In a racing analogy, we have been under starters orders for a considerable amount of time, but now the flag has been dropped, and we are off. 29th April 2024 and 30th September 2024 are now burned into the retinas of all those responsible for driving the changes of EMIR REFIT for the EU and the UK, respectively, at reporting firms.
We know the dates, and now the Regulatory Technical Standards (RTS), Implementing Technical Standards (ITS), we know what the scale of the change to current reporting operations is, and the changes are large and wide-reaching. EMIR REFIT is not alone in the scale of these changes. There is a programme of Regulatory rewrites sweeping the globe, impacting CFTC and CAS in the US and Canada, through EMIR REFIT in Europe and the UK, and encompassing MAS, HKMA, JSA, and ASIC in the APAC markets. Obviously, this isn’t just by chance, no freak coincidence, that is causing firms to have to fundamentally reassess what and how they report.
This is a move towards Global Standardisation and Harmonisation that will incorporate the guidance developed by CPMI-IOSCO on the definition and format for OTC derivatives and the use of Common Data Elements (CDSs) such as Unique Product Identifiers, ISIN, UTIs, etc. across jurisdictions to standardise the tradable instrument identification. These are positive steps because if you are subject to multiple regimes in multiple jurisdictions, anything that can reduce the burden of maintaining multiple data sets must be lauded. But this will require major surgery to existing entrenched systems, and like any surgery, there is risk, discomfort, and worry in the short term.
For anyone in this space that reads the output from the Regulators, such as ESMA and FCA, the key goal for all of the planned changes is to increase the quality of data being reported because after 10 years of EMIR, the matching and pairing rates of reported trades is still around 50 to 60% and for a regulation that’s goal is to monitor systemic risk, this is far too low calls for fundamental changes to what and how data is reported and transmitted in this regime.
So we know there are major changes ahead, but it must be stated early that for this iteration, there is very little divergence between the RTSs published by ESMA and the FCA, but it is no secret that this is not guaranteed to remain the status quo going forward and we should insulate ourselves against the opposite happening, as regulation becomes subject to political and competitive forces in both jurisdictions, it must be noted there are differences, very minor in this version but the major challenge this time will be the gap in implementation timelines rather than technical specifications.
What are the changes that REFIT brings in its goal, to improve data quality through the twin barrels of harmonisation and standardisation? Well, it’s probably best to list the headline changes.
DATA is key, which is relatively obvious in a regime change to drive improvements in data quality, but still, these are fundamental and highlight significant challenges for firms’ preparations.
There is a huge increase in the number of reportable fields from 129 to 203, with the retirement of 15 current fields. Additionally, the definition, naming, and format of the remaining fields are pretty much all changing, giving an eye-watering stat that there is a change in close to 90% of the fields. Keep in mind the key driver to increase matching and pairing rates, and this may seem counterintuitive but the rationale is simple; many firms found that some of the existing field definitions were too ambiguous and this led to counterparties interpreting them differently, and in a double-sided regime this led to the same trade being reported differently by either side of that trade, REFIT will be more prescriptive and to do that there will be more fields.
Also increasing in complexity and importance, is reconciliation. This is going to be a key element in REFIT and one that firms are going to have to think long and hard on how they tackle. The basics are that the number of reconcilable fields will increase, and this will be split into two time frames or ‘Waves’. Currently, 56 fields need to be reconciled, and in Wave 1 (from 29th April 2024), this will increase to 82, and by April 2026, Wave 2, this will increase again to 149 (or ¾ of all fields). In dual-sided reporting, this will be challenging, especially for OTC trades. It is an undertaking to ingest the end-of-day TR reports, as there are many and they are weighty, reconciliation being one, and then to have a mechanism in place to review and remediate any ‘breaks’ with the counterparty to ensure that corrections can be re-reported in a timely manner.
It is imperative firms also understand the added complexity of ‘delegation’ within this operational challenge; where a party has been delegated too, it must now also monitor and report to their NCA and their counterparties’ NCA if the number of rejected reports, including ‘recon breaks’ exceeds a given percentage of trades per volume of trades reported.
To add a further complexity that will require careful planning of existing data and reporting operations is the introduction of Event types to supplement the current Action types to shine a light on why an action was taken. These new fields include Step in, Clearing, Allocation, PTRR, etc., on talking to firms has an impact on how trades are recorded in their source systems, and therefore coordination is required with external vendors, not always a simple or controllable task.
The move to improving matching and pairing also drives the next two areas to highlight; one is the introduction of Common Data Elements, in particular, the introduction of the Unique Product Identifier (UPI) for OTC trades (some will say finally, this has been mooted for over 10 years and the waters were still choppy as late as 2022 when the CFTC split its rewrite into 2 parts to allow for more time to introduce, in part, UPIs), when implemented and ingested into internal systems from Anna DSB this will undoubtedly increase matching for OTC trades.
There is also further prescription around UTI generation and distribution (UTI Waterfall) with the aim of increasing pairing rates, again in the long run, a sensible move, but like all of the above, with much operational and IT overhead in the short term.
So highlighted above are some of the areas being addressed to promote improvements in data quality on the firm’s side, but this would be like coming lazily back to the racing analogy, building a formula one car and having it race over a farmers field, perhaps interesting for the first 30 seconds but an utter waste of time. To improve the performance of reporting, the regulators have understood that the way the messages are transmitted from firms to the Trade Repositories, between the TRs, back to the firms, and or to the National Competent Authorities/Regulators, needs to be in a standardised format, and the format chosen is, ISO XML 20022.
This will hugely increase the efficiency of the transmission, ingestion, analysis, and reporting of trades and updates. For many firms, though, this is going to be a major challenge. If firms have been reporting in CSV or other formats, the mapping of the new RTS to the XML format is not a simple task. If anyone has done this for SFTR, then they will know that this should be addressed as early as possible in any project and testing, with TRs done as soon as UAT environments are available.
For those firms with an obligation under ESMA and the FCA, then there will be the added complication of maintaining two very different data standards for four months, and where they have to report the same trade to two different regimes. This will add to the complexity and must be planned for. The same is true of outstanding positions on the Go Live of REFIT for both regimes.
This is not an exhaustive list of the changes, but it was meant to highlight the challenges facing firms over the next year to get ready, as both Regulators have made it clear that there will be no soft launch of REFIT, they expect firms to be compliant from day 1 or able to explain and demonstrate how they will make good.
For the market, as a whole, once these changes have been made and the upheaval, expense, and risk have been effectively managed either through in-house projects and solutions or moving to an outsourced service-based model with a provider, the benefits will be seen, as firms have spent huge amounts on getting and maintaining compliance for EMIR and there has often been a feeling that their data disappears into a black hole, that in the words of Dire Straits ‘it has been money for nothing’. With these changes, the whole model should become much more transparent and efficient, and as stated earlier, more so for those firms with multiple reporting obligations.
It’s always helpful at this relatively early stage to ask yourself some questions regarding your planning and readiness.
- Have you analysed the new data requirements? Do not risk being held hostage by third-parties inability to support the new schemas.
- Do you have adequate procedures in place with counterparties to support areas like UTI generation, and dissemination and reconciliation?
- Are your systems ready to monitor, track and report excessive failures and recon breaks?
- Are your source system providers ready to support Event types and new Common Data elements such as UPI?
- Do you have expertise in XML ISO 20022?
- Are you able to manage the bridge between EU and FCA go-live dates?
- Are you ready to report updates to open positions against the new schemas?
- How much of your current operational model will need amending?
- Do you have the correct team and budget to de-risk this project?
- Do you feel confident with the answers you are getting from suppliers regarding their readiness?
If any of the above is causing you concern, then now is the time to start asking loudly for answers.
So, without further ado, on your marks, get set, GO! And best of luck!