EMIR: EU council finally takes the next step

Read the article and learn about:

• Background information and timelines for the latest EMIR changes
• Impact analysis on the different market participants
• How regulatory solutions can help firms meet the challenges

Michael Schuler
Senior Business Consultant, Regulatory Center of Excellence, SimCorp 

After a long wait, we have finally received an update on the latest European Market Infrastructure Regulation (EMIR, Regulation (EU) No 648/2012) review, the so-called “REFIT” (Regulatory Fitness Test). With changes affecting all areas of EMIR and hence many market participants, it is crucial that firms analyze the impact and act swiftly to stay compliant.

Fitness test

The European Commission's regulatory fitness and performance (REFIT) program aims to ensure that EU legislation fulfills the intended results with efficiency and simplicity. They are part of the EC’s “better regulation agenda”.¹

The first drafts of the changes to EMIR were published in May 2017 with public consultations on the revisions following. After lengthy deliberations, and most likely some interruptions due to other foci (e.g. EMIR Review RTS, MiFID, and SFTR, to name a few), the EU council announced on May 14, 2019 their plans to have the revised text signed in the following calendar week. On May 28, the revised text was published in the Official Journal and subsequently, 20 days after its publication in the EU Journal, the changes entered into force on June 17. (For more information, please refer to the announcement and legal text² and the publication in the Official Journal³)

The changes and amendments aim to simplify the compliance, address disproportionate compliance costs, increase transparency, and solve insufficient access to clearing for certain counterparties. Small counterparties, both financial and non-financial, will be impacted the most. We welcome this initiative and hope that those changes will result in better quality of EMIR TR Reporting, better access to clearing, lower costs, and other benefits. Figure 1 shows a brief history of the development in EMIR.

Simpler clearing rules

There are several changes to the clearing obligation under EMIR. For example, small financial counterparties (FCs) and small non-financial counterparties (NFCs) are exempt from the clearing obligation whilst being allowed to clear on a voluntary basis. FCs remain subject to the margining obligation though and are required to clear if they surpass the threshold in one of the asset classes. NFCs, both small and large, are only obliged to clear in those asset classes where they surpass the threshold, provided they calculate their position for the category every 12 months.

The removal of the “front loading” requirement (clearing of outstanding OTC contracts per entry into force of the clearing obligation) should make market participants’ lives a bit easier. In addition, the text extends by another two years (and is extendable twice by an additional year) the temporary exemption from the clearing obligation of pension scheme arrangements.

Also, the clearing members are required to offer their services on a FRAND (fair, reasonable, and non-discriminatory) basis to enable parties with a low-volume clearing need to still access the cleared derivatives market. Additionally, CCPs shall make their initial margin calculation models transparent to their clients (clearing members) so the margin calls can be verified.

Emergency brake and higher stakes

For the upcoming EMIR revision, ESMA, who is responsible for the implementation, foresees an “emergency brake” to temporarily suspend the clearing obligation, should this ever become necessary. Let’s hope it won’t… As the data quality, especially the matching and reconciliation rates on the TR Reporting, has proven to be too low, ESMA is raising the stakes by increasing the imposable fines if the trade repositories are not fulfilling their duties.

Changes to TR Reporting

On the EMIR TR reporting side, the biggest news, which is at the same time keeping the suspense alive, is that ESMA is mandated to develop new Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS). This work must be finalized within 12 months after entry into force, i.e. it is expected to be finalized by June 2020 at the latest.

Once those standards are known, specific changes to the content of the reporting (e.g. fields or format changes) and their impact on the market participants can be assessed. Not knowing what the revised RTS and ITS standards will bring and how big the changes will be, one can only hope the regulators will apply a measured approach to changing and amending fields.

As unharmonized reporting formats and submission methods (CSV, XML, sFTP, and WebServices to name a few random examples) hamper the efforts to converge data and focus on the content, it can be expected that this revision will entail further guidelines on standards of submission and formats of the reports, as seen for example under the Securities Financing Transaction Regulation (SFTR) where an ISO20022 XML standard is mandatory.

In other areas, the already passed deadline for the 3-year backloading (expired trades by entry into force of reporting in 2014) is posthumously waived. For market participants that missed the deadline, this is great. However, for those who already invested time and money into fulfilling this requirement, that is an unfair competitive disadvantage.

For non-financial counterparties (NFCs), an exemption from the reporting of intragroup trades is granted. If they are small (NFC-), their life becomes even easier through the delegation requirement of reporting to the financial counterparties they are trading with. However, they are still allowed to report themselves if they choose to do so and are required to support the financial counterparty in the reporting where necessary. Similarly, for UCITS and AIF, the management firms become the legally liable parties for the correct and timely reporting for the funds.

One proposal from the original drafts that was dropped is the mandatory delegation of reporting of exchange-traded derivatives (ETDs) to the CCP, which would have simplified the reporting for the clearing members (CMs), but not for the CMs’ customers, and added an extra level of complexity for the CCPs.

To increase transparency for non-reporting parties, i.e. market participants that have delegated their reporting, TRs are requested to grant them access to the data reported on their behalf on reasonable commercial terms.

Regulatory solutions can help you comply

As the upcoming changes impact multiple areas of EMIR, market participants need to act swiftly and prepare their operating platform to be able to comply. SimCorp’s Regulatory Center of Excellence is ready to help and has developed an integrated, customizable Trade Repository Reporting (TRR) solution. We offer solutions for the clearing and margining obligations under EMIR, hand in hand with the reporting of derivatives.

We are also able to provide a variety of services to help firms stay up-to-date with the regulation, keep their reporting setup up-to-date, and monitor the daily reporting for their clients. The team of experts from the Regulatory Center of Excellence⁴ have monitored the upcoming revision since the first drafts were announced in May 2017 and will keep their clients updated on the relevant changes to the reporting obligation.

1. https://ec.europa.eu/info/law/law-making-process/evaluating-and-improving-existing-laws/refit-making-eu-law-simpler-and-less-costly_en

2. https://www.consilium.europa.eu/en/press/press-releases/2019/05/14/capital-markets-union-council-adopts-updated-rules-for-financial-derivative-products-and-clearing/?utm_source=dsms-auto&utm_medium=email&utm_campaign=Capital+markets+union%3a+Council+adopts+updated+rules+for+financial+derivative+products+and+clearing

3. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2019.141.01.0042.01.ENG&toc=OJ:L:2019:141:TOC

4. /en/services/regulatory-compliance