March 2023

EMIR Refit panel: 5 key takeaways

There’s just over a year to go until the EMIR Refit goes live in Europe. There are lots of changes you’ll have to come to terms with, while still managing business as usual.

We wanted to help firms navigate these challenges, so we brought a panel of transaction and regulatory reporting experts and a group of senior industry figures together for a special briefing in London. The event covered the main challenges and opportunities facing firms from the upcoming EMIR Refit.

Moderator Chad Giussani, formerly of Standard Chartered, Barclays, Lloyds Bank and HSBC, led a lively conversation between our speakers:

Marisa Kershaw, Vice President of Northern Trust Corporation
Adrian Gill, Group Head, Regulatory Operations at CMC Markets
Chris Akuwudike, Regulatory Reporting Manager at Argentex
Tim Hartley, EMIR Reporting at Kaizen Reporting
And our own CEO, Christian Nentwich

Here are five key takeaways from the event.

1. There’s competition for the title of ‘biggest EMIR Refit challenge’

EMIR reporting has been live for almost a decade. But the Refit changes are so sweeping that some firms have started thinking about it like it’s a separate regime. Updates include changes to the number of reportable fields and the introduction of XML standards and Unique Product Identifiers (UPIs).

Sweeping changes to reportable fields

The number of reportable fields is rising from 129 to 203, which will make EMIR twice the size of MiFIR Transaction and Trade reporting put together. There have also been changes made to most of the pre-existing fields as well, such as changing the format or the description of the field itself.

XML as well

Firms will now have to report in XML format. This is positive in one sense, because currently every trade repository has its own set of technical specifications. Switching to XML will standardise reporting and prevent trade repositories from adding custom fields.

But most firms currently send a CSV and aren’t familiar with XML. They’ll have to work out whether to get the skills in house, use a third-party provider, or pay one of the trade repositories to convert their CSV into the appropriate XML.

Event types as well as action types

Action types tell the regulator what you’re doing. For example, if you’re opening a new trade, or closing an old one. Now these fields will be accompanied by event types which require you to justify the trade or the change. This isn’t necessarily information you will already have in your risk systems, though.

UPI uncertainty

Unique Product Identifiers (UPIs) will give regulators a clearer picture of what’s being traded, but there’s huge complexity surrounding them. For one thing, there’s a debate ongoing over whether the regulators will try to create individual UPIs for every single OTC trade.

The alternative is to stick to the current system, where there’s a closed standard you can purchase which helps you to generate the UPI yourself.

Six months to backdate

You’ll have six months from the go-live date to update every open trade and position to the new format. This could prove very difficult for older trades, because you may not have all the new data points needed to populate all 203 fields.

2. Two regimes to manage as the EU and UK diverge

The Refit goes live for European firms on 29 April, 2024 and, confirmed just last week, will go live for UK firms on 30 September 2024. The UK’s validation rules and schemas are in draft form and will be formalised on 24 March, 2023.

This means there will be a sustained period where you’ll have to support both the newer EU version of EMIR and the older UK version. For example, you will have to cater for different parameters, such as action types and lifecycle models, until the Bank of England and Financial Conduct Authority (FCA) agree changes.

Firms may end up having to essentially paper over the gap between the two different versions of the regime until September, when the UK version goes live and the two move into closer alignment.

Even then, while it’s unlikely that the UK version of EMIR will be radically different to the EU version when it goes live, divergence will become a greater issue as time goes on. The FCA have already signalled some areas where they want to do things differently moving forwards. For example, in the future they may decide that FX swaps will count as two submissions rather than one.

The widening of standards between the UK and EU in the coming years will create further operational pain for those who have to report under both.

3. An exodus to in-house reporting?

Reporting used to be something that firms were keen to outsource. Regulatory compliance isn’t a value-add activity, so it was a prime candidate for delegating to someone else with the resources and technical knowhow.

But this gives up control of how the reporting is done. The Refit means firms are responsible for their reporting, even if they don’t do it themselves. They must understand what’s been done and they have to reconcile to ensure that what’s been reported is fit for purpose, complete, accurate and timely.

It’s still the reporting firm that has to notify the regulator, submit the error and omissions form, explain what went wrong and provide a remediation plan. This includes having proper reconciliations, key personal and three lines of defence in place.

To do all that requires pretty much the same resources and expertise in-house as handling the actual reporting yourself. Many companies, therefore, are now looking to bring their reporting back in-house. They’re seeing the EMIR Refit as a way to improve their overall reporting capabilities.

Doing this could help you gain more oversight. It’s not simple but, once set up, the long-term benefits are more stability and control over your reporting.

4. Accurate data isn’t enough; regulators want to see robust controls too

On the face of it, it may not seem like there have been many fines under EMIR since the headline grabbers a few years ago.

But what is happening, which doesn’t make the news, is that regulators are often in touch with chief compliance officers and CEOs. They send requests for information to check very detailed and specific aspects of their reporting.

When fines do happen, particularly in terms of the FCA, most of them are related to the control framework that surrounds reporting. It’s not just whether the quality of the reporting is good or bad. It’s about whether firms have all the correct checks and balances in place to ensure that they are doing everything properly and providing adequate oversight.

On top of this, it’s not just the immediate fines that cost your business. One senior figure at a UK-based corporate and investment bank revealed at an FCA forum that they had spent ten times the cost of the original fine levied by the regulators on putting everything right.

5. Technology advances mean firms can easily capture their regulatory knowledge

The Refit is forcing some technology changes on the industry, such as the ISO 20022 standard XML message type. But there are also some innovations available that the industry can choose to leverage.

There is a spectrum of ways that firms can respond to regulatory change. At one end of the spectrum is DIY: building your own solution. Many firms took this approach when the regulation came in, but it was far more time-consuming and difficult than they’d anticipated

At the other is using vendor solutions to manage reporting. But with the Refit making firms much more accountable for their reporting, this doesn’t necessarily leave you with much control.

The innovation of low and no-code technology has enabled a middle ground: “buy-to-build”. This combines the convenience of a vendor solution with the in-house expertise that firms have. It’s very rare to find someone who is a subject matter expert and also a coder. What usually happens is one person has to document their requirements and another person or team builds it.

No-code technology allows those subject matter experts to build robust, transparent and tested controls for things like EMIR.

Ultimately this helps people solve the real problem – the need to provide guarantees of data quality. Processes built using no-code interfaces are, by their very nature, transparent and understandable.

You can logically follow the transformation of the data and the journey it’s gone on from start to finish. That’s very different to chunking up 203 fields into 14 separate reconciliations so that you can squeeze them onto a cash system that was built to handle no more than 15 fields at a time.

Preparing yourself for the EMIR Refit

A big thank you to our wonderful panellists and all the industry professionals who attended the event.

If you haven’t already, now is the time to be thinking about the resources you need to tackle these huge changes to derivatives reporting rules. You need to consider the resources you need in terms of development, operational staff, protocol testing quality assurance departments, and how you’re going to manage everything.

Your technology will play a key role in determining how easily you can respond to the challenges ahead. Find out more about how Duco can help you ensure your reporting data meets the new requirements.