RegTech Intelligence 
With the CFTC UPI heading into production for Interest Rate, Credit, Foreign Exchange, and Equity asset classes on 29 January, it’s a good opportunity to step back and look at opportunities to simplify derivatives regulatory reporting this year. We asked Chad Giussani for his perspectives in advance of our conference which he unplugged in 2020!
The European Commission undertook an extensive assessment of the application of European Market Infrastructure Regulation (EMIR) as it had been applied to the Union. The Commission’s final report concluded that there was little need for fundamental changes to the core requirements in EMIR. However, the legislation had imposed disproportionate responsibilities and overly complex requirements on non-financial counterparties and small financial counterparties.
It was deemed enough for EMIR to be included in the Commission’s Regulatory Fitness and Performance (REFIT) programme, and in due course a proposal was adopted for new Regulation amending EMIR to address these identified issues. The EMIR “REFIT Regulation” was published in the Official Journal on May 28, 2019 and applied 20 days later. It defined simpler, more proportionate approaches to the original requirements aimed at those smaller firms.
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Making reporting simpler
The article 9 trade reporting obligations have always been regarded as the most problematic of the EMIR requirements and under the new reporting requirements there are many new, changed and removed fields and data points. Trade Repository communications, to and from reporting firms, have become much more complicated using structured ISO 20022 XML messaging formats.
Firms now increasingly have to report detailed lifecycle management events with numerous Action and Event Types and stricter instructions on how these are to be applied. Over-the-counter (OTC) derivatives must be identified using the new Unique Product Identifier (UPI), and Unique Transaction Identifiers (UTI)s must be created and exchanged using a complicated waterfall of decision-making.
Simpler and proportionate? Maybe if you are reading trade reports and not writing them.
The Commission has retained the two-sided reporting approach when both counterparties are caught by the regulation. This invokes new pairing and matching obligations that seek to improve the quality of the data reported. i.e. matching data is tantamount to good data.
The REFIT Regulation offers smaller firms some concessions in this regard. As a gesture to non-financial counterparty firms below the clearing threshold (NFC-), the “Mandatory Delegation” of reporting responsibility for OTC derivative contracts concluded with a Financial Counterparty (FC) is introduced.
That, however, still leaves the NFC- with an obligation to report their remaining exchange-traded derivatives (ETD). Indeed, many smaller financial counterparties are really struggling with the greater complexity of reporting derivative valuation and collateral data.
What can firms do?
EMIR reporting is, as mentioned earlier and under the right conditions, a dual-sided reporting obligation. There has always been the option under EMIR for one party to delegate the reporting activity, if not the legal responsibility, to another party. Often this is the counterparty or an electronic trade confirmation intermediary and this is commonly known as “Voluntary Delegation”.
Now firms are reconsidering their approach on Voluntary Delegation, weighing up the pros and cons of outsourcing their reporting to another party. Some firms are bringing it back in-house for greater control, other firms are using the REFIT as a critical juncture to move to Voluntary Delegated reporting ahead of the REFIT deadline.
Going ahead of REFIT is important for allowing both parties to agree the terms of delegated reporting agreements, implement the reporting and new operational control framework, and to tease out reporting errors without colliding into the added complexity of the upcoming REFIT changes. Firms are pivoting self-reporting build programs into delegation and control framework initiatives.
It may be conventional wisdom not to outsource processes that are complicated or create ongoing problems, and the REFIT reporting requirements certainly qualify. This remains as pertinent as always but, done well, with an exceptional control framework, delegation allow firms to fully exploit the benefits of their regulatory reporting for their derivative risk management.
The go-live dates for EU and UK REFITs are the April 29 and September 30, 2024 respectively, and the start of 2024 is about to prove challenging for those firms that have only recently decided to delegate their reporting.