Are brokers really ready for EMIR Refit and ESMA changes in 2024?

Rick Steves

The EMIR Refit and ESMA reporting requirements necessitate a strategic approach from brokers, involving major updates to reporting systems, data collection processes, and internal resources. We spoke with brokers and RegTech providers to learn more about the upcoming regulatory challenges.

The EMIR Refit, referred to as EMIR 3.0, aims to enhance the harmonization and standardization of reporting under EMIR. Its primary purpose is to monitor systemic risk and contain costs for market participants and trade repositories​​.

Set to go live on April 29, 2024, in Europe, and September 30, 2024, in the United Kingdom, the EMIR Refit presents significant changes for firms in terms of reporting content and technical format​​.

In this feature article, we engaged with leading professionals specializing in brokerage solutions and regulatory reporting. Our discussions included insights from representatives at Point Nine and TRAction, two leading RegTech providers, as well as Equiti Group and FXOpen, two prominent players within the brokerage industry. 

The new reporting standards

Introduction of ISO20022, a global standard for financial data communication, is a key change. It requires all messaging of EMIR reports to be done according to a standardized XML structure, posing a challenge for the industry to correctly implement this new standard​​.

Increased Data Fields: The new technical standards include 203 fields, an increase of 74 fields, alongside modifications to existing fields. This includes new details relating to counterparty information that organizations may need to acquire​​.

Clarifying Trade Lifecycle: The addition of the “Event Type” field aims to increase transparency around the lifecycle of a trade, providing a clearer indication of lifecycle events that trigger reporting​​.

Focus on Data Quality: The Regulatory Technical Standards (RTS) introduced by ESMA emphasize the verification of the correctness and completeness of submitted data, and the validation of lifecycle events reported for a trade​​.

Unique Identifiers: The introduction of Unique Product Identifier (UPI) and changes in the generation process of Unique Trade Identifier (UTI) are significant. The UPI complements the information captured by the ISIN and CFI code​​.

The main challenges for brokers 

EMIR Refit has expanded the range of derivatives brokers must report, including both exchange-traded and over-the-counter derivatives. This demands comprehensive tracking of a wider array of transactions. Brokers now need to provide more granular details in transaction reports. They must understand each transaction deeply to report accurately. 

The main challenge lies in the complexity and volume of data required. Advanced data management systems and staff retraining might be necessary. Data accuracy and completeness are crucial for compliance. Errors or omissions can lead to fines or regulatory scrutiny.

Brokers face difficulties integrating data from various systems, challenging data consistency and accuracy. Implementing automated systems for data validation is helpful but requires investment and human oversight for complex cases.

Collecting and reporting LEI data is mandatory, posing challenges in ensuring clients have an LEI and maintaining accurate LEI information. EMIR Refit and ESMA reporting rules significantly increase operational burdens, requiring system upgrades and possibly additional staffing.

Brokers must align EMIR Refit reporting with other frameworks like MiFID II, requiring a strategic approach and integrated compliance systems. Compliance costs are significant, especially for smaller brokerage firms, impacting both direct and indirect business aspects.

Client outreach for information collection is time-consuming. Maintaining updated records and effective communication is key. Balancing detailed transaction reporting with data privacy regulations like GDPR is challenging, necessitating robust security measures.

Real-time reporting demands significant technological capabilities and operational workflow adjustments for timely data submission. Understanding and keeping up with evolving regulations is an ongoing challenge, requiring proactive engagement and staff training.

Reconciling reported data with trade repositories is complex and time-consuming, essential for avoiding compliance risks. Reporting cross-border transactions is complex due to varying international regulatory requirements, posing logistical and legal challenges.

Accurate trade valuation, especially for complex derivatives, is technically challenging and must align with regulatory expectations. Integrating reporting data into risk management practices is essential but challenging, requiring efficient data analysis and interpretation.

Brokers also must balance regulatory transparency requirements with the protection of sensitive business information and client confidentiality.

 

“The EMIR Refit demands an overhaul in reporting systems and firms will need robust resources to meet new demands. Key challenges will be adapting to the new ISO 20022 format, data standardisation, the introduction of UPIs, and the UK-EU regulatory divergence.”Ella Lindsay, Equiti Capital

 

Equiti Capital, the UK FCA-regulated subsidiary of online trading technology and multi-asset financial products Equiti Group, is preparing for EMIR Refit 3.0, such as adapting to the ISO 20022 format and data standardization.

Running Equiti Capital’s transaction reporting team is Ella Lindsay, who focuses on process development and high-volume EMIR and MiFIR reports. Lindsay advises integrating robust KYC processes for accurate LEI data collection and investing in internal resources for managing increased reporting requirements.

“The major changes include the ISO 20022 XML reporting format, data standardization, the introduction of UPIs (Unique Product Identifiers), and the increase of over 70 new reportable fields. Another consideration is the regulatory divergence between the UK and EU regimes. It could be a challenge for UK firms with EU-delegated clients, as the ESMA go-live date for the EU EMIR is 6 months prior to the UK EMIR. This will require additional time capacity and data infrastructure to submit unique EU delegated reports alongside the existing UK documentation.”

Equiti’s Lindsay also noted that data collection from LEIs is a major challenge as both new and existing clients will need to provide significantly more detailed counterparty information, such as declaring their corporate sector, clearing threshold, and treasury, financing, or commercial activities.

“Accurate reporting will be dependent on clients providing this information before April 2024. For this to go smoothly, the key will be integrating periodic and robust KYC refresh processes to ensure all data is consistently relevant and accurate. For clients delegating their reporting, such as an NFC- company, a financial counterparty will need to encourage these firms to ensure valid LEIs are in place, so their reports are not at risk of rejection,” Lindsay stated, adding that Equiti has been investing heavily in internal processes to ensure the correct data architecture is established, for seamless pairing and matching with LPs and counterparties to the broker’s trading platforms and data warehouses. 

How can brokers mitigate these risks if they are already behind on their reporting? we asked. “There’s a lot of ways these obstacles can be overcome through escalating their preparation. Staff training and upskilling, peer reviews and engaging with regulators such as FCA and CySEC, and solidifying fail-safe documentation protocols, can all prepare firms for a smoother transition. 

“Another way for brokers to mitigate risks will be to mandate necessary risk management tools and to ensure that the new EMIR refit data fields (such as UTI generation logic) are not adjusted without strict internal approvals. As an industry, providing transparent data has become even more imperative since the impact of the FTX collapse last year.”

As to fines and sanctions, Equiti’s Lindsay believes each case will be treated individually as it is now. “Ultimately, it will be at the discretion of the appropriate regulators to formally clarify this in the future, but with the current EMIR regime – fines can vary and are also dependent on the National Competent Authority.”

 

FXOPEN“For most good-quality brokerages, it will just be a routine exercise” Natalia Zakharova, FXOpen

FXOpen, a renowned retail and institutional CFD broker, is one of the many firms within the FX industry that continually adapts its compliance procedures to every new regulatory requirement coming into effect in the jurisdictions it operates. 

Natalia Zakharova, Head of Business Development at FXOpen, reflected on the challenges faced during MiFID II implementation, highlighting the need for continuous preparedness for regulatory changes. 

“As the majority of regulated brokers in Europe, we’ve had to go through the process of structuring for the original implementation of MiFID II a few years ago. That was a massive undertaking and required quite a lot of infrastructural changes. I can remember some degree of panic towards the end when the deadline approached because it was quite apparent that many brokerages were not ready for it, and found the transformation quite difficult. 

“That was getting on for five years ago now and memories are often short. Therefore, it could be fair to say that, despite how many brokerages have had to adapt to regulatory changes in the past, regulatory evolution is a constant subject of discussion in many industry conferences and publications. Therefore, for most good-quality brokerages, it will just be a routine exercise.”

 

What do RegTech providers say?

“With ESMA’s increased regulatory focus on data quality and transparency, EMIR Refit is ushering in a comprehensive transformation. This goes beyond a mere technical IT update; it represents a complete regime facelift” Fotini Tzimi, Point Nine

Fotini Tzimi, Product Owner at Cyprus-based regulatory reporting specialist Point Nine, stressed the need for a holistic approach to the comprehensive transformation brought by EMIR REFIT. 

According to the Point Nine expert, key considerations include:

Change in the reporting format: “Firms will be required to submit their transaction reports to the trade repositories (TR) in the ISO20022 XML format. The feedback reports from the trade repository will also be in the same format. This will normalize the reporting formats across trade repositories which will allow for an increase in the supervisory effectiveness by the regulators.”

UTI Format Changes: “The UTI reported at both trade and position level reporting must adhere to a specified code pattern and must incorporate the Legal Entity Identifier (LEI) of the party generating it.”

Expanded Reporting Fields: “The number of fields to be reported is escalating from 125 to 200< fields. Significant additions include the introduction of the Entity Responsible for Reporting, the Event Type field, the Delta field in the Valuation table, and the Unique Product Identifier for OTC derivatives lacking a Product Identifier. Anna DSB is the sole service provider of the UPI performing both functions of the issuer and operator of the UPI code. The UPI production environment at Anna DSB is now available, however, there are still numerous outstanding UPI codes for certain OTC contracts.”

Increased Reconciliation Fields: “The Trade Repository Reconciliation is also evolving with an increase in the number of reconcilable fields and the introduction of the Valuation Reconciliation Status. This status reflects the outcome of reconciling Mark to mark-to-market valuations between counterparties. Reporting counterparties can find some relief in the fact that this will be implemented two years after the go-live date.”

Transparency Requirements: “In instances of delegated reporting, where counterparties undertake reporting on behalf of others, transparency requirements are being reinforced. All counterparties bear the obligation to notify their National Competent Authority (NCA) of any significant issues encountered in reporting. This aligns with established requirements under MiFIR transaction reporting.”

“In summary, EMIR REFIT signifies a transformative shift, demanding a holistic and strategic approach that goes beyond the conventional confines of traditional IT updates. With less than 6 months to the EU go-live date and the trade repositories only now starting to open the relevant User Acceptance Testing (UAT) environment for testing, I believe market readiness is lacking and there is still a substantial amount of work to be done in terms of data sourcing and testing”, Tzimi concluded. 

 

“At this point, transaction reporting has become so specialized that unless you have a dedicated full-time person in-house, it will be difficult to implement this requirement without a third-party provider” – Quinn Perrott, TRAction

Quinn Perrott, co-CEO of Sydney-headquartered TRAction, also submitted a response to our queries about the EMIR challenges brokers are facing. TRAction specializes in regulatory trade and transaction reporting, providing financial and regulatory technology services across Europe and Asia Pacific.

 

 

What are the biggest challenges?

EMIR Refit requires two important data components:

  • Unique Transaction Identifier (UTI)
  • Unique Product Identifier (UPI).

Unique Transaction Identifier

“The Unique Transaction Identifier requires both sides of a trade use the same number in their submissions. While this is an existing requirement under EMIR in order to facilitate ‘pairing and matching’, it is something that hasn’t been widely adhered to or enforced due to there being little or no guidance or systems on how to come up with the same UTI,” said Perrott.

“The regulators’ solution has been to come up with a UTI generation and sharing waterfall which we consider is practically difficult to implement, particularly at scale. Unless a bilateral agreement is put in place regarding generation of the UTI in a way that both parties can access it or generate it themselves, with certainty that it will match that of their counterparty, meeting this requirement is going to be difficult at scale. We have put together one suggestion for some of our clients to consider

“Brokers executing large numbers of trades with multiple liquidity providers on a daily basis will need certainty and efficiency to ensure their UTIs match what is reported by their LPs.”

Unique Product Identifier

“The Unique Product Identifier (UPI) is being run by an organization called the ANNA-DSB. 

“The role of the UPI is to uniquely identify an OTC derivatives product. A unique UPI code signifies a collection of specific values on the reference data elements which resides in the UPI Reference Data Library on ANNA-DSB.

“If a UPI code exists, firms will have to obtain the UPI code from the UPI Library.

“If a UPI is not available on the UPI Library, firms will have to provide ANNA DSB with a set of reference data element values which represent a unique combination of characteristics related to the OTC derivative product.

“When EMIR Refit goes live, ESMA has confirmed the UPI will have to be updated to outstanding OTC derivatives, even if previously they were identified with an ISIN. 

“This is going to be another aspect of the regime which initially causes difficulties for a lot of brokers. It is a new system which requires you to log in and learn how to navigate. At present, the testing platform (UAT) has thousands of different UPIs which have been created and it is difficult to distinguish between them without specialist knowledge.”

XML Format

“Another difficult change under EMIR Refit will be the requirement to report using the XML format. This is significantly more technical to read and adjust than CSV or excel files which brokers who reported in-house to date would have experienced. 

“Converting reports between native excel/CSV formats and XML, then back again for reconciliation, will require a significant technological uplift for brokers,” Perrott continued.

Is data collection from LEIs part of the problem?

“All Local Operating Units (LOUs) are currently facing signification challenges to their efficient operating. As with many services which are considered a commodity, pricing pressures have resulted in a race to the bottom on LEI costs has meant a deterioration in quality, undermining the entire system.

“TRAction assists its clients to register and maintain LEIs to facilitate their reporting process and accordingly is closely aware of the various providers in the market. 

“One of the largest LOUs, which is a provider of LEIs and their maintenance run by DTCC, the GMEI, ceased operating earlier this year. GMEI transferred all their LEIs to other LOUs. This wasn’t necessarily a surprise given their service standards slipped over the past few years and they became difficult to deal with.

“With the increased load on other LOU providers as a result of the mass transfers, we are seeing significant delays in the creation and renewal of LEIs. Where LEIs are meant to be renewed within a few days, this is taking weeks, and only achieved after multiple follow-ups.

“One curious result of GMEI trying to distribute the LEIs fairly amongst other LOUs resulted in a lot of our clients’ LEIs being transferred to an LOU that issues all its communications in German! “No LEI, no trade” is looking like it could be a significant hindrance to a lot of firms until this gets resolved.”

How can brokers mitigate these risks if they are already behind on their reporting?

“At this point, transaction reporting has become so specialized that unless you have a dedicated full-time person in-house, it will be difficult to implement this requirement without a third-party provider,” TRAction’s Perrott concluded. 

Conclusion

As the EMIR Refit and ESMA changes draw near, brokers must intensify their preparations. Adapting to new standards like ISO 20022 and expanding reportable fields is a significant undertaking. Firms must ensure they have the necessary technology and expertise in place. The UK-EU regulatory divergence adds another layer of complexity. Brokers must navigate these differences effectively to maintain compliance in both markets.

Brokers are encouraged to invest in their internal resources. Staff training, robust KYC processes, and efficient data management systems are crucial. Firms should also focus on establishing strong communication channels with clients. This will aid in collecting accurate data and ensuring compliance with the new requirements. Proactive engagement with regulatory bodies is also vital. Staying informed about the latest developments and guidelines will help mitigate potential compliance risks.

Finally, the implementation of EMIR Refit and ESMA changes is not just a regulatory obligation but an opportunity. It’s a chance for firms to enhance their operational efficiency and data-handling capabilities. By embracing these changes, brokers can position themselves strongly in the evolving financial landscape. They can ensure continued growth and success in an increasingly regulated and competitive market.

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