knowledge 3 January 2024 |

Go-Live for EMIR Reporting Changes is Fast Approaching!

Background

Entities that are in scope for the EMIR¹ reporting obligation must report details of any derivative contracts (within the meaning of EMIR) entered into, and any modification or termination of those contracts, to a registered or recognised trade repository (“TR”) by the end of the next working day.  Certain counterparties – being those categorised for EMIR purposes as financial counterparties (FCs) or non-financial counterparties which exceed one or more clearing thresholds (NFC+s) – are also subject to collateral and valuation reporting requirements.  The detailed requirements regarding the content and format of the required reports are set out in regulatory technical standards and implementing technical standards.

The EMIR reporting obligation is structured as “dual-sided reporting”, i.e. each in scope party to an in scope derivative contract is generally obliged to report its position.  In certain limited cases, responsibility for reporting the position of one party to a derivative contract is imposed by EMIR on its counterparty or a third party; this is referred to as “mandatory reporting” (see here).   We have in this briefing referred to the entity legally responsible for reporting any particular position under an in scope derivatives contract as the “Responsible Reporting Entity” and, where a Responsible Reporting Entity reports on behalf of a third party pursuant to the mandatory reporting obligation, to that third party as the “Reported Entity”.  A Responsible Reporting Entity may delegate the function of (but not the legal responsibility for) reporting to another entity such as a counterparty of the Responsible Reporting Entity or, where applicable, the Reported Entity or a third party service provider; this is referred to as “delegated reporting” and any such delegate is referred to below as a “Reporting Delegate”.

Changes made to EMIR by EMIR Refit mandated the development of new technical standards regarding the information to be reported to TRs, with a view to:

• aligning with certain other regulatory reporting requirements²; and

• improving data quality and transparency, which were perceived to have been undermined by diverging reporting practices deriving from uncertainties in the current rules, resulting in reconciliation breaks. 

The revised standards were published by the European Commission (the “Commission”) in October 2022 (see here) and the European Securities and Markets Authority (“ESMA”) subsequently published Guidelines clarifying certain aspects, and providing practical guidance on the implementation, of the new standards, together with validation rules and certain other guidance, all of which are available here. 

The revised standards and related Guidelines and guidance go live on 29 April 2024.

Effect of changes

Whereas these reporting changes do not change the responsibility for reporting³, they will:

• significantly impact the substance and form of the required reports on a go-forward basis;

• impose an obligation to re-report outstanding derivative contracts in accordance with the applicable new requirements within 180 calendar days of the changes taking effect – 26 October 2024 - or in any earlier report of the relevant contract (e.g. due to a modification of its terms or a reporting correction); and

• introduce an express requirement for a Responsible Reporting Entity to notify relevant EMIR national competent authorities (each, an “NCA”) of certain types of material errors or omissions in its reporting.

Given the serious consequences of failure to comply with EMIR reporting obligations (see here), it is essential that all Responsible Reporting Entities and Reporting Delegates are prepared for compliance or, as applicable, monitoring compliance, with the new requirements once they take effect.

Key changes to note

Some of the key changes to note are as follows:

• the use of ISO 20022 messaging with a harmonised XML schema is mandated for reports to TRs, aligning with the approach to SFTR and MiFIR reporting.  This change is intended to improve data quality, facilitate reconciliation of reports and enhance the automation of reporting;

• the level of detail to be reported is significantly expanded with an increase in the reporting fields from 129 to 203 (although not all fields will be relevant to all contracts or reportable events) and a requirement to report whether the underlying includes crypto assets;

• European Union FCs⁴ undertaking mandatory reporting of a European Union NFC- counterparty’s positions under OTC derivatives between them⁵ must have arrangements in place with each relevant NFC- to obtain from it the information that the FC needs to make the reports, and for the NFC- to maintain its LEI (legal entity identifier).  This may in some cases require amendment of applicable terms and conditions between such FCs and their NFC- counterparties but many such FCs may already have addressed this in applicable terms and conditions;

• A Responsible Reporting Entity is required to notify its NCA (and, if different⁶, the NCA of any relevant Reported Entity) of certain types of material errors or omissions in its reporting as soon as it becomes aware of them.  The types of errors and omissions encompassed by this are those of a particularly significant nature and include any:
   
  • misreporting caused by flaws in the reporting systems that would affect a significant number of reports;
  • reporting obstacle preventing the Responsible Reporting Entity from sending reports to a TR by the deadline; and
  • significant issue resulting in reporting errors that would not cause rejection by a TR.

• The ESMA Guidelines contain metrics and thresholds for use in determining the significance of a reporting error or omission.
  
  The notification to an NCA must, with respect to any error or omission, at least identify the:
   
  • scope of the affected reports;
  • type of error or omission involved;
  • date of, and reason for, its occurrence;
    steps taken to resolve, and timeline for resolution of, the issue and corrections.
     
• ESMA has published a common template for use in notifying errors and omissions to NCAs and has stated in its Guidelines that notifications to an NCA must be made in accordance with the procedures adopted by that NCA.  ESMA has also confirmed that the Responsible Reporting Entity should have processes in place to be able at any time to assess the significance of identified cases of misreporting as outlined above and to promptly notify them to the relevant NCAs.  ESMA emphasised that this includes swift identification of impacted records and their numbers and the computation of relevant metrics to assess whether thresholds have been exceeded or not;

• a new approach for determining which party to a derivative contract is responsible for generating its unique transaction identifier (“UTI”) in line with guidance published by CPMI-IOSCO⁷ for UTIs; again this may affect terms and conditions or other contractual agreements between the parties to that contract regarding who produces the UTI;

• enhanced requirements for TRs to reject reports that do not comply with the standards and obligations on TRs to provide timely (within 60 minutes of the moment the submitted data enters the TR’s system) feedback to reporting entities on rejections and reconciliation breaks; and

• specific provisions as to which of the reporting fields need to reconcile, and any tolerance levels permitted for those fields.

Comment

Substantial changes to reporting systems, and applicable reporting policies and procedures, are likely to be required to facilitate reporting in compliance with the proposed changes and, in the case of a delegated reporting structure, monitoring that compliance.

The new obligation of a Responsible Reporting Entity to notify to relevant NCAs errors and omissions in reporting undertaken by it pursuant to the mandatory reporting obligation may also present challenges, including in the context of:

• making notifications to NCAs other than the Responsible Reporting Entity’s own NCA and the possibility that different NCAs may adopt different notification procedures and the fact that the Responsible Reporting Entity may also be subject to notification obligations pursuant to regulatory regimes other than EMIR;

• ensuring that its internal policies, processes and procedures facilitate a quick determination as to whether any particular reporting issue affects a significant number of reports or transactions by reference to the metrics and thresholds set out in the ESMA Guidelines;

• determining the content of information with respect to notifiable issues to be provided to the Reported Entity, and the timing of that provision.  These are issues on which any Reported Entity of a Responsible Reporting Entity is likely to have a view.  Interestingly, the ESMA Guidelines emphasise that an NFC- Reported Entity should have access to the information reported on its behalf by an FC Regulatory Reporting Entity and suggests that such an FC could provide to a NFC- counterparty on a regular basis (e.g. monthly) information about its outstanding contracts reported to TRs⁸.  Existing agreements relating to mandatory reporting are unlikely to encompass such information sharing arrangements.

The notification requirement will also present challenges for a Regulatory Reporting Entity that delegates the function of EMIR.  As indicated above, the Regulatory Reporting Entity retains the legal responsibility for reporting and is, therefore, subject to this notification obligation.  Any Regulatory Reporting Entity that delegates the reporting function must satisfy itself that it will be capable of complying with the notification obligation on the basis of information that its Reporting Delegates are contractually obliged to provide to it and/or that is otherwise available to it through any independent monitoring that it undertakes of its Reporting Delegates’ activities.

Regulatory reporting is firmly within regulatory cross-hairs (see here) and all Regulatory Reporting Entities and Reporting Delegates need to focus on ensuring that they are ready for go-live of these new standards on 29 April 2024.

Other EMIR developments

The European Commission’s proposal for targeted amendments to EMIR (“EMIR 3.0”; see our briefing here) has been wending its way through the European legislative procedure.  Each of the European Parliament’s Committee on Economic and Monetary Affairs and the European Council has now confirmed its position on the Commission’s proposal for EMIR 3.0 and political and technical trilogue has commenced.

An issue of particular interest to industry will be the Commission’s “active account” proposal referred to in our earlier briefing; that institutions subject to the EMIR clearing obligation hold, directly or indirectly, active accounts at EU central counterparties (each, an “EU CCP”) and clear at least a specified portion of derivatives contracts identified as of substantial systemic importance through those accounts.  This is subject to political trilogue and each of the European Council  (see here) and the Parliament (see here) has offered alternative proposals, with trilogue promising to be lively.  In the meantime, the derivatives industry is keen to see a comprehensive and robust cost-benefit analysis undertaken of the active account requirement before it is implemented (see here) and ongoing advocacy is to be expected in this regard.

There is some EMIR good news in respect of an issue of time-sensitive concern to the derivatives industry – the expiry on 4 January 2024 of the time-limited exemption from the EMIR margin requirement for non-cleared OTC single-stock equity options or index options currently provided for in the “Margin RTS”⁹.   Positions taken by the European Parliament and the European Council on EMIR 3 support a non-time limited exemption for those options and, in the meantime, the European Supervisory Authorities, on 20 December 2023, published draft regulations for a two-year extension of the existing time-limited exemption and issued no-action relief to bridge any gap between expiry of the existing exemption and introduction of any temporary or permanent solution (see here).