What EEA and UK Organizations Should Know
Following the 2008 global financial market crisis, the European Market Infrastructure Regulation (EMIR) was introduced in 2012 as an effort to improve market transparency and reduce risk associated with the derivatives market. Since then, it was revised in the EMIR Regulatory Fitness and Performance programme (EMIR Refit) which came into effect on 17 June 2019.
On 7 October 2022, the European Securities and Markets Authority (ESMA) published the final guidance in the Official Journal of the European Union (EU), with the go-live date for EU Members on 29 April 2024. The Financial Conduct Authority (FCA) followed suit and set the go-live date for the United Kingdom (UK) on 30 September 2024. This means that companies have less than 18 months to uplift their existing systems and processes to comply with the revised regulation by the deadline.
Key Items to Know About EMIR Refit
In summary, EMIR requires all entities who enter into derivative contracts to:
- Report details of all derivative contracts (both exchange-traded derivatives (ETD) and over the counter (OTC) derivatives) to trade repositories (TR)
- Clear OTC derivatives which are subject to mandatory clearing obligations via a central counterparty (CCP)
- Implement risk mitigation techniques
The reportable derivative contracts include asset classes such as interest rates, foreign exchange, equity, credit and commodity, and emission derivatives. The entities affected by the regulation include:
- Financial Counterparties (FC) such as investment firms, fund managers, banks, insurance companies, etc.
- Non-Financial Counterparties (NFC) which are entities that are not qualified as a financial counterparty and those not involved in financial services
- Central Counterparties and Clearing Members
- Foreign Alternative Investment Fund registered
- Branches of EEA and third county companies established in the EU
In addition, there are several key changes introduced by EMIR Refit which are worth noting:
- Reporting format: The previous way of reporting in CSV is now moving to ISO 20022 XML schemas, bringing it closer in line with the Critical Data Element (CDE) guidelines and Securities Financing Transaction Regulation (SFTR) reporting.
- Reportable fields: EMIR Refit has increased the number of reportable fields from 129 fields to 203 fields, putting increased pressures on entities to ensure completeness and accuracy of the reporting. This increase will result in EMIR Refit having the highest number of reportable fields across all regulatory regimes (SFTR (155) and MIFID II (65)).
- Unique Product Identifier (UPI): A UPI will be assigned for all OTC derivatives products, in addition to the existing ISIN and CFI code. This enhances uniformity in reporting and reduces breaks in post reporting reconciliations between TR.
- Unique Trade Identifier (UTI): Historically, the UTI has been bilaterally agreed between counterparties and not centrally generated at point of trade execution. EMIR Refit introduces prescriptive steps in determining the responsible party required to generate the UTI which is based on a new waterfall methodology, following the CDE Guidance.
- Reporting Obligations: In the scenario where the non-financial counterparty (NFC) is below the clearing threshold, the responsibility to report OTC derivative transactions is now being passed from the NFC to financial counterparty (FC), However, exchange-traded derivative (ETD) transactions remain reportable by the NFC even if still below the clearing threshold. This brings increased responsibility to the delegated party and firms will need to put in place robust controls.
- Inter-Trade Repository Reconciliation: TRs are now required to perform reconciliations as mandated under EMIR Refit. There are prescriptive fields to be reconciled which have been increased from 3 fields to 82 fields, with 64 more fields to be reconciled two years later.
What’s at Stake
Regulators are expecting firms to comply with the 29 April 2024 (EU) and 30 September 2024 (UK) deadline and non-compliance could result in regulatory fines.
EMIR Refit has brought in increased responsibilities on all in-scope counterparties, especially considering the change in reporting format to ISO 20022 XML, the transfer of reporting obligations from the NFCs to the FCs, and the significant increase in reportable fields.
The UK regulator (FCA) handed the largest EMIR fine to-date, amounting to £34.5 million due to failure in reporting exchange traded derivatives transactions. Therefore, it is vital for all counterparties to ensure that they are well-equipped to comply with the regulation by the deadline above.
How FORVIS Can Help
For questions on the implications of EMIR Refit or for help figuring out your organization’s next steps, please reach out to a professional at FORVIS or submit the Contact Us form below.