With the final technical standards for ESMA’s EMIR REFIT expected this quarter, firms must get to grips implementation of EMIR trade reporting requirements for OTC derivatives. In a Q&A with DerivSource, Stephen McPherson, Principal Consultant at Capco, shares the highlights of the recently published white paper, “EMIR REFIT: Getting Technical”, which explores the key challenges and considerations to account for when making compliance preparations.
Q. In your report you mention that the benefit of mandatory delegated reporting could be minimal as a result of the continuous need for smaller sized firms to report exchange-traded activity and the required data to the reporting firm or repository. Can you explain why this benefit is reduced as a result of the challenges this change introduces?
A. There are material benefits for NFCs (smaller firms). For instance, they will have no obligation to report Valuation or Margin data. Also, with their trading being within ESMA clearing threshold requirements for an NFC, they will have no trade level reporting obligation for OTC Derivatives.
However, the NFC (Non-Financial Counterparty) will retain certain obligations to report transactions deemed as exchange tradeable. This is particularly relevant following Brexit – ESMA has not yet taken the step of recognising UK market exchanges as being equivalent third country exchanges, meaning that there is now a clearing obligation on certain UK trading depending on the jurisdiction of the parties. This raises the potential for trades to be reportable as exchange traded.
The cost benefit of mandatory delegated reporting for NFCs is therefore substantially reduced, given they will need to maintain an internal reporting infrastructure for Exchange Traded Derivatives.
The added burden on FCs to make systemic changes to fulfil the mandatory delegated obligation, as well as implement the associated controls to ensure they correctly report and reconcile the data, is another factor in the overall cost that this change has incurred for market participants.
Q. Quality of data is paramount for the success of any type of reporting. In your paper you discuss the adoption of the Critical Data Element or CDE methodology. What is CDE and how might this new requirement, along with the possible mandatory use of ISO 20022 messages, create challenges for firms as they adjust their data management processes to meet new technical requirements?
A. The adoption of ISO 20022 as the industry data standard is being implemented to move to a harmonised and consistent approach for EMIR reporting.
CDE methology will utilise ISO 20022 to deliver a common approach for data. This should benefit market participants with increased pairing and matching across EMIR reportable transactions. The ISO 20022 approach is in line with the delivery of SFTR reporting that was implemented via XML submissions.
It is worth noting that the implementation of ISO 20022 for SFTR did involve numerous revisions of the data requirements as well as agreement on data attributes. Once these challenges are overcome for EMIR, ISO 20022 should deliver a robust and tested approach if implemented correctly and provide a standard that can incorporate future EMIR field level changes.
Q. Why is the use of CDE methodology essential to the success of reporting?
A. ESMA deems ISO 20022 at the most adequate standard for CDE methodology. The adoption of CDE is being widely recognised as a positive approach for EMIR reporting. The intention is to implement a global standard for the harmonisation of key data, including definitions, formats, and allowable values.
Key challenges remain. Some data elements could have multiple definitions and the interoperability with other jurisdictions will not be seamless. Even if a CDE approach has been implemented across different reporting jurisdictions, it does not automatically mean that the data is harmonised. Should ESMA derivate or enrich the definition of the CDE, then the implementation will not provide a fully consistent solution.
Q. In your report you highlight some of the key steps firms should be taking to prepare for the regulatory reporting changes now. What do you think is the most critical first step or steps firms should be taking now given the complexity of this undertaking? Why is the step or steps so important?
A. Whilst we await the fully mandated decision from ESMA and the UK FSA, impacted firms should be investing time now to analyse the flow of data feeds from upstream risk systems to downstream reporting systems. They should also perform an assessment of their current data attributes to consider the impact, as well as the scale of architecture required. This will allow firms to assess the effort required to deliver EMIR RTS in line with ISO 20022 via XML submissions, whilst also considering broader global regulatory change work scheduled during the 18-month deployment timeline.
Q. Do you have any final pieces of advice for our audience as to what they should take away from your research and the report?
A. Aside from the review of data and an assessment on the effort required to deliver EMIR RTS, impacted firms should consider engaging industry bodies such as ISDA to keep fully informed of any further challenges on the ESMA consultation paper. They should also track ESMA for updates for the final mandated sign off for RTS (expected sometime in Q1), which will confirm the approach and timeline, including agreed dates for back reporting of live EMIR reportable trades.