As the EMIR REFIT comes into effect in the UK, it is likely to consume compliance departments and staff involved in the firm’s trade reporting for long days in the coming weeks. Ultimately, we expect to see a successful “Go Live” on 30 September 2024 (UK Go Live), noting the EU version already commenced on 21 April 2024 (EU Go Live). Most firms will be able to submit reports in the first week, with any internal teething issues and trade reporting bugs being ironed out in the first month or two.
Background to EMIR and REFIT
The European Markets Infrastructure Regulation (EMIR) governs (amongst other things) the reporting of derivative transactions to a Trade Repository.
REFIT (the European Commission’s Regulatory Fitness and Performance Programme) was launched in 2012. It is a mandatory regulatory update to EMIR and applies to other regulations. In 2017, ESMA rolled out the first EMIR REFIT, which added additional collateral fields and the country of counterparties. After this point, things started getting interesting and active.
What is UK EMIR REFIT?
After Brexit, EU EMIR was transcribed into UK law. This means that subsequent edits made by the EU through REFIT processes are not automatically updated in the UK but rather require a separate update process (which so far has largely been the same but is expected to diverge further as time goes on).
In February 2022, in a UK EMIR consultation paper, the FCA indicated that it proposed to harmonise UK EMIR REFIT with EU EMIR REFIT, as well as with global CPMI-IOSCO reporting data components.
What Are EMIR REFIT’s Main Objectives?
EMIR REFIT primarily has two main objectives:
- Harmonisation across similar global derivative reporting legislation.
- Improved data quality and scope, achieved by the addition of several fields and the adoption of XML and its associated validations
How Is It Looking So Far?
Going live in the month of September has created a resourcing issue for many firms due to staff taking their usual summer holidays (and the general slowdown) in July and August.
The UK Trade Repositories appear to have learned from the EU rollout of EMIR REFIT and decided to copy and migrate some real trades to the User Acceptance Testing (UAT) environment for full lifecycle testing.
The Unique Product Identifier (UPI) System by ANNA-DSB also seems to be working smoothly. This is mainly due to the phased global implementation dates, with the US and the EU preceding the UK Go Live. As all these regimes are using the same methodology, it means that 95% of the UPIs are already registered.
Pairing and matching is great when it works, as it allows a firm to see what values their counterparty has reported. This provides a kind of real-time audit and reconciliation between the two parties, so if one party gets a value wrong, hopefully their counterparty will get it right! The parties will then engage in dialogue on their conflicting data values and both improve their processes in near real time.
What Are the Biggest Challenges Likely To Be?
Although the regulatory frameworks are clear, the reporting might be tricky at times. Some areas where companies might face challenges include:
Unique Trade Identifiers (UTIs) are still a major source of problems. The “waterfall” approach is not a great solution as it usually relies on sharing the UTI after the trade. This means it has to be created, sent, re-ingested, and attached to the original trade. It is usually done manually, which seems contrary to ISDA and IOSCO’s concept of “digital trade reporting.”
Due to the difficulty of real-time UTI sharing, many investment firms are delegating reporting to their counterparties—leading to both sides of the trade being reported the same and eliminating any checks and balances from pairing and matching.
XML and TR validations are still extremely tight and cumbersome compared to the predecessor system based on CSV files. Firms hoping to fulfil their trade reporting by manually filling in some of the supplied XML templates may be sorely disappointed. We saw this play out in the Trade Repository support groups a week before the EU Go Live, where firms that hoped to adopt this approach were desperately seeking help, but it was too late and out of scope for the Trade Repository to provide XML assistance.
End-of-day reports like the trade state report (which shows open positions according to the trade repositories’ records) or the pairing and matching reports are likely to be not fully functional on day 1, if the EU experience is anything to go by. In fact, some versions of the end-of-day reports are still not live for the EU trade repositories, five months after the EU Go Live.
As the UK prepares for the EMIR REFIT Go Live, firms must brace themselves for a period of adjustment. While the EU rollout offers valuable lessons, challenges such as UTI sharing, XML validations, and resourcing constraints are likely to persist. However, with proactive planning and the experience gained from other markets, companies can navigate these complexities and ensure compliance. The key will be maintaining flexibility and open communication with counterparties and trade repositories as the new regulations bed in over the coming months.
