Non-financial regulatory reporting – a period of change

This is the second in our series of articles detailing changes to non-financial regulatory reporting that will take effect over the next year. Our first article explored the changes to MiFID II / MIFIR reporting in the UK & EU. This second article will look at the changes and challenges to firms' reporting being brought in by EMIR Refit.

The European Market Infrastructure Regulation (EMIR) was introduced by the European Union in 2012 to implement the G20 commitments to reduce systemic, counterparty and operational risk and increase transparency in the over-the-counter (OTC) derivatives market. The increase in transparency was implemented by obligations to report details of derivatives contracts to Trade Repositories (TRs). TRs centrally collect and maintain the records of all derivative contracts which then regulators use to monitor systemic risk and prevent market abuse. 

To improve the consistency, and therefore usefulness to regulators of the data reported, CPMI-IOSCO published, in April 2018, technical guidance on the harmonisation of critical data elements for OTC derivatives (`CDE guidance'). ESMA in the EU and the Bank of England/FCA for the UK have now updated the reporting rules in EU EMIR and UK EMIR — generally known as EMIR Refit — to take account of this guidance.  

Continuing volatility and stresses in the financial markets mean that regulators have increased their focus on the quality of this reporting to help them spot emerging risks and issues.

The implementation dates for EU and UK EMIR Refit are five months apart. The EU rules are due to enter into force from 29 April 2024, with the UK following on 30 September 2024.

One of the biggest changes in EMIR refit is the number of reporting fields — 85 reporting fields will go live with Phase 1 and a further 66 fields live after 2 years — including critical data elements at both trade and reference data level. There will be new contract and product data requirements that will require firms to update interpretation reviews and documentation.

Reporting format will change to ISO 20022 standards and XML format. This presents a challenge as front to back infrastructure needs to be reviewed and refreshed.

Collateral and valuation reporting has been updated with the inclusion of additional calculated fields. Alongside this new valuation matching requirements are being introduced. Both these changes will require firms to review processes to ensure they are fit for purpose and aligned with industry practice. 

EMIR Refit has amended the definition of financial counterparties (FC). FCs are now solely responsible for reporting on behalf of non-financial counterparties (NFCs). As such there is now the obligation for NFCs to accurately provide reporting data to their FC counterpart in the trade.

KPMG in the UK has been working across the industry to help firms prepare for EMIR Refit. There are a number of common issues arising, including:

• Firms need to implement these updated requirements alongside remediation of current reporting and other jurisdictions' initiatives to implement the CPMI-IOSCO guidance. Firms are having to decide on tactical, focused fixes or a complete revamp of their transaction reporting.
• Differences of interpretation between EU and UK regimes can lead to operational issues and create inconsistencies in the reporting. We have also found inconsistent interpretation in the industry of key reporting attributes, such as price type, leading to inaccurate reporting (e.g. nominal vs. notional, asset class specific attributes).
• A decade of transaction reporting implementation and changes has created complex architecture and data environments. Reference data problems also persist in the industry in part due to this complex architecture but also due to difficulties in sourcing data. The increasing number of fields will only add to the complexity. Some firms are now trying to decide between in-house solutions and external vendors.
• The additional fields and reporting mean that controls and reconciliation processes will need to be reviewed and updated, both from a functional and technical perspective. 

The recent changes to CFTC reporting have highlighted problems that will occur for EMIR Refit: sourcing and maintaining new reference data, introducing stricter reconciliation controls and reporting in a new format.

Our experience shows that early mobilisation and investment in change management and regulatory interpretation reviews will be crucial to ensure a smooth transition to the new schema and requirements.

KPMG in the UK has extensive experience supporting financial services firms on Non-Financial Regulatory Reporting (NFRR) reform and is well placed to help firms assess and implement the proposed changes. This includes advisory services such as post implementation reviews, controls and operating model reviews, assisting firms with implementation of changes to reporting requirements and providing remediation support.

Read our previous article on Transparency requirements in MiFIR/MiFID II and look out for our upcoming article on data quality.