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EMIR Refit - What you need to know and what you need to do

sales@eflowglobal.com (eflow) — Mon, 09 Sep 2024 11:00:00 +0000

The EMIR Refit - a significant update to the European Market Infrastructure Regulation (EMIR) - has been in effect across the EU for several months now. With the UK fast approaching its own go-live date, 30th September 2024, it’s the perfect time to recap the key aspects of the key points of EMIR Refit and what you need to do.

Background - EMIR and EMIR Refit

EMIR is an EU regulation aimed at increasing the transparency and stability in over-the-counter (OTC) derivatives markets. Companies with trading activities in the European Economic Area, and those in the UK from September 2024, are obligated to comply in a few key areas:

Reporting: Market participants must report details of their OTC derivative contracts to trade repositories.
Central Clearing: Certain OTC derivative contracts must be cleared through a central counterparty to reduce counterparty risk.
Risk Management: Market participants are required to implement robust risk management processes, such as collateral management, to reduce systemic risk.

EMIR Refit

Over time, EMIR’s regulations have become outdated and complex, and mass reporting errors emerged, leading to the launch of the EMIR Refit (Regulatory Fitness and Performance Program) in 2017. The program intends to improve the quality of reporting by simplifying the regulation, including alignment with international standards. An initial round of amendments in 2019 expanded the definition of Financial Counterparties to include more entities posing risk to the financial system, and introduced the concept of Small Financial Counterparties which are exempt from clearing obligations, among many other changes.

ESMA’s Final Report, laying out the program’s next steps, was published in December 2020, endorsed by the European Commission in June 2022 and published into the European Commission Official Journal in October 2022 for implementation in April 2024. This latest publication includes substantial updates to the technical standards associated with EMIR, covering both the regulatory obligations (Regulatory Technical Standards) and the standards, formats, frequency and methods of fulfilling these obligations (Implementing Technical Standards). Following Brexit, the FCA have ‘onshored’ the EU regulation, EMIR Refit will be a requirement in the UK in September 2024.

What you need to know

EMIR Refit: The latest changes

At a high level, there are three areas of change that you should know about:

Reportable fields: With the inclusion of 89 new reporting fields and the elimination of 15 previous fields, the total number of reporting fields under EMIR has increased from 129 to 203. For context, this is more than double the number of reportable fields under MIFIR for trade and transaction reporting. Whilst the removal of ‘Beneficiary’ and ‘Trading Capacity’ go some way to simplification, reporting firms’ overall requirements have been made more complex with the addition of challenging fields such as those pertaining to their counterparties, including clearing thresholds, reporting obligations and corporate sectors.

Reporting lifecycle: EMIR Refit aims to make the lifecycle of a trade more transparent with increased granularity on what action has been taken, including the reporting of modifications or terminations of a contract, as well as a new field, ‘Event Type’, which helps to explain why an action was taken. ‘Event Type’ is to be reported and used in conjunction with ‘Action Type’ - ESMA has provided the matrix below to illustrate when reporting is required and at what level (Transactional, ‘T’, or Positional, ‘P’)

Action and Event Types Matrix

Harmonisation: As part of simplifying EMIR, ESMA has sought to align the regulation with international standards with which firms are already familiar. For example, EMIR Refit aligns closely to the work done by the CPMI-IOSCO Harmonisation Group on critical data elements, directly impacting the generation of Unique Transaction Identifiers. Harmonisation also applies to the formatting of data reports. The fully standardised ISO20022 XML format is widely used elsewhere, and isthe required format of EMIR reporting as of April 2024 in the EU, and in September 2024 in the UK.

Regulatory rewrites - EMIR is not alone

Research published In 2021 highlighted that 97% of firms were misreporting under EMIR. With that backdrop, EMIR’s rewrite is no surprise. Similarly, high profile reporting failures and enforcement actions have occurred in the US, and the CFTC implemented an initial round of changes to its swaps reporting rules in December 2022, ahead of plans to implement its second phase in Q4 2023. The Monetary Authority of Singapore also expanded their OTC derivatives trade reporting requirements in 2021, and the Canadian Securities Administrators plan to implement changes to their trade reporting rules will come into force in 2025. This is to name just a few. Given this wider context, EMIR Refit can be viewed as one of a long list of regulatory rewrites in the trade and transaction reporting space. And since EMIR Refit is not alone, the actions taken in response to these amendments can go a long way in determining a firm’s preparation for the trials to come.

What you need to do

Data

As a regulation which leans heavily on reporting obligations, EMIR has always represented a data problem for firms. The amendments made through EMIR Refit compound these challenges, with a significant increase in reportable fields and a new required format. For many of the large firms that fall into EMIR’s scope, managing masses of global data will already present an operational challenge, especially if those firms are also operating on legacy systems. Big data consulting and technology industries are experiencing significant growth as firms respond to competitive and regulatory pressures to modernise - of which EMIR Refit is one of the latest. Firms that take the opportunity to clean up their data stores and optimise their data pipelines in preparation for EMIR Refit will find themselves better prepared to respond to the challenges ahead, regulatory or otherwise.

Technology and expertise

In the same way, firms that view EMIR Refit as a driving force for technology transformation will be better placed for more seamless transitions during future shifts in economic and regulatory conditions. In particular, the use of dynamic and broad solutions, such as platforms, can provide a breadth of operational coverage which means that many of the necessary changes can be made all within one system. Managing these changes with speed and precision requires that the technology partner is equipped with deep subject matter expertise - a commodity that is especially important in the context of a rewrite that comes 10 years after original EMIR implementation. In that time, many firms will likely have lost their internal experts. Trusting an external partner is not always easy, as trust is built not only through expertise and accolades, but also through communication and customer service excellence. This point can easily be missed when the primary focus is technological change, but is a crucial consideration when firms are relying on external partners to address regulatory obligations.

So, to avoid dreading the next regulatory rewrite, choose a technology partner with the capabilities to understand and operationalise your end to end obligations, and who you can trust to guide you through the process with maximum clarity. Most importantly, choose a technology partner with a track record of customer service excellence alongside technical expertise. This combination is the most impactful for successful change.

eflow’s TZTR Transaction Reporting platform is purpose-built to meet all EMIR and MiFIR reporting obligations and is already being used by European firms to comply with the new legislation that was rolled out in April 2024.

Key Changes

1. Expansion of Reportable Fields

The number of reportable fields has increased from 129 to 203 in the EU and to 204 in the UK.
This expansion aims to enhance the granularity and accuracy of derivatives reporting.

2. Introduction of the ‘Corporate Sector’ Field

A new data field, ‘corporate sector,’ has been introduced to classify counterparties based on their primary business activities.
This addition helps regulators better understand the nature of the entities involved in derivative transactions.

3. Adoption of ISO 20022 XML Reporting Format
Both EU and UK EMIR Refit mandates the use of the ISO 20022 XML format for reporting, replacing previous formats to standardize data submission.
This change facilitates improved data quality and interoperability across reporting entities.

4. New Reporting Timelines

EU EMIR Refit went live on 29 April 2024, with a backloading deadline for outstanding derivatives set for 26 October 2024.

UK EMIR Refit is scheduled to commence on 30 September 2024, with a backloading deadline of 31 March 2025.

EMIR Refit Implementation Timeline

Date	Milestone
29 April 2024	EU EMIR Refit go-live
26 October 2024	EU backloading deadline for outstanding trades
30 September 2024	UK EMIR Refit go-live
31 March 2025	UK backloading deadline for outstanding trades

Additional Resources

For more detailed information on EMIR Refit and its implications, consider exploring the following resources:

To help you prepare effectively, we are offering a free EMIR Refit Readiness Audit. This complimentary 30-minute consultation will assess your current readiness and provide insights on how to maintain your compliance during the transition. Book your free EMIR Refit audit here.

Harmonising EMIR Refit with global standards: Ensuring consistency in derivatives regulation

sales@eflowglobal.com (eflow) — Tue, 05 Dec 2023 10:00:00 +0000

EMIR Refit and global derivatives regulation

While some sensationalised media headlines suggest that the UK and the EU financial services regulators are constantly at loggerheads, this is not always the case. They may be competing for business, but both parties recognise the need to harmonise global standards concerning derivatives.

We only need to look back at the 2007/8 financial crisis, which saw contagion sweeping through the markets and bringing many governments and financial institutions to their knees. It is critical that regulators can monitor not only their local derivatives markets but also global trends. By homogenising derivatives reporting regulations, the risk of noncompliance would be greatly reduced.

This article will look at harmonising derivatives regulations and EMIR REFIT, which will see global standards more closely aligned.

Fundamental changes and objectives of the EMIR Refit

There are several critical changes to the reporting system, which include:-

Increasing the number of reportable fields from 129 to 203 to align with CPMI-IOSCO standards
Switching from submissions in CSV to XML (using ISO 20022 standards)
The removal of irreconcilable fields and tolerance levels in the UK system
Unique Product Identifiers (UPIs) will reduce inconsistencies but at a cost
Unique Trade Identifiers (UTIs) will remove a degree of discretion, creating a more formalised process
UTIs must be provided by 10am T+1, thereby ensuring that both parties can report trades on time

It is important to note that the new regulations cover market traded and OTC derivatives, thus giving regulators information across the entire market.

EMIR Refit: What is the ultimate aim?

The objectives are simple:

“To further enhance the harmonisation and standardisation of reporting under EMIR."

The new reporting system will allow regulators to better monitor systemic risk, which has the potential to bring down not only individual entities but entire financial systems/investment markets. It is also a means of controlling regulatory and reporting costs across the whole financial services industry.

As both sides of each transaction need to match, it is asynchronous, and a sign of slight regulatory divergence post-Brexit, that Europe will go live with its version of the EMIR REFIT on 29 April 2024 while the UK is a little later, on 30 September 2024. This means that some financial counterparties will be operating two different reporting systems for a period. The overlap is due to the UK government being committed to an 18-month introductory period between the announcement of the EMIR REFIT (slightly delayed) and the switch to the new reporting system. Yes, there will be harmonisation, but at a later date.

International regulatory standards and initiatives

The G20 and, by proxy, the Financial Stability Board (FSB) are at the heart of the push to harmonise international derivatives regulations. This body promotes global financial stability by working with regulators and supervisory bodies from G20 members and non-member countries. The FSB was a successor to the Financial Stability Forum (FSF), with the need for change in light of the 2007/8 financial crisis.

The FSB was created to:

Identify and review potential vulnerabilities of the global financial system
Promote the exchange of information between different regulators and reporting bodies
Assess the potential impact of regulatory changes on global markets
Advise on best practices for regulatory standards
Work with international standard-setting bodies to co-ordinate global regulations
Set guidelines for establishing and supporting supervisory colleges
Support contingency planning for cross-border crisis management
Collaborate with the IMF to conduct early warning exercises
Promote the harmonisation of global reporting standards

Where historically local regulators, taking in an array of different reporting systems, would be defensive of their domestic oversight, instances of contagion have brought these parties together. As we saw just recently, we were for a time staring contagion down the barrel when the US banking sector wobbled, and some banks needed additional financial backing.

The introduction of EMIR REFIT now brings the EU and the UK more in line with the US market. While the broader benefits have been detailed above, some US institutions will encounter margin calls in the future due to regulatory harmonisation.

The benefits of global harmonisation

As the leading financial markets, such as the US, UK, EU and APAC, come together to harmonise global derivative regulations, this forces others to follow suit. EMIR REFIT has also brought together actively traded derivatives against OTC markets to provide a global picture. This allows regulators to assess ongoing and even predict systemic risk, which, as we have seen, can bring down markets and economies.

As a result of this ongoing harmonisation of derivatives regulations, there will be improved transparency and risk management. In hindsight, it was apparent before the 2007/8 financial crisis that derivatives exposure placed the US subprime mortgage market in a perilous situation. Such was the use of derivatives to slice and dice, repackage and resell mortgage obligations that a wobble and a sudden drop in confidence would bring the market crashing down. However, hindsight is a beautiful thing!

This prompted the US government to bring in new regulations to restrict the power/influence of derivatives. On the flip side, it is crucial to recognise the role that derivatives play in creating liquid markets.

Cross border trade

Growth in cross-border derivatives trading is a significant factor which brought together G20 regulators and other non-members across the globe. While everyone from Warren Buffett to the Vatican has expressed concern about derivatives, they are an integral part of the global financial markets. Enhanced transparency and information sharing will create a more stable trade environment and, hopefully, reduce the threat of contagion as we advance.

Challenges in achieving global consistency

As investment and money markets around the world become more entwined, with cross-border transactions now as easy as dealing with your neighbour, there is a need for greater regulatory consistency. While OTC derivatives markets are primarily unregulated, there is an indirect degree of control as the financial institutions/counterparts are usually regulated. This provides an element of regulatory harmonisation, but bringing together reporting systems and formats is very different.

The main challenges in achieving global consistency in reporting standards are as follows:

Economic and political considerations

The US, UK and EU continue to battle it out to become leaders in all areas of the investment/money markets. However, each country, political party and regulator will have domestic challenges to consider in line with international pressures. While they all know they need to work together, it is often akin to a game of poker; who will blink first, who will lead and who will follow.

Different jurisdictions, different regulations

There are three central leading bodies regarding global investment regulations; the US, UK/EU and various parties in the Far East. However, even though the UK and the EU are moving in the same direction, they are moving at different speeds. As cross-border trade continues to grow and investors/financial institutions demand greater protection and transparency, other regulators will eventually be forced to fall into line.

Technological/operational challenges

The RegTech sector, a subsector of the wider FinTech industry, has attracted massive investment over the last decade or so. This has prompted governments and regulators to be more appreciative of new technology and innovation while also looking to retain a degree of control. Then there are the operational challenges, the increase in short-term costs and challenges to profitability.

Ultimately, global regulators know they must work together to create a transparent regulatory structure. One that will help them identify potential problems, such as the systemic pressures building before the 2007 financial crisis, and take pre-emptive action.

Regulatory cooperation and the next steps

The fact that the UK and EU, according to the broader media, appear to be at loggerheads regarding their financial services industries, but working together on derivatives regulations, says everything.

They are both well aware of the need to cooperate and add the next piece of the global regulatory jigsaw because cross-border trading is now as simple as pressing a button.

While impossible to rule out entirely in the future, the convergence of derivatives reporting regulations makes catastrophic market events less likely or, at least, less damaging.

Even though the 2007 financial crash began in the US subprime mortgage market, an inability to identify the risk from derivatives led to contagion and a worldwide economic crash.

We would be surprised if, despite partisanship, countries didn’t see the benefits in alignment and synchronizing of at least the important aspects of derivatives regulation.

Conclusion

Bringing together domestically traded derivatives and OTC markets is important, but doing this worldwide is critical. This enhanced transparency allows regulators to adapt and control margin obligations to account for underlying market conditions.

It is vital that the EU, the UK, and global partners look to harmonise EMIR REFIT and their comparative domestic regulations.

The ongoing UK and EU EMIR REFIT regulatory changes in the derivatives market are the next stage in what some see as an eventual global regulatory system.

At eflow, we provide various regulatory compliance solutions for the financial services industry, using continually-updated, market-leading technology to ensure accuracy and reporting speeds.

If you would like to chat about your future obligations under the EMIR REFIT, get in touch.

The Consumer Duty: What MiFID II investment firms need to know

sales@eflowglobal.com (eflow) — Mon, 20 Feb 2023 11:00:00 +0000

The Consumer Duty: What MiFID II investment firms need to know

What is The Consumer Duty?

The Consumer Duty is an imminent FCA Regulation which sets high expectations for the standard of care that firms give to customers in retail financial markets. It includes the addition of a new consumer principle, set to be added to the FCA Handbook, which captures the purpose and sentiment of the regulation as a whole:

Principle 12

“A firm must act to deliver good outcomes for retail customers”

The Consumer Duty imposes a higher level of attention to customer outcomes than before. In practice, this means that Principle 12 supersedes the existing, lower standards of care outlined in Principles 6 and 7, wherever the Duty applies. In the regulation, The FCA explains that the principle is supported by 3 cross-cutting rules:

The cross-cutting rules

Firms must act in good faith towards retail customers
Firms must avoid causing foreseeable harm to retail consumers
Firms must enable and support retail customers to pursue their financial objectives

The cross-cutting rules also inform and are supported by four outcomes which define, at a greater level of detail, firms obligations across key areas of the customer relationship:

The relationship outcomes

The products and services outcome - Firms must create and distribute products and services that are suitable for their intended purpose.
The price and value outcome - Firms are required to address factors that may result in products or services that are unfair or of poor value, including unsuitable features that may cause foreseeable harm or hinder customers from using the product or service effectively.
The consumer understanding outcome - Firms should communicate in a manner that facilitates consumers’ comprehension of their products and services, including their characteristics, potential risks, and the consequences of their decisions.
The consumer support outcome - Firms are expected to provide support that is tailored to their customers’ needs. Such support should empower consumers to achieve the benefits of the products and services they purchase, pursue their financial objectives, and act in their own interests.

Implementation and scope

Following two consultation papers issued in 2021, the FCA published finalised guidance on 27 July 2022. The most significant changes made in the finalised rules were in the areas of implementation. Notably, the implementation period has been extended from 9 to 12 months, and the final deadline has been pushed to the end of July 2023. In the meantime, firms were required to produce approved implementation plans before the end of October 2022, which the FCA has since been reviewing. In January 2023 the FCA published its findings, raising ineffective prioritisation, overconfidence in existing systems and inter-firm collaboration as three areas of concern that require attention from firms.

The scope of the regulation is broad, encompassing all firms under the FCA’s remit, such as banks, insurance companies, and investment firms that provide products and services to retail customers. These firms are required to not only review their immediate sales channels but also account for the impact of their products and services across the entire distribution chain. This includes a requirement for firms to clearly articulate the target market to their distributors, and to notify the FCA when they become aware of another firm in the distribution chain that is not complying with the Consumer Duty which requires not just management information but also strong oversight and management of the distribution channels.

How will The Consumer Duty impact MiFID investment firms?

MiFID II investment firms are those which offer Investment services and activities as defined and regulated by the directive. Such services are increasingly demanded in retail markets, and the broad scope of consumer duty means that these firms now face further regulation. This is understandable, against a backdrop of fears that under informed, or even vulnerable individuals might be harmed when engaging in the market for investment products or services. This is especially relevant in the context of MiFID II Investment services and activities, which can be highly complex and risky and where significant harm has already been realised (e.g. Retail investors losing significant amounts of money through exposure to high risk, leveraged products such as Contracts for Difference). MiFID II investment firms are therefore likely to face much greater scrutiny under the duty

For instance, MiFID II investment firms which transact directly with the consumers of MiFID II regulated products and services, such as asset managers, will be accountable for various requirements under the duty:

Providing a thorough understanding of the product and its alternatives
Suitability assessment (including risk appetite both from the customer’s financial objectives but also from their ESG objectives)
Outcomes testing
Risks of harm

Firms operating further back in the distribution chain, such as market makers, will also be accountable for ensuring that their actions do not result in harm to consumers. They must clearly define the appropriate target markets and distribution channels and, further, that they achieve the best possible outcomes as measured by factors including transparency, price, venue and speed. In this area, MiFID II and Consumer Duty crossover significantly, as MiFID II already mandates this behaviour through best execution rules. Regardless of where they are situated in the distribution chain, firms need to gather the necessary data to demonstrate compliance with regulations.

The role of technology?

When operating at the speed, scale and complexity of MiFID II firms, complying, and proving compliance, with such high standards will require the use of technology. Trade and transaction surveillance technologies, for instance, provide firms with the capability to observe and analyse the outcomes of their activities, thereby potentially identifying instances where consumers may be adversely affected. These technologies are highly aligned with the cross-cutting rules of duty that refer to consumers’ behavioural biases as a crucial factor for consideration. By leveraging surveillance technologies to monitor trade and transaction activities, firms can identify any instances where consumer behaviour may be influenced or manipulated by these biases, thus helping them to address and mitigate any potential harm to consumers.

eComms surveillance technology can also help MiFID II firms to comply with the Duty. By allowing firms to monitor their internal and external communications, firms can ensure that they are taking appropriate actions to achieve the best outcomes for customers. Further, the resulting audit trail can serve as part of a package of evidence to prove compliance. The latest technologies are built for added convenience and intelligence - integrating unstructured communications (including voice) data from any platform, utilising machine learning and natural language processing to automate the flagging of suspicious records and presenting these cases alongside subsequent trade or transaction activity that may be related.

Best execution, as discussed, is a requirement that sits comfortably in the intersection of MiFID II and Consumer Duty. As such, MiFID II firms will already have some measures in place, and most will utilise technology to support compliance. Consumer Duty therefore serves as an opportunity for firms to review their current systems and ensure they are up to speed with the best-in-class products, which automate the tracking and reporting of best execution performance data (e.g. trade reason codes and the outcomes of off-market rate checks) and trigger workflows in the event of a tolerance breach, enabling firms to react, as mandated by the duty, where foreseeable harm may occur.

On the whole, Consumer Duty is a highly demanding and complex regulation which presents significant challenges to firms and how they comply. Critically, it is potentially impossible to prove compliance in the absence of up-to-date technology. However, firms which embrace technological change will also achieve second-order benefits of greater operational efficiency, data insight and customer satisfaction. Make sure that your firm is equipped to take Consumer Duty for what it is - an opportunity to serve customers’ true needs in order to build relationships that last.

EMIR Refit - Flagship reporting regulation after Brexit

sales@eflowglobal.com (eflow) — Tue, 10 Aug 2021 23:00:00 +0000

The EMIR REFIT Regulation aimed to reduce unnecessary regulatory burdens imposed on market participants. It stemmed from the European Commission’s findings that the original technical standards introduced by EMIR in 2012/13 were unduly onerous, but the question of whether it has achieved its aims is very much up for debate.

Critically, the REFIT’s expanded definition of financial counterparties has brought a new class of entity within the bounds of reporting requirements. Coupled with the legal implications of Brexit and the onshoring of EU law to the UK, this development has arguably made the European Union’s financial market protection regime more complicated now than ever before.

In this article, we explore the key provisions of EMIR REFIT and consider the implications of Brexit for UK-based market participants.

What is EMIR REFIT?

The European Market Infrastructure Regulation (EMIR) was enacted on 15 March 2013 and introduced reporting obligations for financial counterparties to trades of over the counter (OTC) derivatives. With some exceptions, both buyers and sellers of derivatives must report transaction details to a trade repository (TR).

Following an extensive 2015 review, the European Commission concluded that EMIR was overly complex and required reform. This came as part of the Commission’s Fitness and Performance (REFIT) programme which culminated in

Regulation (EU) 2019/834

– commonly known as the REFIT Regulation or EMIR II.

The majority of the Regulation’s provisions came into effect on 17 June 2019, but many contend that it has introduced yet further confusion into the EU’s market protection regime. There is significant confusion surrounding the inclusion of Alternative Investment Funds (AIFs) as financial counterparties and further questions surrounding the applicability of the law to UK firms following Brexit.

EMIR REFIT – Key Provisions Explained

The REFIT Regulation has amended many of the provisions contained within the original EMIR regime, all with the express aim of streamlining the reporting process.

1. A Wider Class of Financial Counterparties

In an expansion to EMIR reporting requirements, the REFIT Regulation includes EU-established Alternative Investment Funds (AIFs) and central securities depositaries in its definition of financial counterparties. This status change applies to all AIFs established in the EU, regardless of their Alternative Investment Fund Manager’s (AIFMs) status or location.

This change casts a particularly wide regulatory net by introducing reporting requirements for an entirely new class of market participants. AIFs are now subject to EMIR’s clearing requirements and for the margining provisions that affect non-cleared derivatives (NCDs). The amendment has further implications for AIFs established outside of the EU, which are now classified as third-country entities and as such are subject to EMIR margin requirements when transacting with EU dealers.

Certain special purpose entities and employee share purchase plans are notably excluded from the definition of an AIF, and instead fall under the banner of non-financial counterparties (NFCs) for the purposes of EMIR.

2. Exemptions for Small Financial Counterparties

In addition to widening the definition of financial counterparties, the REFIT Regulation also establishes “small financial counterparty” (SFC) status. Entities that fall within this class of counterparty are exempt from clearing obligations, but are subject to margin requirements and other general risk mitigation obligations.

SFC status (and therefore the exemption) is determined by applying the same thresholds that are used for non-financial counterparties (NFCs). The determination must be made once a year, based on aggregate month-end average figures for the preceding 12-month period. Organisations can opt out of ongoing determinations by electing to adopt full financial counterparty status, subject to notifying ESMA and any relevant national competent authority (NCA).

3. Removal of Backloading Obligations

The REFIT Regulation removed the obligation for counterparties to report historic derivative transactions, effectively ending the practice of ‘backloading’.

Under EMIR, counterparties were required to report derivative transactions that were outstanding on 16 August 2012 despite official reporting commencing on 12 February 2014. Firms faced a technical deadline of 12 February 2019 to report historical trades, but the European Securities and Markets Authority (ESMA) has since stated that it does not expect national authorities to prioritise supervisory action on the reporting of backloaded transactions following the implementation of REFIT.

4. Introduction of FRANDT Requirements

Beyond changes to reporting requirements, EMIR REFIT also introduced new obligations on clearing members and firms providing clearing services. From 18 June 2021, entities that provide clearing services must offer them using commercial terms that are fair, reasonable, non-discriminatory, and transparent (FRANDT).

The new obligations aim to improve transparency by ensuring that clearing clients are provided with a standardised service both in respect of the terms on which they contract and the information they receive as part of a deal.

More information about the new clearing requirements can be found in

ESMA’s final report on FRANDT.

5. Suspension Powers for ESMA

EMIR REFIT introduces further powers for ESMA, including the right to lodge a request with the European Commission to suspend the clearing obligation for up to three months (extendable in three-month increments to a total period of 12 months) for particular types of assets or counterparties.

This provision enables ESMA to take radical action to suspend clearing obligations in order to maintain market suitability and adjust its regime in line with the rapidly evolving financial markets.

Does EMIR Apply After Brexit?

Despite much confusion regarding the applicability of the REFIT Regulation following Brexit, it is important to remember that the UK did not actually leave the EU until 31 January 2020. EMIR Refit came into force on 17 June 2019, and its provisions were largely onshored and enshrined into UK domestic law by the

European Union (Withdrawal) Act 2018.

This retained body of law is now widely referred to as ‘UK EMIR’, and although it broadly mirrors its EU counterpart there are several key changes for UK entities to be aware of. Most notably, UK-established counterparties must report all qualifying derivative transactions entered after 1 January 2021 to a UK EMIR registered trade repository and may no longer be able to rely on their relationship with an EEA group entity for reporting or clearing exemptions.

Change on the Horizon

It remains to be seen whether the EMIR REFIT Regulation will succeed in its objective of simplifying the EU’s derivatives market regulatory regime. In any case, it is clear that this area of regulation is extremely complex and the changes made by REFIT require careful consideration by all market participants dealing in OTC derivatives.

Reporting regulations are often incredibly difficult to navigate, making it all the more important for firms to adopt a robust approach to compliance. eflow’s TZTR software simplifies the transaction reporting process and makes it easy to stay on the right side of market abuse regulations – however demanding they may be.

For more information, book a demo or contact eflow today.

*This article is provided for informational purposes only and should not be relied upon as legal or financial advice. Its contents are current at the date of publication and do not necessarily reflect the present state of the law.

EMIR reporting after Brexit - What to expect

sales@eflowglobal.com (eflow) — Tue, 01 Dec 2020 12:00:00 +0000

The end of the UK’s Brexit transition period is fast approaching, and businesses on both sides of the English Channel are hurriedly priming themselves for what’s to come. Whilst nobody can predict exactly what a transitional arrangement with the EU might look like, we do know that firms will need to make adjustments to the way they do business with the continent – particularly if an agreement is not reached.

With time running out the future is coming into focus and changes abound, not least in the field of financial services regulation. The government has already announced, for instance, that the UK will not implement the fourth phase of the Securities Financing Transactions Regulation (SFTR) due to come into effect across the EU from January 2021. The treatment of financial reporting post-Brexit is perhaps less clear, however. Firms that are used to the existing regime under the European Market Infrastructure Regulation (EMIR) may need to brace for a significant shift in the way the Over the Counter (OTC) and Exchange Traded derivatives markets are managed.

What will happen after 31 December 2020 remains to be seen, but the EMIR reporting regime is changing. Here’s how.

The EMIR regime - A summary

As it stands, EMIR sets out the requirements for the clearing of OTC derivatives through central counterparties (CCPs), and imposes post-trade reporting requirements. Its provisions affect a broad range of entities including banks, investment firms, and asset managers that participate in transactions involving derivatives. For the uninitiated, derivatives are financial contracts that are linked to the price of an underlying asset or group of assets.

Under the existing regime, reports of trades and transactions involving derivatives must be submitted to an Approved Reporting Mechanism (ARM) or Trade Repository (TR). TRs (which act as central data centres for reports and records concerning the exchange of derivative contracts) are authorised at an EU level, whilst ARMs are authorised by a national competent authority. The Financial Conduct Authority (FCA) is the body that takes that role in the UK.

EMIR applies to the Member States of the European Economic Area (EEA), comprising the 27 EU Member States in addition to Iceland, Liechtenstein, and Norway. Once the UK’s Brexit transition period has elapsed, it will become a “Third-Country” for EMIR purposes and the Regulation will no longer apply directly.

For more information about reporting obligations under the existing EMIR regime, why not read our full explanation here.

What will happen after Brexit?

You might be relieved to hear that the UK government plans to maintain the current policy approach set out in the EMIR legislation as far as possible after Brexit. Both sides have shown an interest in securing continuity for businesses, and the European Union (Withdrawal) Act 2018 transcribed a substantial body of EU legislation into UK law – including the EU’s EMIR. The FCA and other bodies refer to the transcribed legislation as ‘onshored’, and it’s important to note that the UK government will be able to make amendments as it sees fit following the exit date.

There will be two versions of EMIR to pay heed to from the beginning of 2021. This means that:

The original EU EMIR will apply to EU counterparties to derivatives transactions, whilst the UK’s version (‘UK EMIR’) will apply to firms registered in the UK.
Starting from 1 January 2021, UK counterparties to derivatives contracts must comply with UK EMIR rather than EU EMIR – although this may change if the UK leaves with a transitional arrangement in place.
The FCA will assume responsibility for the registration and supervision of TRs operating in post-Brexit Britain.

On a practical level, TRs and ARMs based in the UK will not be a compliant destination for EMIR reports submitted by EU-based firms after a no-deal Brexit. Similarly, an EU-based TR or ARM will not be a compliant destination for reports submitted by UK firms.

To accommodate these changes, many TRs and ARMs have established new entities and obtained registration on either side of the Channel – although businesses should be careful to ensure that any arrangements made by their partners bring them in line with the relevant EMIR regulations.

What counts as a UK counterparty under EMIR?

How you need to respond to the upcoming compliance changes will depend on the status of your business. With this in mind, your existing reporting obligations could act as a rule of thumb when deciding how to proceed in the post-Brexit landscape:

Firms that are obliged only to report to the UK Financial Conduct Authority (FCA) will need to report their trades and transactions to a UK-registered TR or ARM. Overseas branches of UK firms will fall under the scope of the UK EMIR regime and so will need to submit reports of their derivative transactions to an FCA-registered TR.
Firms that report to other EU National Competent Authorities (NCAs) only should continue to do so. UK branches of third-country firms (for instance incorporated in an EU Member State) will not be caught by the provisions of UK EMIR and will not be required to submit reports to UK-based TRs.
Firms with dual reporting obligations under the current EMIR regime will need to report to the relevant TRs and ARMs in the UK and the EU.

In essence, perhaps the greatest challenge for businesses involved in derivative transactions will be to decide where EMIR reports should be submitted after the end of the Brexit transition period.

Derivatives reporting after Brexit – how to prepare

From 11:00 pm on 31 December 2020, all new derivative trades entered into by UK counterparties will fall under the UK EMIR regime. Historical trades made after 16 August 2012 will need to be held in an FCA-registered TR too – so it’s essential for firms to take account of their complete portfolio of trades when considering their compliance obligations.

The FCA has confirmed that UK TRs will be obliged to provide UK authorities with “direct and immediate” access to data reported by UK counterparties from the end of the transition period. Ultimately, the task between now and that time is to decide where your business falls in terms of EMIR reporting and to ensure that you have an arrangement in place with Trade Repositories or Authorised Reporting Mechanisms that are registered or recognised under the correct regime.

Get ready for the Brexit transition

With the added complexity of the dual UK / EU EMIR regimes to compete with, it’s critical for businesses to ensure that the EMIR reports they submit are accurate and compliant.

By making use of eflow’s TZTR regulatory reporting software, you could avoid the complexities of having to prepare and format your reports for the different regimes whilst benefiting from a simple and united approach to dealing with Trade Repositories, Approved Reporting Mechanisms and National Competent Authorities.

For an effective, cost-efficient, and above all compliant approach to post-Brexit transaction reporting, book a demo below or contact eflow today.

Trade Surveillance and Regulatory Compliance Solutions | eflow

EMIR Refit - What you need to know and what you need to do

Background - EMIR and EMIR Refit

EMIR Refit

What you need to know

EMIR Refit: The latest changes

Regulatory rewrites - EMIR is not alone

What you need to do

Data

Technology and expertise

Key Changes

1. Expansion of Reportable Fields

2. Introduction of the ‘Corporate Sector’ Field

3. Adoption of ISO 20022 XML Reporting Format

4. New Reporting Timelines

Additional Resources

Harmonising EMIR Refit with global standards: Ensuring consistency in derivatives regulation

EMIR Refit and global derivatives regulation

Fundamental changes and objectives of the EMIR Refit

EMIR Refit: What is the ultimate aim?

International regulatory standards and initiatives

The benefits of global harmonisation

Cross border trade

Challenges in achieving global consistency

Economic and political considerations

Different jurisdictions, different regulations

Technological/operational challenges

Regulatory cooperation and the next steps

Conclusion

The Consumer Duty: What MiFID II investment firms need to know

The Consumer Duty: What MiFID II investment firms need to know

What is The Consumer Duty?

Principle 12

The cross-cutting rules

The relationship outcomes

Implementation and scope

How will The Consumer Duty impact MiFID investment firms?

The role of technology?

EMIR Refit - Flagship reporting regulation after Brexit

What is EMIR REFIT?

EMIR REFIT – Key Provisions Explained

1. A Wider Class of Financial Counterparties

2. Exemptions for Small Financial Counterparties

3. Removal of Backloading Obligations

4. Introduction of FRANDT Requirements

5. Suspension Powers for ESMA

Does EMIR Apply After Brexit?

Change on the Horizon

EMIR reporting after Brexit - What to expect

The EMIR regime - A summary

What will happen after Brexit?

What counts as a UK counterparty under EMIR?

Derivatives reporting after Brexit – how to prepare

Get ready for the Brexit transition