ESMA EMIR Review Fireside Chat: Compliance. Completeness. Correctness.
With the consultation period for the EMIR review being at an end, ESMA has weighed in at the eleventh hour and given an indication of the changes they propose the Commission make to the regulation as it currently stands.We expect to see amendments to the regulation no earlier than 2016 since any changes to the EMIR legislation itself would need to go through the mill at the Commission, Council of Ministers and Parliament. ESMA has arranged their views into two parts: Trade Reporting (Section 6), impact to data; and Trade Repositories (TR) (Section 9), structural impact. Out of all the headlines around Central Counterparty (CCP) equivalence, the clearing obligation and client segregation, here are the nuggets we found most interesting for those of us focused on Transaction Reporting.
Impact to Data
ESMA proposal: Exchange Traded Derivatives (ETD) trades continue to be reportable.
Removing ETD trades from the reporting obligation was always going to be a hard sell, especially since some regulators are actively using ETD records for market abuse surveillance. Nonetheless, ESMA "stands ready to advise the Commission" should they decide to explore the alternatives. We'd like to see further discussion on ETD position reporting, which will need to be fleshed out further before ETD trade level reporting can be retired.
ESMA proposal: Double-sided reporting to remain, but see below if you are a Non-Financial Counterparty (NFC-).
There are pros and cons to single-sided and double-sided reporting and the debates will continue at industry groups, ESMA and the Commission. The need to reconcile data between counterparties is not going to go away, irrespective of whether there's an Inter-TR Reconciliation process to complete. In fact, firms may find themselves welcoming the continuation of double-sided, since it allows them to keep reporting in-house rather than being required to go down the delegated reporting route.
ESMA proposal: Counterparties obliged to report on behalf of NFC-.
The winners here are obviously the NFC-, for whom EMIR has been a baptism of fire into the world of transaction reporting. Their financial counterparties and CCPs, however, are now contemplating being obliged to offer a delegated reporting solution for their non-financial clients. In the spirit of higher quality of data, we anticipate an improvement if this proposal is adopted.
ESMA proposal: No back-loading of trades closed pre-EMIR.
Was this ever really going to happen? So long as the Commission changes the regulation before February 2017, firms are off the hook.
ESMA Proposal: ESMA becomes responsible for TR tech specs and TRs become responsible for data quality.
In spite of ESMA's efforts with Level 1 and 2 Data Harmonisation, they are looking for specific permission to define the data formats being reported to TRs as they strive for the three Cs of Compliance, Completeness and Correctness. There are a couple of considerations here. The obvious one is that any changes to tech specs, including standardising them, means more work both for TRs and for reporting firms and their respective tech teams. The not-so-obvious one is that the more the TR tech specs become standardised, the easier it is for unhappy firms to switch to a new TR.
ESMA Proposal: Extension of ESMA's enforcement powers over TRs.
ESMA is clearly drawing from their experience of working with the six TRs over the last eighteen months, and feels that an extension of their powers will enable them to be more effective in assuring the quality of TR service, now that reporting is well bedded in. In fact, ESMA gets pretty specific as to their wishlist: "…the power to impose a temporary prohibition on the acceptance of new reporting counterparties or the extension of the services that the TR offers...the power to require the removal of a natural person from the governing bodies of a TR…". Good news, perhaps, for reporting firms, but unlikely to be popular with any TR struggling to make the grade.
ESMA Proposal: Explicit powers for ESMA to define and require harmonised data validation across the TRs.
Again, ESMA is looking to improve on the three Cs of Compliance, Completeness and Correctness of reported data, as well as to improve the performance (and reputation) of the still-foundering Inter-TR Reconciliation. That's a must-have since double sided reporting is likely to remain for the foreseeable future.
ESMA Proposal: Alignment of ESMA's supervisory provisions across CRA, MIFID II / MiFIR, SFTR and EMIR for terms and conditions for NCA access, TR registration and fining regimes.
ESMA has been growing into its role as the European Super Regulator since the launch of EMIR, and there are benefits here from the perspectives of Reporting Entities, CCPs, NCAs, TRs and ESMA. The proposed increase in TR fines is justified, having been set originally at a surprisingly low level.
ESMA certainly has a clear view of what it thinks EMIR reporting should look like in the future, and is looking for the tools both they and NCAs need to really make this a regulation with teeth. More tightly-defined legislation, improved data quality and enhanced enforcement powers mean that we're a step closer to seeing the first investigations and fines for both TRs and reporting firms (oh yes we are!).
In terms of next steps, we wait patiently for the Commission to publish their public response in Q4 2015. So, while we all contemplate the next instalment, it's worth considering the impact of the various proposals on your organisation, engaging with industry groups, regulators and TRs, and continuing to advocate for your firm's views. We'll be doing the same and then checking back in with another update.