Updates to the European Market Infrastructure Regulation, known as EMIR Refit, are scheduled to go live in 2023, following 10 years of discussion between the European Securities and Market Authority (ESMA) and participants in the derivatives market. EMIR Refit is bringing some incremental changes to EU and UK swaps reporting requirements, and these changes will involve significant effort from both trade repositories and the entities that must report to them.
But while the incremental changes can be challenging, banks would do well to look at the underlying trends and tone of ESMA’s communication to gain insights into the longer-term implications of the regulator’s thinking. Readiness for EMIR Refit actually has two aspects: readiness for the specific reporting changes required by the ESMA specification, and readiness for the future responsibilities expressed in ESMA’s overall engagement with the market.
Incremental Change: An EMIR Refit Compliance Checklist
The EMIR Refit spec contains a number of concrete changes to reporting requirements. Some of these relate to new reporting fields and formats; others are further-reaching, potentially requiring new processes and service levels. To achieve compliance by the deadline should be feasible for all entities, but will not be trivial. A high-level checklist for readiness would certainly include:
- Changes to reporting fields: EMIR Refit expands the number of accepted fields from 125 to 203 (not all mandatory) while also removing some fields that are not compatible with the new reporting format—potentially creating problems for internal processes that might have come to depend on the deprecated fields. Updating existing trades to match the new action and event codes will also be complex.
- Standards harmonization: The move to ISO 20022 as a format, and to the Unique Transaction Identifier (UTI) and Unique Product Identifier (UPI), is extremely positive and likely to bring the long-term simplification that ESMA hopes for. But in the short term there will be significant work.
- New processes: Several requirements imply new processes that span multiple parties—for example, agreeing UTIs, handling corporate events, and responding to reconciliation errors.
- New artifacts: Most notably, trade repositories are required to produce seven new end of day reports for reporting entities and counterparties to consume and reconcile.
- New service level agreements (SLAs): Refit defines much-needed SLAs around various processes—most conspicuously around reconciliation (which will be T+1/next business day) and response to exceptions, but also around cross-entity communications, such as notification of changes to delegated reporting between trade repositories and counterparties. Changed rules around permissioning and authorization also imply changed processes, for example around counterparty onboarding.
Perhaps more important than any one format or process change, however, is the potential for multiple standards to be in operation at once—particularly over the six-month period ESMA intends to allow for updating existing trades, but also in the longer term as ESMA and the UK’s Financial Conduct Authority potentially drift apart.
Since the publication of the draft EMIR Refit standard in 2019, there has been an ongoing and busy dialogue between regulators and market participants. This discussion has been characterized by a strong—in fact, increasingly strong—focus on data quality.
“The reconciliation rate of derivatives has improved over the last years, however it is still at an unsatisfactory level and therefore additional efforts are needed by counterparties and trade repositories.”—ESMA / SFTR data quality report, 2020
Over the last few years ESMA has taken several steps to ensure that data quality is at the top of the agenda for counterparties, trade repositories, and reporting entities, including:
- Issuing updates on overall data quality across the market, identifying successes but making it clear that current levels of quality are inadequate.
- Focusing heavily on data quality in the clarifying guidelines issued in 2021—emphasizing the long-term value of universal identifiers such as UTI and Legal Entity Identifier (LEI), while acknowledging that participants will in some cases have to do significant work to keep this new reference data up to date.
- Enforcing data quality controls on participants—for example, requiring that trade repositories check incoming trade reports against a formal schema and immediately reject non-conforming files, regardless of their business contents.
- Proposing a set of data quality metrics for participants to generate and monitor, as well as making statements about participants’ internal controls, going as far as to define a data quality framework for participants to use.
“ESMA has established a comprehensive framework to monitor the data quality of the EMIR and SFTR reporting regimes. The framework identifies control methods, frequencies, and techniques to detect data quality issues across key data quality aspects.”—ESMA / SFTR data quality report, 2020
It should be noted that when a regulator such as ESMA speaks in terms of “data quality,” the implications go well beyond functions within a bank that would normally fall under that term. ESMA’s view of data quality revolves around the intelligibility and accuracy of reports submitted to trade repositories; from the point of view of a bank acting as a report submitter, data architecture, data governance, reference data management, and data quality are just some of the functions that need to work together to achieve the required reporting standard.
The focus on data quality, and the relatively broad interpretation of data quality as spanning formats, file validity, reference data, authorization, and business content, have been hallmarks of the regulatory dialogue so far, and this has a strong implication for all entities involved.
The Responsibilities of a Market Participant
“Misreporting by a single counterparty can undermine economic/financial stability analysis performed by data users.” —ESMA / SFTR data quality report, 2020
That quote from ESMA’s April 2021 data quality review implies an important point: that a market participant has a wider responsibility to the market and indeed the economy as a whole.
We are entering an age of pervasive data analytics, in which market surveillance can be conducted more effectively than ever before and used as a powerful macroprudential tool. But the implication is that the power of an individual participant to help or to harm the community as a whole increases; the indirect effects of poor data quality can spread widely and rapidly if a poorly-behaved participant misreports. Conversely, well-behaved parties with technically sophisticated quality and governance processes will be ever more valuable to the market.
Implications for Banking Data Governance
In terms of what banks should physically do to prepare for EMIR Refit, the implication is clear: While compliance with specific reporting changes should not be neglected, the most successful entities will be those that extend a strong data governance and data quality umbrella over the entire swaps reporting estate. And that governance must not be siloed—to achieve good governance efficiently, the scope must be set widely so that swaps reporting becomes a participant in an overall data governance and data quality strategy that spans not just trade data, but reference data, internal MI, and internal key risk indicators. In short, the further a bank progresses toward strong overall data governance, the more influential a player it will be in the ever more closely regulated derivatives market.