By Thomas Steimann, Head of Regis-TR at SIX.
The OTC derivatives markets have faced a slew of new regulations since the 2008 Global Financial Crisis, to which the market has continued to adapt. 2024 will be no different. The EMIR Refit is the latest in a wave of regulatory change for the derivatives markets, with the new rules coming to the EU in April 2024 and to the UK in September 2024. It is the largest regulation for derivatives reporting which will affect the full range of derivatives market participants, from large tier 1 banks to smaller corporate treasury teams at regional banks. However, while individuals turn to gyms and exercise clubs after Christmas, many firms are worryingly out of shape with their derivatives reporting as the new regulation approaches.
Up to this point with EMIR reporting, there have already been several adaptions. European regulators have looked at harmonising regulatory reporting, retrofitting the learnings from global standards back into EMIR. With Refit there’s a particularly big focus on data quality and the reconciliation rates. As a result, banks are taking a long hard look in the mirror to see if they have this data to report and if not where they get it from.
This is especially the case because unlike individuals getting fit in the New Year, which is a personal journey, market participants are preparing for what will be a very closely monitored new set of standards. So closely monitored that national competent authorities (NCAs) will now be centre stage – focusing on individual firm’s rejection and reconciliation rates. Counterparties are obliged to report errors and omissions to the NCAs as part of the resolution process with counterparties. We have already seen the financial consequences of failing to comply. Back in late November, GlobalReach Multi-Strategy ICAV was fined €192,500 and reprimanded by the Central Bank of Ireland for breach of its reporting obligation under EMIR. We’ve also seen with other regulations, such as the Central Securities Depository Regulation (CSDR) Settlement Discipline Regime, that failure to complete certain actions can be met with penalties in the form of fines. Firms should be expecting repercussions if data and reporting isn’t fit for purpose shortly after the introduction of EMIR Refit.
There is less than four months to go and how firms implement the changes necessary to manage the introduction of the new EU rules in the regions relevant to their operations will depend, to an extent, on the size of the volume of trades and the number of counterparties traded with. The banks with the most counterparties will experience the biggest impact on the exception management process.
As a result, these institutions need to place a big focus on using the resources and connections to the rest of the industry to be ready to do much of the heavy lifting. Thankfully many of these banks have started, but overall and slightly worryingly very few across the board are at an advanced stage of readiness. From conversations we have had with the market, it seems many are seeing Q1 as the time to prepare. But Q1 is three months long and leaving it to the end of the quarter leaves inadequate time for preparation.
This is especially true for institutions operating across the EU and the UK, because of the unique challenge from the split introduction across both markets. While there is minimal change to clients in how they undertake reporting in the two regions under the Refit, the time lag in implementation means those operating in both will be reporting in two different formats for five months. This requires two different platforms for the different standards. The operational complexity of doing both will require extra build on the part of market participants to segregate data within their systems for the different standards, something which is yet to be completed.
Proactivity and planning in January then is essential. By the time REFIT goes live in the UK, there will have been 5 months of production data highlighting where the systemic issues have been for market participants. In theory, getting derivatives reporting into shape from January thankfully can be easier than a two-hour spinning class or high intensity workout session.
Through a UAT testing environment, with trade repositories including REGIS-TR, market participants can simulate the testing requirements for Refit reporting without a heavy lift. Access to the testing environment is free. In addition, REGIS-TR (he trade repository managing more than two-thirds of all Europe’s derivatives reporting) has been working on an enhanced analytical engine allowing clients to benchmark their rejection and reconciliation rates against the rest of the market. If a firm is achieving, say, successfully reconciling 80% of its derivatives transactions, 80% reconciliation that might be poor compared to the wider market. These are the insights needed to adapt and improve so that the firm in question can prove to NCAs that you are taking meaningful steps to improve your reporting.
That’s why trade repositories are so important in this situation. The experience, technological capabilities and preparation for the introduction of the new regulation means that firms can get ready for the EU implementation early, leaving extra time and resources for managing the delayed UK introduction. So instead of preparing on their own, market participants should begin their derivatives reporting New Year’s resolution with the support of a personal trainer, in the form of a trade repository. That early work will mean firms are beach body ready for the UK go-live come September.
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