EMIR REFIT: What do you need to know ahead of the 29 April go-live date?

EMIR REFIT (EMIR REgulatory FITness Program), the large-scale, mandatory regulatory update to the existing European Market Infrastructure Regulation (EMIR) derivative transaction reporting rules, will soon come into effect on 29 April 2024.

With this imminent go-live date, Luxembourg financial and non-financial firms with derivative exposure need to ensure they are compliant with the new reporting rules. The requirements apply irrespective of whether firms report directly to a trade repository or delegate their obligations to a third party.

In June 2022, new standards for EMIR reporting were adopted to enter into force in April 2024. In December 2022, the European Securities and Markets Authority (ESMA) also published extensive supplementing guidelines¹ for reporting under EMIR (EMIR Guidelines) aimed at further enhancing harmonization and standardization of reporting across the Union.

It is also important to note that UK legislators are performing their own review of EMIR, commonly referred to as UK EMIR, which was onshored into UK legislation post-Brexit. Luxembourg firms which have derivative exposure in both the EU and the UK should consider the impacts of these new sets of rules on their reporting models, as well as be aware of the divergent requirements and delivery timelines between the EU and UK EMIR REFIT programs.

Three key areas of change to reporting rules

More than just an update, the new rules entail increased technical challenges and complexity of reports requiring significant technical and operational implementation efforts.

New data needs

The number of reportable fields will increase from the current 129 to 203. Beyond this, the definitions and expected values of multiple existing fields demand a review of the current reporting logic. Specific examples include new “action type” fields and the addition of the “event type” information aimed at increasing the transparency around the exact purpose and specification of a transaction. Another challenge lies in the new fields relating to counterparty details, such as the nature, corporate sector, and clearing threshold of the counterparty to the trade, as some of this information may, as of today, not be available in firms’ client information databases.

The new reporting guidelines finally address the issue around exact product classification and related reference data, an issue that has caused significant ambiguity in the reporting of some OTC derivatives in the past. The Classification of Financial Instrument (CFI) code pertaining to the instrument must be included for all trades, irrespective of whether they are executed on a regulated trading venue (Exchange Traded Derivatives (ETD)) or entered “over the counter” (OTC). For ETD, an additional ISINwill be required, while for OTC transactions, a unique product identifier (UPI) will be become a mandatory part of the report to be submitted.

ISO20022 implementation

To further harmonize technical reporting standards, compliance with the ISO 20022 XML format will be mandatory for the transmission of data to a trade repository. While this allows for richer and more structured data, implementation will be challenging for companies still working with CSV, FpML and other legacy formats.

Phased approach

Beside the need to comply with the updated UK EMIR REFIT framework, all existing open positions (including those entered before the go-live) must be uplifted to the new expected standards within six months after the go-live. Any post-trade lifecycle events on open positions, such as valuation updates or modifications, must also be reported using the new reporting standards introduced by EMIR REFIT. Hence, while impacted firms currently focus their transformation efforts on new trades, a second implementation phase is likely to be needed after April of this year.

Governance and Controls: A critical area of attention for Luxembourg firms

Large parts of the Luxembourg financial industry, in asset management, rely on derivative counterparties or other third parties to perform EMIR reporting on their behalf. These firms may not be impacted by the full extent of the above technical changes, but still need to put in place appropriate governance and control arrangements to ensure the reporting performed on their behalf complies with the new reporting guidelines. This is particularly important given the new requirements on notifying the CSSF about under-, over- or misreporting – an obligation to which professionals in regulatory roles, such as board members and conducting officers, should pay particular attention.

To address associated risks, a proper governance framework, developed with the involvement of key stakeholders and senior management, is necessary to monitor key metrics around data quality and issue resolution. Appropriate committees are also needed to make decisions on the key issues to be communicated to the CSSF.

Consequence of Brexit: Divergence of EU and UK EMIR timelines and requirements

Following Brexit, many practitioners were wary that a UK outside the EU will lead to regulatory divergence and result in operational complexity in the mid to long term for firms operating on both sides of the Channel.

As previously indicated, UK legislators are also performing a review of the UK-EMIR equivalent transaction reporting regime. In February 2023, the Financial Conduct Authority (FCA) published final Technical Standards and new rules for trade repositories regarding updates to the derivatives reporting framework under UK EMIR, along with draft UK EMIR validation rules and XML schemas.² With a confirmed go-live of 30 September 2024 and differing requirements, firms will need to prepare for significant divergence between EU and UK EMIR reporting regimes.

After 29 April of this year, there will be differences in reporting requirements and supporting technology while UK EMIR remains on existing rules until 30 September. Entities which report under both regimes will have a five-month period during which they are required to comply with the new EU regime and the old UK regime. Once both EU-EMIR and UK-EMIR REFIT have been implemented, there will be an ongoing divergence in reporting requirements between the two markets, for example one field with several different validation rules.

Considering the UK’s strong financial services ties with Luxembourg, many local firms stand to be impacted by the new reporting rules. The good news is that Luxembourg firms active in the UK market still have time to prepare for these requirements. However, this divergence in rules adds considerable complexity to implementation and ongoing support may be required in production, including resource management, testing, client reference data consumption and storage.

What is coming next?

The go-live date for mandatory implementation is fast approaching and market participants in Luxembourg need to ensure they are on schedule with regard to the new regulatory requirements. Faced with a significant amount of work to update existing models and processes, as well as considering deviating regimes where applicable, Luxembourg firms should prepare for these changes as a matter of priority.

Looking ahead on the regulatory change agenda, this is not the end of the developments in relation to EMIR. In December 2023, the Council of the EU adopted a mandate to start negotiations with the European Parliament on a review of the European Market Infrastructure Regulation. The review aims to make the EU clearing landscape more attractive and resilient, to support the EU’s open strategic autonomy and to preserve the EU’s financial stability. The text is currently under discussion by the Parliament which has announced that the expected sitting date will be at the end of April 2024. Depending on the date of adoption, EMIR III may already apply in 2025. Thus, EMIR REFIT should not be seen as a one-time exercise but rather as a preparation for the upcoming EMIR III which will, by no doubt, bring operational changes to entities in scope.