EMIR Refit will come into effect in 2024 in both the EU and UK and like many rules rewrites there are significant changes for in-scope firms. Many reporting entities may underestimate just how fundamental many of these regulatory revisions will be to their processes and even their legal agreements. In a Q&A, Sam North, executive director, product management at the Depository Trust & Clearing Corporation’s (DTCC) and Andrew Pinnington-Mannan, head of regulatory practice at DTCC Consulting Services, discuss how trade reporting will change in Europe and how trade repositories can support firms through the transition.
Q: What are the most significant changes that EMIR Refit is introducing for reporting firms and trade repositories?
Sam North: There will be big headline changes, as well as many changes that are ‘hidden’ underneath. There are also many areas where EMIR Refit differs from other reporting regimes’ re-writes.
Most firms are aware of the most obvious items, such as the move to XML, whereby firms will not be able to submit to the trade repository using CSV or FpML data standards as they can today. Larger firms that are active in repo will likely have solved XML implementation from a technology perspective for the Securities Financing Transactions Regulation (SFTR), but many smaller firms may struggle with the new data format.
Firms might not be aware of the impact the move to XML will have on repository file routing. Today, a client can submit a single message to the DTCC’s locally registered/authorized trade repositories as part of our Global Trade Repository service (GTR), and the ingestion layer routes that to the relevant jurisdiction whether it is in Europe or Australia. EMIR’s move to XML removes that ability because the GTR does not have a proprietary field to indicate the jurisdiction, and the schemas will be fundamentally different as well, even if they are based on the ISO standard. Similarly, firms will no longer be able to use the internal trade ID field or the third-party viewer field as a consequence of the move to XML.
Furthermore, there are 74 new additional fields that need reporting. We know many firms are working on data mapping and data lineage, which is a major task. Post go-live, there is a six month transition period where firms must submit a modification to upgrade their open trade population into the latest technical standards. Trade repositories also have to do a data harmonisation exercise across that trade population, so all the reports that firms will get back post go-live will contain harmonised data, regardless of whether they have upgraded their trade population or not. This means what they get back might not be the same as what they submitted pre-EMIR Refit
If a reporting firm realises they made a mistake with their reporting, they will need to submit a historic correction which the repositories need to be able to support. For market participants, a correction might mean they have to go back and correct their entire population. It might be something that changes their processes or even internal agreements with their compliance teams. This change is not a major issue for the trade repositories, but for market participants it will depend on the strength of their controls and control frameworks. EMIR Refit has new requirements to report “significant issues” and the European Securities and Markets Authority (ESMA) has outlined a formula for determining whether an issue is significant. To account for this firms will need to make sure their controls are in good shape.
“For market participants, a correction might mean they have to go back and correct their entire population. It might be something that changes their processes or even internal agreements with their compliance teams.” – Sam North, DTCC
From an identifier perspective, there are many new fields for linking identifiers, such as prior Unique Trade Identifier (UTI) to subsequent position UTI. Firms need to start tracking this in their own reporting systems through the life of a transaction as it gets cleared. In addition to UTIs, firms also have to obtain Post-Trade Risk Reduction (PTRR) identifiers from the vendors that provide compression and other post-trade services, and store those in their reporting systems to report them out.
Unique Product Identifiers (UPIs) also represent a major change for the industry. Firms need to be able to connect to the Association of National Numbering Agencies – Derivatives Service Bureau (ANNA-DSB), to generate the UPI, and to be able to share the UPI with counterparties. It is a reconcilable field from go-live, so firms need to make sure they are reporting it correctly for the trade to match.
Q: How will the changes mentioned above impact in-scope firms? Do firms understand how the TR changes may impact their own reporting?
Andrew Pinnington-Mannan: Data lineage continues to be a problem for firms and firms will be rightly focused on finding this new data to report. The problem is firms have implemented reporting for previous regimes but haven’t always documented how their data is transformed from trade capture systems down to the reporting engine. They almost have to reverse engineer what has been done previously in order to work out how data is moving through the firm. Therefore, data mapping is a huge challenge.
Firms may also struggle with changes to their processes in the face of increased regulatory scrutiny. ESMA has been very clear it expects firms to spend more time interrogating data quality. Trade repositories will publish anomaly reports. Regulators clearly expect firms to validate data internally before sending it to trade repositories. DTCC advises all its clients to make sure their data is correct before sending it out rather than find out it is wrong via regulatory inquiry or a rejection from the trade repository.
Historical corrections, or back reporting, is an enormous problem for firms and many firms underestimate the impact the changes will have. Firms will be required to submit a correction to each reported event rather than just updating the latest state of the trade. Some trades will have multiple lifecycle events, so firms could see an exponential increase in the number of corrections they need to report. This implication might not leap out from the guidelines, but it will have a significant impact on firms. Some firms will need to update their systems to even store a historic state—they may not currently be able to see what the state of a position was five years ago.
“Firms will be required to submit a correction to each reported event rather than just updating the latest state of the trade. Each trade obviously has many lifecycle events so firms could see an exponential increase in the number of corrections they need to report.” – Andrew Pinnington – Mannan, DTCC Consulting Services
Another interesting trend is firms providing delegated reporting as a service to their underlying buy-side clients providing notifications to their clients’ regulators if there is a reporting issue. This is a significant change to the arms-length delegated reporting approach that exists today and may shift the balance of power between buy and sell-side firms.
When it comes to EMIR Refit, firms are rightly focused on sourcing data to fill the additional fields, but all of the topics mentioned here have implications beyond data, including changes to processes and potentially even legal agreements.
Q: What is the best way that firms can start preparing and minimise the impact?
Andrew-Pinnington-Mannan: Firms need to be doing a line-by-line gap analysis of what they currently have versus what they are going to have to do, not just for the data element, but for every line of the rules. They need to firm up over the next three months what they need to do to meet these new requirements and to make sure they have enough time for testing because there is a direct correlation between firms that perform well at go-live and the amount of time they spent on testing.
Most firms are currently in a period of interpretation and gap analysis. Firms rarely spend enough time on testing. The key is to work backwards from the deadline. When is the deadline? How much testing does the firm want to do before going live? When does the firm need to finish the build to do that testing? When does the firm need to finish the impact analysis? Working back from the date enables the firm to figure out what needs to be done by when.
DTCC Consulting Services provides guidance across the project lifecycle, from helping firms interpret the rules and providing the impact analysis and impact assessment through to mapping data. We can map firms’ data from trade capture systems to the requirements and the trade repository specification, building controls at the same time. Firms should always build controls at the same time as they are doing the implementation rather than after the fact. DTCC Consulting Services also designs testing strategy, develops test packs, and can run testing programs for clients. After it go live, our consultants can also do a post-implementation review comparing what firms have reported against what they think they are reporting. This is all underpinned by DTCC’s subject matter expertise.
Q: What are the biggest challenges firms face as they prepare for EMIR Refit?
Andrew Pinnington-Mannan: Many firms may struggle to find the appropriate experience and resource in-house. This is not a project they can assign to a generic business analysist or project manager. It requires in-depth subject matter expertise and an understanding of how the workflow can be impacted.
Sam North: Firms should not leave this until it is too late. The changes are huge for EMIR Refit, and they do not want to be the last firm on the Street to look at this. Firms need to think about what types of resources they need, and how they will get them. If they wait too long, the best people and resources will not be available.
There is a massive expectation from regulators that data quality does not drop as the industry transitions to the new rules. Regulators have been investing heavily into their own technology over the last few years and now have the capability to look deep into the data. The amount of data trade repositories now have to give the regulator is huge and includes not just trade state and activity reports, but also rejection statistics, which highlight where corrections have had to be made. Reconciliations statistics are also broken down at a counterparty level, and aggregated position data is broken down at a currency level, as well as a product level. The national competent authorities (NCAs) are now receiving huge amounts of data and they have the ability to use it.
“The national competent authorities (NCAs) are now receiving huge amounts of data and they have the ability to use it.” – Sam North, DTCC
Q: How is DTCC’s GTR helping clients prepare for these changes?
Sam North: We are hosting an industry working group as well as running webinars which touch on the more high-level issues and provide updates on the technology build. GTR will publish its message specifications in March so firms can start building to those, as well as various learning materials and product guides through the rest of the year. Lastly GTR will open its formal user-acceptance testing (UAT) environment from October 2023, providing firms with six months to implement and test the changes, which is important given the scale.
*Related reading:
UK/Europe Regulatory Roundup 2023: EMIR 3.0, CSDR, DORA, SFDR and CSRD – Derivsource
