EMIR Refit: What you need to know in 2022 and 2023

It has been nearly a decade since the European Market Infrastructure Regulation (EMIR) took effect, introducing reporting requirements to make derivatives markets more transparent, covering clearing, reporting, risk mitigation and margin and collateral exchange.

What is EMIR Refit?

EMIR lays down clearing and bilateral risk-management requirements for over-the-counter (OTC) derivative contracts, reporting requirements for derivative contracts (OTCs and ETDs) and uniform requirements for the performance of activities of central clearing counterparties (CCPs) and trade repositories (TRs).

A review of EMIR proposing measures to reduce disproportionate costs and burdens on counterparties without compromising the objectives of the regulation - known as EMIR Refit - was initially published in May 2019 and started the stepwise implementation in June 2019 with clearing obligations. The go-live of the new RTS and ITS for reporting obligations will finish the stepwise implementation in Q4,  2023.

What are the updated standards and requirements? 

The EMIR Refit has introduced several changes and amendments to the standards and requirements set out in EMIR.

• NFC Clearing: EMIR established definitive clearing thresholds for NFCs. Under EMIR Refit, a new regime is used to determine when NFCs and FCs are subject to the clearing obligation. When NFCs conduct the calculation, they are only subject to the clearing obligation for the OTC derivative contracts pertaining to those asset classes where the result of the calculation exceeds the clearing thresholds. NFCs only need to include the OTC derivative contracts which are not objectively measurable as reducing risks. FCs need to include all OTC derivative contracts they enter into or novate.
• New or updated terms: EMIR Refit expands the scope of FC to include more entities that could pose a significant risk to the financial system, such as Alternative Investment Funds (AIF) and their managers. It has also created Small Financial Counterparties (SFCs) that are exempt from the clearing obligation but remain subject to risk mitigation obligations, including margin requirements. The reporting obligation for historic derivative transactions, often known as “backloading”, has been amended to remove the backloading obligation. EMIR Refit also requires CCPs to provide clearing members with a simulation tool that allows them to determine the amount of additional initial margin, on a gross basis, the CCP may require upon the clearing of a new transaction.
• Article 39: Article 39 of EMIR has been amended to ensure national insolvency laws do not prevent a CCP from complying with existing client clearing obligations in porting and liquidation of positions or assets recorded to client accounts. It does not bring any changes to existing EMIR client clearing obligations.

What are the technical standards under EMIR Refit? 

The final report on technical standards under EMIR Refit was published by the European Securities and Markets Authority (ESMA) in December 2020. It covered data reporting to TRs, procedures to reconcile and validate the data, access by the relevant authorities to data and the registration of TRs.

The timeframe for implementation of the technical standards by the reporting counterparties and TRs in the EU is 18 months from the date of their publication in the Official Journal. Following the launch of public consultation in July 2021 and an open hearing on the reporting guidelines announced in September, it is expected that the revised RTS and ITS will be endorsed by the EU Commission in the coming months. The reporting of the new framework is expected to start in Q4, 2023 or Q1 in 2024.

Reducing risk

Alignment with international standards, in particular, the global guidance developed by CPMI-IOSCO on the definition, format and usage of key OTC derivatives data elements reported to TRs, including the Unique Transaction Identifier (UTI), the Unique Product Identifier (UPI) and other critical data elements. The introduction of these changes into the EU regulatory framework will foster global data harmonisation and facilitate compliance for entities that are subject to derivative reporting requirements in non-EU jurisdictions. Common draft regulatory technical standards specify supervisory procedures, including the levels and type of collateral and segregation arrangements, to ensure initial and ongoing validation of risk-management procedures.

Reporting

XML schemas developed in line with ISO 20022 methodology will be used for the communication between the reporting agents, the TRs and the authorities as well as for the data exchange between the TRs. A fully standardised format for reporting will eliminate the risk of discrepancies due to inconsistent data. End-to-end reporting in ISO 20022 XML is expected to further enhance data quality and consistency by reducing the need for data cleaning/normalisation and facilitating exploitation for various supervisory and/or economic analyses.

Initial Full Load

All outstanding derivatives at the time of the go-live must be reported based on the new technical standards. There will be a transition period of six months to perform the initial full load. Changes in outstanding derivatives after go-live must be reported directly in the new standard.

New Data Elements and Event Type

The number of reporting fields will likely increase from 129 to over 200. According to the Final Report published by ESMA, only three data fields will be removed while 77 data elements have been introduced. One of the new data elements is the Event Type. The Event Type will confirm the already-existing Action Type.

Data quality

Another cornerstone of the technical standards is the enhanced and harmonised data quality requirements for data validation and data reconciliation processes, that take place at the TRs once derivatives are reported to them.

Registration

The documentation for TRs to extend their registration from SFTR to EMIR has been clarified. 

Standardised process for data access

The report includes references to standardise the type of information and the timeline for setting up data access for authorities.

EMIR Refit and Brexit

EMIR ceased to apply in the UK in December 2020 when Brexit came into effect. It has now become part of “retained EU Law”. The UK’s Financial Conduct Authority and Bank of England recently completed a three-month consultation paper on the UK EMIR reporting regime.

The consultation was on proposals to align the UK derivatives reporting framework with international guidance from the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions (CPMI-IOSCO) to ensure more globally consistent data set. This will enable authorities to better monitor for systemic and financial stability risk.

Measures were also proposed for mandatory delegated reporting requirements, counterparty notifications and reconciliations processes and the use of XML schemas and global identifiers. The proposals aimed to provide clarity to counterparties and Trade Repositories, including where there were discrepancies on how certain data fields were reported.

The FCA also proposed new rules for TRs on the registration and reconciliation processes to streamline the process for registration. The FCA plans to issue a new specialist sourcebook for the UK EMIR data harmonisation rules in the FCA Handbook.

EMIR Refit in 2022 and beyond

The EMIR Refit is designed to amend and simplify European Markets infrastructure. While it was originally expected to be a small-scale exercise, it has introduced major changes, particularly regarding reporting standardisation on the ISO 20022 standard and a significant increase in reporting fields from 129 to over 200. EMIR Refit will also necessitate more granular reporting and the entirely new requirement to notify the national competent authority of any failures during the reporting process.

There is no clear timeframe yet for when EMIR Refit’s reporting requirements and technical standards will go live. Affected organisations are recommended to start the Refit projects as early as possible as experiences with SFTR and its ISO 20022 standard have shown that 18 months of implementation time is shorter than expected.