenges of satisfying a mix of regulators who use differing mechanisms for classifying a product: for example, ISDA product taxonomy, CFI (Classification of Financial Instruments), and ISIN (International Securities Identification Number). CFI and ISDA product taxonomy are broad and inconsistent, while ISIN is too granular and does not exist for every instrument.
UPI is meant to facilitate a common understanding of product and associated data elements. However, its effectiveness depends on a detailed understanding of how different regulators apply and adopt UPI under different circumstances. Furthermore, many organizations not already integrated to ANNA DSB (the sole provider of UPI data) will be behind the curve wherever UPI is mandatory for reporting.
Ultimately, lack of reporting accuracy and misreporting can result in financial penalties, reputational damage, and mandatory resource-heavy remediation efforts. The right technology can help by delivering comprehensive, real-time report validation. This surfaces reporting errors in time to address them prior to submission, measurably improving compliance.”
What will be learned after EMIR Refit?
Tom: “Once EMIR Refit is done, two things will become apparent.
First, careful preparation for EMIR Refit using a combination of best-in-class technology and expertise will have positioned organizations to rapidly address future regulatory reporting rewrites.
Second, the complexity of reporting rules will continue to grow, leaving organizations with legacy technology stacks and slow responsiveness to change vulnerable to ongoing reporting deficiencies.
However, this can be solved by using Droit’s award-winning Adept platform. Adept enables real-time regulatory decision-making that reflects the latest industry consensus.
Watch our latest webinar for more information and details on how Droit can help you with EMIR Refit.