Enhancing Derivative Market Transparency: The Entry Into Force of EMIR Refit

To have a better view of over-the-counter derivatives, European legislators required in 2012 already that counterparties ensure that the details of any derivative contract they conducted and of any modification or termination of the contract are reported to a trade repository no later than the working day following the conclusion, modification or termination of the contract (T+1). The financial crisis of 2008-2009 namely highlighted the need for regulators’ understanding of the risks in the financial system caused by OTC derivatives. The European Market Infrastructure Regulation (EMIR) Refit introduced significant changes to the original EMIR framework, with a particular focus on enhancing the reporting requirements outlined in Article 9 of EMIR specified in Commission Delegated Regulation (EU) 2022/1855.

One of the critical aspects of EMIR Refit was the introduction of new fields and identifiers (ie from 129 to 203), designed to provide a more comprehensive view of derivative transactions. By providing more detailed and standardized data, EMIR Refit can enhance the transparency of the derivatives markets. Regulatory authorities can also utilize this enriched dataset to conduct more thorough and accurate monitoring of market activities and risks. The new fields include detailed information on the counterparties, collateral, valuation, and other transaction-specific details but also the introduction of a unique product identifier (UPI) for derivatives without an International Securities Identification (ISIN – ISO 6166) code, which is typically already present for transactions admitted to trading or traded on a trading venue or a systematic internaliser.

The ISO 4914 UPI consists of 12 alphanumeric characters and is based on reference data such as the asset class (ie credit, rates, commodities, equities, and FX) relevant for a derivative instrument type (eg forward, option, swap, etc) and underlying (eg single name CDS, interest rate swap, aluminum option; depending on the instrument type). In layman’s terms, the UPI is thus a standardized code that uniquely identifies each derivative product based on a large number of elements of the contract. The UPI is somewhat different from an ISIN code in that the latter is more granular and, according to the International Swaps and Derivatives Association (ISDA), can result in the same product receiving a different ISIN every day due to the inclusion of attributes such as ‘maturity data’. The UPI was welcomed by global standard-setting bodies such as the Committee on Payments and Market Infrastructures (CPMI), the International Organization of Securities Commissions (IOSCO), and the Financial Stability Board (FSB). By requiring the use of UPIs, EMIR Refit aims to eliminate inconsistencies and ambiguities in the reporting of derivative products. This standardization will facilitate more accurate aggregation and analysis of data across different market participants and jurisdictions.

The transition brought several changes and challenges which provided critical lessons for the industry: the increased number of data fields necessitated significant upgrades to existing reporting systems of reporting entities. This affected  financial counterparties most, as they have to report not only for their own transactions but also for the non-financial counterparties with whom they act as counterparties. Firms also had to invest in IT infrastructure and software updates to accommodate the new XML-based reporting format. The shift from CSV to ISO 20022 XML format aims to reduce discrepancies and enhance data quality. Indeed, this requirement ensures that all market participants report data in a uniform manner, thereby facilitating easier aggregation and comparison of data by regulators. The adoption of UPIs also required firms to upgrade their systems to capture and report these identifiers accurately with the main goal of improving the accuracy, transparency, and reliability of derivative transaction reporting. It also asked for close collaboration with a UPI service provider, such as the Derivatives Service Bureau (DSB) of the Association of National Numbering Agencies (ANNA), which issues UPI codes, maintains a reference data library that stores the data associated with each code, and publishes a collection of links to the UPI product definitions. The introduction of new data fields such as collateralization details, margin data, and specific contract terms meant that firms also had to enhance their data collection processes. Trade repositories then needed to adapt to the new reporting requirements under EMIR Refit. The additional data fields and validation rules required TRs to upgrade their systems and processes to ensure compliance. The go-live experience on 29 April 2024 therefore highlighted the importance of close collaboration between regulators with trade repositories (TRs) and reporting entities that needed to ensure that their data submissions met the new validation rules and reconciliation tolerances established under EMIR Refit. Early engagement with TRs and proactive testing of reporting flows were then also crucial in mitigating initial reporting errors and avoiding penalties.

Based on discussions with financial counterparties, many highlight that, given the complexity of the new reporting requirements, extensive training for compliance and operational staff was essential. Workshops and training sessions focused on the new fields and reporting standards to ensure that all relevant stakeholders were adequately prepared for the transition. The European Securities and Markets Authority (ESMA) provided, in collaboration with the national competent authorities, updated Q&A and guidelines to support market participants in navigating the new requirements. These resources were instrumental in clarifying ambiguities and offering practical guidance on the implementation of the new reporting standards. Regular updates and communication from ESMA and national competent authorities helped firms stay informed about ongoing adjustments and best practices.

The initial feedback from industry participants indicated a mixed experience with the transition. While some firms managed a relatively smooth transition due to early preparation and robust systems, others faced more challenges related to data quality and system readiness. Nevertheless, the transition went overall smoothly – with a few exceptions perhaps where eg the data was sent somewhat too late. Rejection rates by the trade repositories seem to be declining with more stabilized data transmission and data volumes back to pre-refit levels. Overall, while the implementation of EMIR Refit thus presented several challenges, the proactive approach taken by many firms, coupled with strong industry and regulatory collaboration, seemed to have helped in achieving a relatively smooth transition.

Of course, it is too early to tell whether the transition was a success and what the lessons are for both reporting entities and trade repositories. Hence, a follow-up by the industry and regulators in the coming weeks is important. Regulators will also need to continue focusing on data quality. ESMA, in cooperation with the national competent authorities, developed EMIR data quality indicators, which will continue to be closely monitored. The data quality has improved over the last few years, but EMIR refit now necessitates keeping a close look to detect eg teething problems. In addition, the validation rules that were implemented to enhance the integrity of the reported information will have to be analyzed to see whether these are sufficiently fit for purpose. The advice that can be given to reporting entities is to develop their own monitoring tools and data analytics with key performance indicators that allow proactively analyzing the quality of data. Reporting is a regulatory obligation and consistently reporting low-quality data can be considered as an infringement of EMIR. The ESMA guidelines also require an entity responsible for reporting to promptly notify its competent authority in case of (i) any misreporting caused by flaws in the reporting system that would affect a significant number of reports, (ii) any reporting obstacle preventing the report submitting entity from sending reports to a trade repository within the deadline, and (iii) a significant issue resulting in reporting errors that would not cause rejection by a trade repository following the regulatory technical standards on data quality.  In the case of high-quality data being reported, the long-term benefits of improved market transparency, risk management, and regulatory oversight are likely to be substantial.

Randy Priem is Professor of Finance at UBI Business School (Middlesex University London) and at Antwerp Management School (University of Antwerp), as well as Coordinator of the Markets and Post-trading Unit at the Belgian Financial Services and Markets Authority. The views in this post are his own and do not necessarily represent those of the forementioned institutions.