The EMIR Refit: What Will it Mean for Financial Services?

European regulation is once again shaking things up with the recent full EMIR Regulatory Fitness and Performance Programme (REFIT) which standardizes global reporting requirements. The aim of this regulation is to improve the quality of reporting and the effectiveness of supervision which – in turn – will reduce both costs and the reporting burden for affected parties. However, the greatest impact is likely to be on parties’ outdated systems and architecture – which increases the consequences, complexity and possible costs of the implementation.

What is the EMIR REFIT?

On 20 December 2022,  the European Securities and Markets Authority (ESMA) published its final report on EMIR. This report finalizes the EMIR technical standards. Parties must now prepare for EMIR’s 2024 deadline as the new standards will enter into application on 29 April 2024 and introduce major changes. 
Here are the most significant  changes:

• Alignment with international standards on data requirements: Harmonizing data requirements, including the Unique Transaction Identifier (UTI), the Unique Product Identifier (UPI) and other critical data elements. The UTI and UPI are important elements of the EMIR REFIT that aim to increase transparency in the over-the-counter (OTC) derivatives market. These provide unique identifiers for each transaction and product.:
  • The UTI is a unique 48-character alphanumeric code that identifies each OTC derivatives transaction, regardless of where it’ is reported. 
  • The UPI is a unique identifier for each OTC derivatives product. It’ is a 52-character alphanumeric code that’ is used to identify the underlying instrument or index that the OTC derivative contract is based on.
• End-to-end reporting in ISO 20022 XML: EMIR harmonizes reporting formats across trade repositories. ISO 20022 XML is a reporting mechanism that requires all information related to an OTC derivative transaction to be reported in a standardized XML format. This helps improve the quality and consistency of data reported to trade repositories, and it enables regulators to better monitor and analyze OTC derivatives transactions.

Because many firms are reporting directly to a trade repository in formats such as CSV or fPML, the new ISO format will be a challenge to implement.

• Changes to the total amount of reportable fields: ISO reporting enlarges the number of data fields that need to be reported to trade repositories. This addition will mean up to 89 new fields, the withdrawal of 15 fields, and updates to the name, definition, and format of how to report a data field. This brings the total number of reportable fields up from 129 to 203.
• Counterparty details: The EMIR REFIT introduces new requirements for the authorization and registration of central counterparties (CCPs) and trade repositories, including new supervisory powers for regulatory authorities.
• Harmonized data quality requirements across trade repositories: This cornerstone of the EMIR technical standards relates to enhanced and harmonized data quality requirements for data validation and data reconciliation processes. This takes place at the trade repositories once derivatives have been reported to them.
• EMIR introduces a new category of “small financial counterparties”: These counterparties are exempted from the obligation to clear their transactions through a CCP – while remaining subject to risk mitigation obligations. Smaller non-financial counterparties will also have reduced clearing and reporting obligations.
   

How to get ready

Here are some key actions financial entities should consider to ensure compliance with the EMIR REFIT:

1. Understand the scope of the EMIR Refit: Financial entities need to thoroughly review the updated obligations and requirements. By doing so, they will understand the scope and changes introduced and how this will impact their business operations. 
2. Perform an initial gap analysis: To ensure that financial entities are compliant with the new requirements, they must assess their current systems and processes for managing OTC derivatives transactions by performing an initial gap analysis. 
3. Consider the impact on counterparties: Financial entities should consider the impact of the EMIR REFIT on their counterparties. This may lead to modifications to existing contractual arrangements with counterparties.
4. Assess internal governance and risk management processes: To ensure ongoing compliance with the EMIR REFIT, financial entities should assess their current internal governance and risk management processes.
5. Closer collaboration with regulators: Financial entities need to engage with regulators to be aware of the latest developments and guidance related to the regulation. 

In summary, financial entities must be proactive in their approach to complying with the EMIR REFIT. By taking a strategic and proactive approach, financial entities can ensure that they are prepared for the updated regulation and mitigate the risk of non-compliance.