European Securities and Market Authority (ESMA) came out with the guidelines and technical documentation on reporting under European Market Infrastructure Regulations (EMIR) regulatory fitness and performance program (Refit) in December 2022. The improved guidelines offer amendments to the regulation as a necessary means to address rising compliance costs and regulatory transparency issues. While financial counterparties (FC) and non-financial counterparties (NFCs) have already been reporting for EMIR, EMIR Refit aims to reduce systemic risks prevailing in the financial system and strengthen the macro-financial system further. In this blog, we will shed light upon some of the critical changes that business entities in scope cannot ignore and how they can strategically maneuver these changes while overcoming the challenges that might feel overwhelming.

What does EMIR Refit bring to the table?

With the implementation of EMIR Refit, a unique transaction identifier (UTI) and unique product identifier (UPI) will be introduced, including a few other critical data elements (CDEs) to harmonize the international standards. This amendment would also help all the entities reporting in non-EU jurisdictions. Furthermore, EMIR Refit will facilitate the analysis at the supervisory level and address the data quality issues. For example, ISO 20022 XML is suggested for reporting from the FC/NFCs to help validate data and recon at the trade repository (TR) end. An event type (e.g., credit event, corporate event, etc.) will also be introduced to supplement the action type (new, modify, terminate, etc.) in providing more granularity for business events in a trade life cycle for triggering a report. Furthermore, the transition window of six months, when all the open trades would need to be upgraded to the new technical standards, would need sourcing the new data elements for these trades. Additionally, the entities must align with the counterparties to ensure that recon issues do not crop at inter and intra-TR levels.

But are entities in scope ready for these changes?

As mentioned above, like any other regulation, EMIR Refit intends to reduce systemic risk in the financial system. However, it does bring some discomfort for the entities in scope. The exercise at hand for FC/NFC starts with interpreting the regulation, running a gap analysis, embracing business process changes, and understanding system-level changes. That being said, understanding and complying with the ever-changing regulations in a complex banking and financial diaspora landscape can be complicated for all the FC/NFCs in scope. But if we focus only on the reporting aspect of EMIR Refit, there are various salient points to understand.

Critical changes brought by EMIR Refit that you can’t miss

The EMIR Refit aims to amend and simplify the EMIR to address disproportionate compliance costs, transparency issues, and insufficient access to clearing for certain counterparties by incorporating some of the following critical changes:

Revised reporting lifecycle event
In isolation, the action type field is insufficient to describe the business event. So, ESMA has introduced the ‘event type.’ The purpose of having an event type is to provide more granularity on the kind of business event triggering a given report. The change adds ten event types to the current eight action types. The event types describe more details of the underlying action and include events of a corporate event, exercise, allocation, early termination, etc. Each action type has specific events that can be applied to it.
ISO20022 XML
ISO 20022 is currently used for other regulatory regimes and is widely accepted in the financial industry. The ESMA will introduce the harmonized XML submissions for EMIR reporting as a critical measure to bring and establish global standardization. This will allow a fully standardized format for reporting that aims to eliminate the risk of discrepancies in data.
Changes to reportable fields
The number of fields will increase from 129 to 203 as new fields will be introduced in the derivative based on crypto-assets. Initial analysis shows that 40 percent of the total fields are newly introduced. A little over half of those are existing ones as per EMIR or introduced with a new name; the rest are duplicate ones. Fifteen fields got decommissioned of the 89 new fields, which totals to net 74 new fields. This would call for a relook at the regulatory reporting architecture, and the regulatory reporting solution may start from the product processor systems.
Legal entity identifier (LEI) standardization
The legal entity identifier’s (LEI’s) renewal will now be validated only for the reporting counterparty by the entity responsible for its reporting to allow lapsed LEIs for other counterparties.
Unique product identifier (UPI)
A unique product identifier (UPI) will be assigned to an over-the-counter (OTC) derivatives product. Furthermore, this UPI will identify the product in transaction reporting data. Thus, allowing authorities to aggregate data on OTC derivatives transactions by product or UPI reference data element. As a result, this aggregation will facilitate the effective use of OTC trade data, including helping authorities assess systemic risk and detect market abuse.
Unique transaction identifier (UTI)
The change to the unique transaction identifier (UTI) generation waterfall model considers bilateral agreements as fallbacks. When there is no agreement, firms follow the UTI waterfall to generate this identifier. ESMA sets a deadline where the counterparty developing the UTI shall communicate the UTI to the other counterparty timely, which is by 10:00 a.m. UTC on T+1.

Are you planning to implement EMIR Refit?

Here are some of the key considerations that we think you should know before you plan to implement EMIR Refit. For an FC/NFC looking to address the EMIR Refit regulatory requirements would have the following key considerations. These considerations revolve around the criteria of submitting data into the TR and closing end-of-day reports from the TR or how to run a valuation or collateral reporting, and more.

What does EMIR Refit bring to the table?

But are entities in scope ready for these changes?

Critical changes brought by EMIR Refit that you can’t miss

Are you planning to implement EMIR Refit?

Key Considerations

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