The EMIR refit entered into force on 17 June 2019 and contains revisions to the original regulation with the aim to make rules simpler and more proportionate. Some of the key changes are an expansion of the definition of a financial counterparty (FC), reduced clearing obligations for non-financial counterparties (NFC), and mandatory delegated reporting for FC with NFCs that are not subject to the clearing obligation (NFC-). The reporting obligation for the latter will come into effect on the 18th of June and poses a significant challenge for firms. In this blog Joost Verkade, Amrita Sawhney and Hussain Abdullah from Deloitte’s Risk Advisory practice will discuss some of the data challenges.
What is mandatory delegated reporting?
In contrast to the ‘voluntary’ delegated reporting in which firms choose to delegate their reports to another counterparty, but remain legally liable, the EMIR Refit introduces a mandatory form of delegated reporting. Under this requirement, Financial Counterparties will be responsible and legally liable for providing accurate and correct reporting of OTC derivative contracts on behalf of their NFC- counterparties. This shifts the burden of reporting from the smaller NFC- towards the FC. To ensure the FC has the required data to fulfil the delegated reporting obligation, the NFC- should provide the details relating to the OTC derivative contracts that the FC “cannot be reasonably expected to possess”.
What are the key data challenges?
Communication - The mandatory reporting obligation for FCs trading with NFC-‘s will require counterparties to agree clearly on a number of responsibilities and obligations. ESMA expects these agreements on roles, responsibilities and obligations to be clearly documented in relevant contractual forms. Communication with impacted counterparties is, therefore, a key component of ensuring compliance with these amended rules. There are a number of points that counterparties will need to agree on as responsibility shifts from the NFC- to the FC, including:
UTI Generating entity
Whether the NFC- is choosing to perform its own reporting in full or in part. If in part, what is the exact scope of the FC’s reporting obligation for the NFC- when trading with it
Whether the liability of the FC is limited to only reporting of new contracts following the go-live date or all new contracts and lifecycle events for existing contracts on the go-live date
Monitoring of the NFC thresholds and how this communication will be made to the FC within the specified timeframes
How Trade Repository (TR’s) portability will be managed where the NFC- and FC report to different TRs – will the FC transfer reports of the NFC- trades onto their repository or will the FC become a participant of the NFC-‘s TR.
How data will be provisioned and communicated to the FC from the NFC - to ensure it can perform complete, timely and accurate reporting on behalf of the NFC-.
The provision and communication of data for specific trade fields should be addressed and tested as a priority to ensure minimal to no disruption when mandatory delegated reporting commences. The NFC- and FC should also identify and reconcile any existing breaks as these may impact the delegated reporting.
Completeness - According to the regulatory text in the EMIR Refit, the data that the NFC- should provide are the details that the FC “cannot be reasonably expected to possess”. ESMA expects the FC to possess the information related to the other counterparty, given that the FC will be expected to report it also in its own report. There is certain information that the FC cannot be reasonably expected to possess and these are clearly defined. These include fields such as the beneficiary ID (if not the NFC-) and the Broker ID field – essentially fields that may change from trade to trade that only the NFC- would know. Firms will need to implement robust measures for the receipt of data regarding these specific fields if they have not done so already
Reconciliation - If the FC and NFC- report to different TRs, existing positions initially reported would need to be moved to a single TR. The TRs could transfer the positions as per the ‘Guidelines on portability’ as specified by ESMA. Certain industry bodies recognize potential issues with this such as differing UTIs across the TRs or existing trade breaks, and are considering the potential for manual rerunning of affected trades. There are a number of challenges with this approach, for example the two parties need to agree on how existing positions are exited and replayed. This can be done via an Error report (action type ‘E’) which requires a new UTI, or via an early termination (action type ‘C’) which allows for re-use of the same UTI. Furthermore, there needs to be agreement between the parties on which date the positions will be replayed to avoid under reporting or duplicative reporting.
Data management & procedures - The EMIR Refit provides a challenge if the classification of an NFC changes to that of an NFC- (or the reverse). The FC cannot reasonably be expected to have this information which means the NFC- should provide it. It is essential that this is done timely and such that an approach can be determined on when and how the FC takes over the reporting obligation. ESMA acknowledges that the FC may not be able to ensure continuity of reporting in case the NFC- does not timely inform the FC. However, it is expected that there are written procedures or agreements in place between the FC and NFC- that address any potential disruption in reporting “within a reasonable delay”.
Timing - The delegated reporting obligation will be effective as of the 18th of June 2020. While many FCs have done considerable work to prepare for the reporting obligation, they are very dependent on the responsiveness of their NFC counterparties. The NFC needs to confirm whether it intends to self-report (to prevent the risk of double reporting), review and sign any required legal agreements, and exchange relevant data needed to report. Many FCs have progressed well into their counterparty outreach programmes to understand where their obligations will lie and are using these channels to set up appropriate arrangements between themselves and their NFC- counterparties.
Given the current COVID-19 situation, there is a significant challenge for both the FCs to respond to their client outreach, as well as for the NFC- to provide the required reporting information. As such, a postponement or forbearance, similar to what was granted for Securities Financing Transactions Regulation (SFTR), may be very welcome. However, an extension of the deadline may also actually place a burden on those NFC- firms who are ready, as they remain responsible for their reports – which is in contrast of the aim of the regulation to provide relief to the NFC-.