EMIR Refit: how are the regulators going to get you?

“Regulators, mount up!”

So said Warren G in the intro to his and Nate Dogg’s 1994 smash hit Regulate. And those words – albeit in a different context – might just serve as a warning cry 30 years later as the deadline to ESMA’s EMIR Refit looms large on the horizon.

It’s no secret that regulators are going to be taking transaction reporting infringements much more seriously in the not-too-distant future.

Is ESMA going to use the Refit to get tough? And if so, what exactly will the regulator be looking for?

To test the waters and help you get ready, we’ve spoken to a number of sell-side and buy-side firms about their preparedness. Read on to find out what stage firms are at and the challenges they’re facing, what the regulators will be looking for, and how long you could have to get your house in order after the deadline.

What will the regulators be expecting?

Following our conversations, we’re seeing that firms are mainly focused on getting the mechanics of their reporting for the EMIR Refit correct.

For firms that self-report, this means mapping their data to the new/changed fields, making sure it’s all in a compliant ISO XML 20022 format, and then testing, testing, testing. Firms that delegate their reporting will be looking at the current agreements with their providers, and trying to finalise the legal documentation around the new requirements.

But getting fields correctly mapped and legal agreements in place will be the bare minimum as far as the regulators are concerned.

From ESMA’s perspective, at this point in the game, you should be deep into testing your ability to report. You should be able to understand what your issues are, and what you need to work on to meet the 29 April deadline.

That’s not all. Think about ESMA’s original intention behind the EMIR Refit. The regulator wants to see that parties with reporting obligations are reporting the correct data, yes. But it’s also looking to increase the quality of data at the trade repositories.

So not only should you be testing your ability to report through your UAT cycles, but you also need to have the control environment and reconciliation solutions in place to validate the information that sits at the trade repositories post-reporting. This will enable you to understand how competently you’re reporting to the level of detail required by ESMA.

We believe there will be a burn-in period for the changes, but we also believe that this period will be very short: probably just 3-6 months. And we don’t have visibility from ESMA about what kind of actions they will take in light of non-compliance. But based on our years of experience dealing with regulations like these, avoiding fines or other punitive action is all about having a handle on your issues.

You’ll need to make the regulator aware that you understand your obligations, as well as where you have issues and how you will resolve them. Any organisation walking into 29 April without an understanding of how they will identify and remediate issues is on extremely unstable ground.

A rewrite that mandates an increased level of data integrity at trade repositories is very intentional from ESMA’s point of view. The regulator has been prescriptive around what change and high-quality data look like, and in light of that, what information it wants to see.

The messaging behind the Refit feels clear: reporting parties have had EMIR reporting obligations for over ten years – more than ample time to get their data in order.

Worried? Here’s where to focus

You’ll have different priorities depending on whether you report to trade repositories yourself, or delegate your reporting. But when it comes to control, the solution is the same – robust reconciliation supported by a weapons-grade control environment.

For self-reporters, your eyes should be on the information that you’re reporting. You need the control environment to be able to understand your taxonomy, where you’re getting your information, and how you’re housing it.

You also need to consider how comfortable you are with the quality of that information, and the timing – how long it’ll take you to collate all the required information, and report it in a timely fashion.

Think about the scale of what you need to accomplish. You have 203 reportable fields under the EMIR refit, and you’re likely dealing with hundreds of thousands of reportable transactions. This could lead to hundreds of thousands – if not millions – of breaks.

Running that reconciliation without the right control framework is daunting to say the least. Getting your house in order, implementing a framework that’ll enable you to manage this without crumbling, is essential. Not just for the EMIR refit, but for the global wave of regulatory change that’s beginning to break.

If you’re a firm that delegates reporting, it’s key to remember that you’re delegating the reporting role and not the responsibility. You’ll want to keep your delegated reporting parties honest, reconciling transactions on your own books to those that your delegate has reported to your trade repository. This is an imperative part of the process, and an obligation under the EMIR Refit.

Historically, we’ve seen firms that delegate reporting – in particular those with a small number of transactions – run reconciliations monthly at best, using spreadsheets. We probably don’t need to tell you that this type of solution isn’t fit for purpose. Spreadsheets can’t scale or integrate, there’s no in-built issue remediation, you can’t manage metrics, they are difficult to share across teams and time zones – the list goes on.

Organisations in our conversations have realised that their reconciliations – validating the information reported by the third parties to whom they’ve delegated – have to be industrial strength.

How can Duco help?

Whether firms are self-reporting or delegating, we’re seeing regulators take a much more serious approach to reconciliation and data integrity.

Here at Duco, we’ve made it our mission to help you get compliant. Have a look at our EMIR Refit demo for a better idea of how we can help. Alternatively get in touch, and we’ll be happy to talk to you about setting up your own regulatory control framework – for the EMIR Refit and beyond.