EMIR Refit Regulator Problems

EMIR: Potential for hidden costs & huge fines

The implementation date for EMIR Refit is fast approaching, and despite years of preparation, a sense of unease lingers within the market. Two key concerns are emerging: the potential for increased fragmentation within Europe, and the level of scrutiny regulators will exercise on complying with the new regulations.

The implementation date of EMIR Refit is fast approaching in the UK, and despite years of preparation, a sense of unease lingers within the market. Two key concerns are emerging: the potential for increased fragmentation within Europe, and the level of scrutiny regulators will exercise on compliance with the new regulations.

ESMA’s EMIR Refit passed just a few days ago in Europe and there is just over 130 days to go for the UK. It will require market participants to use unique transaction identifiers (UTIs) in the reporting process for the first time and participants will be required to submit an additional 89 new fields. The transmission of data to a trade repository in compliance with the ISO 20022 XML format will also be mandatory.  And finally, all existing open positions (including those entered before the go-live) must be uplifted the new expected standards within six months after EMIR’s implementation. This is all being introduced to ensure that any reported data is complete, accurate and timely.

It’s been discussed ad nauseam, and every capital market participant has been aware of and preparing for its impending implementation for months if not years. Why then, is there a level of concern still filtering through the market? Two prominent threads have emerged at the forefront. One is that the reform does not tackle the biggest European problem of fragmentation. And secondly, the extent to which regulators plan to crack down on any infringements.

Many industry mainstays are concerned about the regulatory divergence between the UK and the EU and the resulting operational complexity that could occur. Niels Lemmers, head of Public Affairs at Flow Traders, reiterated this cause for concern and the issue of fragmentation at the recent FOW Trading Amsterdam. He felt an aspect of the regulation is the fragmentation of the central counterparties which increases costs, and these increases are ultimately finding their way into the price of the products being traded and being paid by the end-users. He also added that he wasn’t sure if the new regulations and rules would end fragmentation and the constant increase in costs.

Fellow speaker Diederik Dorst, chief commercial officer at All Options, agreed with Lemmers and took it a step further suggesting, “Europe’s fragmented post-trade landscape is hampering innovation and product development”. He felt the biggest hurdle to growth is at the back end of post-trade. The incredible complexity of European post-trade infrastructure is preventing new markets from being introduced in a timely manner. Compared with the simplicity of how it is done in the US, surprised him immensely.

The fragmentation is worsened when you consider that firms operating and reporting across both the UK and Europe, will need to adhere to both sets of reporting requirements. This means that there will be a five-month period where they will need to comply with the new EU regime and the old UK regime. It doesn’t get any simpler once they’ve both been implemented either, as there will be numerous divergences in the reporting requirements between the two. These differences will add considerable complexity to implementation and ongoing support.

It is easy to see why larger organisations are worried by this complexity especially when operating across numerous markets with new reporting requirements in place. Dorst sagely noted that Emir is still trying to discuss the same problem whilst attempting to address symptoms with the various versions. “Why not sit down and hammer out a post-trade system that is simple, works for everyone and takes away the base costs?” he put it to the delegates attending.

If many still feel that Emir does not simplify the complexity, then logic would dictate that more infringements are likely to occur. Data quality will be the centre of focus and the addition of 89 new fields to report (increasing the required number to 203) and possibly millions of reportable transactions, could push your point solutions to the brink. The reporting data also needs to be, as we mentioned, complete, accurate and timely, whilst requiring firms to have fields correctly mapped and all legal agreements in place.

The regulators laid out their EMIR reporting obligations over a decade ago though and feel this has been more than enough time for organisations to get their affairs together. Falling foul of these requirements will be at a substantial cost to firms. The fines will be expensive, and the subsequent reputational damage could be considerable. Some of the other causes for concern include managing reconciliations between diverging UK and EU regimes, underreporting or overreporting, testing controls as part of the UAT phase and investigating countless daily mismatched data points.

In a report published last year, Acuiti noted that certain firms continued to be concerned about ambiguity regarding how certain fields would be interpreted. There is a widely held belief amongst firms that their counterparties may interpret data differently from themselves. Add in the crossed lines of how each jurisdiction’s regulator approaches UTI, lends itself to the concern that harmonisation in theory, will be a lot easier than it is in practice.

If you haven’t prepared for EMIR and are unaware of the new requirements and obligations, then you are very much behind the 8 ball and need to act fast. Firms will need to either repurpose legacy systems or acquire new tools for data collection, marshalling and reporting. Unfortunately, a new system will not resolve all as data mismatches can occasionally have nothing to do with interpretation or complexity. It is, in fact, a challenge that no regulation can truly abolish – which is a basic human error at some point in the transaction process.

HelloZero has been able to help our customers by offering a range of solutions that are all available individually and can be used to address specific gaps, working alongside existing platforms. It retains all ingested data in the original untouched format thus providing total visibility of enhancements or adjustments, fully auditable for compliance and regulators alike.

We are experts when it comes to getting our clients compliant and we’ve been helping firms of all sizes across capital markets get ready. Get in touch and we’d be happy to discuss how we can help you.

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