Insights

On 7 October 2022, the European Parliament and Council approved a set of Technical Standards^[1](the “Technical Standards”) supplementing the European Market Infrastructure Regulation^[2] (“EMIR”). In a Circular issued by the MFSA advising market participants of this publication, these Technical Standards are described as being “…the most extensive set of changes since the inception of EMIR”. ^[3] In fact, the Technical Standards are part of a lengthy process of re-examining the EMIR regulatory regime and will significantly affect the obligations of derivative market participants under EMIR, in particular their reporting requirements.

By way of background, on 20^th May 2019 the EMIR Refit Regulation^[4] (“EMIR Refit”) was published with the aim of amending and simplifying EMIR primarily to reduce compliance costs and adopt a more proportionate approach to regulatory obligations of non-financial counterparties.^[5] EMIR Refit also required the European Securities and Markets Authority (“ESMA”) to submit draft regulatory and implementing technical standards to the European Commission to implement the changes to the EMIR regulatory regime set out in EMIR Refit. ESMA published its Final Report on technical standards under EMIR Refit^[6] in December 2020 and these draft standards have now been passed into law by way of the Technical Standards.

From the outset it is important to note that subject entities are required to comply with the changes set out in the Technical Standards by 29 April 2024. While this may seem like a long while away, the changes are significant and adequate preparations should be made to ensure timely compliance.

Overview of the Technical Standards

The Technical Standards published, consisting of regulatory technical standards (“RTS”) and implementing technical standards (“ITS”),^[7] are the following:

1. Commission Delegated Regulation (EU) 2022/1856 of 10 June 2022 amending the regulatory technical standards laid down in Delegated Regulation (EU) No 151/2013 by further specifying the procedure for accessing details of derivatives as well as the technical and operational arrangements for their access;

2. Commission Delegated Regulation (EU) 2022/1857 of 10 June 2022 amending the regulatory technical standards laid down in Delegated Regulation (EU) No 150/2013 as regards the details of the applications for registration as a trade repository and for applications for extension of registration as a trade repository;

3. Commission Delegated Regulation (EU) 2022/1858 of 10 June 2022 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards specifying the procedures for the reconciliation of data between trade repositories and the procedures to be applied by the trade repository to verify the compliance by the reporting counterparty or submitting entity with the reporting requirements and to verify the completeness and correctness of the data reported;

4. Commission Implementing Regulation (EU) 2022/1859 of 10 June 2022 amending the implementing technical standards laid down in Implementing Regulation (EU) No 1248/2012 as regards the format for applications for registration as trade repositories and for applications for extension of registration as trade repositories;

5. Commission Delegated Regulation (EU) 2022/1855 of 10 June 2022 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards specifying the minimum details of the data to be reported to trade repositories and the type of reports to be used (the “Trade Details RTS”); and

6. Commission Implementing Regulation (EU) 2022/1860 of 10 June 2022 laying down implementing technical standards for the application of Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to the standards, formats, frequency and methods and arrangements for reporting (the “Report Format ITS”).

The first four Technical Standards listed above amend the obligations and requirements imposed on trade repositories in terms of EMIR, therefore for present purposes, the last two Technical Standards are of relevance as they relate directly to the reporting obligations of derivative counterparties.

Changes to EMIR Reporting Requirements under the Trade Details RTS and the Report Format ITS

The Trade Details RTS include an Annex setting out the data fields to be included in derivative trade reports. This Annex constitutes a complete overhaul of the data fields to be reported. Whereas under the previous RTS,^[8] the data fields totalled 129, the Annex to the Trade Details RTS includes 203 data fields. Apart from increasing the number of data fields, existing data fields are also amended and updated.

As expected, when the increase in data fields was first suggested by ESMA during consultation with the industry, the response was not positive. The rationale put forward was primarily to improve the specification of reportable data and include data elements which have been deemed critical by regulators worldwide to monitor systemic risk.^[9]

To complement the increased transparency sought by the Trade Details RTS, the Report Format ITS focus on increased standardisation and harmonisation of derivative trade reporting. These ITS follow the guidance developed by CPMI-IOSCO on the definition, format and usage of key OTC derivatives data elements reported to TRs, including the Unique Transaction Identifier, the Unique Product Identifier and other critical data elements which now should be identified using ISO standards. In addition, the Report Format ITS mandate the use of XML format in line with ISO 20022, for trade reporting. This will align reporting standards to those applicable to reports submitted for securities financing transaction trades^[10] and to global standards in order to harmonise reporting for those entities which are subject to reporting requirements in non-EU jurisdictions. A similar requirement for implementing ISO 20022 XML trade format is also imposed on trade repositories to eliminate, as much as possible, the risk of discrepancies due to data inconsistencies and failed data reconciliation.^[11]

Next Steps

While April 2024 may seem like a long time away, it is important that derivative industry participants start to devise a plan to ensure compliance with their updated reporting obligations. However, as noted by the MFSA’s Circular, more granular specifications are required by the industry for various matters including final validation rules and the XML schemas which will be used to validate the structure and content of trade reports.^[12]

Such guidance should be provided as soon as possible given the impact which the changes under the Technical Standards may have on industry participants. Internal procedures and IT infrastructures may need to be updated to comply with the new reporting standards and such an exercise may require significant time and manpower. Parties to derivative contracts which delegate their reporting requirements to their counterparty need to ensure that such counterparties are aware of, and are adequately prepared for, these changes.

^[1]     OJ L 262 Volume 6.

^[2]     Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (as amended).

^[3]     MFSA, ‘Circular on Regulation No 648/2012 – The European Market Infrastructure Regulation (‘EMIR’/the ‘Regulation’) – Publication of EMIR REFIT Technical Standards’, 27 October 2022, 1.

^[4]     Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories

^[5]     The most significant development in this regard was the introduction of a new clearing threshold mechanism to determine whether a counterparty to an OTC derivative contract was subject to the clearing obligation.

^[6]     ESMA, ESMA74-362-824 ‘Final Report: Technical standards on reporting, data quality, data access and registration of Trade Repositories under EMIR REFIT’, 17 December 2020.

^[7]     Generally speaking, there are two types of Technical Standards namely: (i) RTS adopted by the Commission by means of a delegated act to supplement or amend certain non-essential elements of the main act, and (ii) ITS which are used to establish uniform conditions for the implementation of the main act, in this case EMIR. These RTS and ITS are referred to as Level 2 measures which are to be read in conjunction with EMIR, i.e. the Level 1 measure (https://finance.ec.europa.eu/regulation-and-supervision/regulatory-process-financial-services_en#:~:text=There%20are%20two%20types%20of,means%20of%20an%20implementing%20act, accessed on 1 November 2022).

^[8]     Prior to the enactment of the Trade Details RTS the data fields to be reported were included in Commission Delegated Regulation (EU) No 148/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories with regard to regulatory technical standards on the minimum details of the data to be reported to trade repositories. These shall continue to be the required data fields until 29 April 2024 when compliance with the Trade Details RTS becomes mandatory.

^[9]     n.6, 52.

^[10]    In line with the requirements of the Securities Financing Transaction Regulation (Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (as amended)).

^[11]    The obligations imposed on trade repositories are set out in the other four Technical Standards listed above.

^[12]    n.3, 2.