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Start planning now to solve your market infrastructure refit challenges

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The clock is ticking. Market participants have 18 months to implement the European Market Infrastructure Regulation (EMIR) Refit standards before they come into force on 29 April 2024.

This is the first in a series of articles considering the challenges our clients face as they ready themselves for this significant transformation.

The EMIR Refit challenge

EMIR’s focus is to enhance transparency in the over-the-counter (OTC) derivative markets. It also aims to monitor and mitigate risks posed by OTC derivatives to aid financial stability.

The European Commission’s regulatory fitness and performance programme (Refit) reviews existing legislation to make sure it delivers intended benefits, and simplifies rules where possible. While no fundamental re-think was necessary for the EMIR Refit, there is a focus to improve data quality and reconciliation rates, and to address disproportionate costs and burdens on firms without compromising the regulatory goals.

Ironically, these changes will not simplify compliance for participants, but rather make it significantly more complex.

Why you need the full 18 months to implement

There are several themes in the Refit reporting agenda, including:

  • alignment and harmonisation with other global reporting regimes
  • achieving end-to-end reporting with the XML formats required by financial information standard ISO 20022
  • focus on high data quality and detail

For the EMIR Refit, the wide scope of these factors means participants such as counterparties and trade repositories will likely need the full 18 months to implement the standards.

The renewed emphasis on quality of reportable data will create complexity for clients who need to achieve effective and timely compliance. Our discussions with clients around the data challenges have focused on the following themes:

1. The granularity challenge

Under EMIR’s Refit, the count of reportable data fields has risen to 203 – although not all reportable. This is more than for other regimes. The depth of reporting fields means it is a significant undertaking for clients to extract, enrich and validate data points.

Over 90% of existing data field obligations have been updated in some capacity. A large number (87) of fields have been removed, renamed or changed in format and description.

Updating these fields means you must also address concerns around data sourcing and reconciliations. There is a strong emphasis on firms and counterparties ensuring the granularity, accuracy and reliability of information reported.

2. The new data field challenge

The EMIR Refit promotes adoption of reporting standards under the CPMI-IOSCO guidance for critical data elements (CDE). There are over 50 new CDE fields that will help harmonise definitions, formats, and use of data elements for OTC derivative transactions reported to trade repositories.

A series of new reportable fields will also be needed. This will include fields that provide more detail and clarity about the entity responsible for reporting; and fields that link related reports via a new Unique Trade Identifier (UTI) data point. This reference data challenge is amplified by the Unique Product Identifier (UPI) change, which will create a centralised store of such identifiers under Derivatives Service Bureau (DSB) rulings.

Market participants will have different expectations about how they implement and adhere to these obligations. But however they do it, they need to establish a control framework to manage the process in production.

3. The Extensible Markup Language (XML) challenge

XML is a set of codes that describe the text in a digital document. The major hurdle for market participants will be adherence to automated XML ISO20022 schema to report data to trade repositories, who must only accept reports from market participants in this format under the regulation. This means participants must build a capability to submit and consume responses in XML ISO 20022 format, and move away from current, more flexible CSV submissions.

Firms will likely use reporting middleware to assist with this conversion to XML from their own internal formats.

The European Securities and Markets Authority (ESMA) is looking to set pre-defined error codes for any exceptions communicated via this XML format. So this data normalisation will need to happen across trade repositories.

With the imminent challenges the EMIR Refit will pose, firms must start focusing on where they will source data points for each field. Experience of implementing previous compliance regimes has proved that these will need a significant lead time, so we recommend firms start planning well ahead of the implementation deadline.

How Delta Capita can help

DC’s Regulatory Services team are experienced in helping financial services clients prepare for market change and enable a sustainable regulatory reporting function.

Our expertise includes project management and project management office (PMO) change practitioners to deliver against new compliance measures. This includes testing and quality assurance services.

DC provide gap analysis to strengthen your teams’ understanding of the impact of regulatory requirements. Our data and architecture analysis expertise helps you establish the requisite process for reportable field extraction, enrichment, and validation through internal and market reference data sources.

We have experience on similar large regulatory projects in vendors, trade repositories and tier 1 and 2 market participants. We can help you design and deploy optimal target operating models to support new legislation.

DC use independent readiness assessments to give you an objective view on progress and likely readiness for implementation. We also offer resourcing and implementation support to manage go-live.

For more information, contact Michael Robertson, Head of UK Consulting; or Karan Kapoor, Head of Risk and Regulatory Consulting.

This article was co-authored by Michael Robertson, Head of UK Consulting; Claire Suttie, Senior Manager, Consulting; and Paula Salifu, Business Analyst, Consulting at Delta Capita.