Key themes to consider in ESMA’s proposed revised EMIR RTS – by Alan McIntyre, Risk Focus

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Key themes to consider in ESMA’s proposed revised EMIR RTS

On the 13th of November last year ESMA published their Final Report on the review of the EMIR RTS & ITS (Regulatory and Implementation technical standards) for trade reporting under article 9 of EMIR. As MIFID fever and the rumours of a delay were at fever pitch at the time this document didn’t generate quite as big a splash in the puddle of G20 trade reporting as it might otherwise have caused.

According to ESMA the new RTS has three primary aims:

  • Convert the guidance issued in the Q&A’s, along with the L1 & L2 validations into a technical standard
  • Introduce new fields and values to better reflect market practice and improve the data quality
  • Further align the fields, where possible, with the fields reportable under MIFIR for data elements reported under both regimes.

Whilst these proposals are currently going through the European legislative process and don’t come into effective until Q3 2016 (subject to legislative approval), here are some of the main themes and challenges for firms with an EMIR reporting obligation to consider:

Collateral Reporting

A lot more granularity and complexity has been introduced. The previous fields Value of the collateral and Currency of the collateral have been divided into separate fields for Initial Margin and Variation Margin and then these fields have been further divided into Posted and Received from the perspective of the reporting party.

In addition a new concept of Excess Collateral has been introduced. And similarly to the Variation and Initial margin fields, they have been classified separately into Excess Collateral Received and Excess Collateral Posted.

Also the format of the Collateral Portfolio Code field has been extended from the previously problematic 10 numeric digits to a more pragmatic 52 alphanumeric format.

Product Identification and classification

One of the biggest areas of change within the new RTS involves the fields used to identify the Product. The three previous fields (Taxonomy used, Product ID 1, Product ID 2) have been replaced with more granular repurposed fields.

Interestingly in the absence of an endorsed UPI the so called ‘Interim Taxonomy’ has been fully adopted by ESMA with two dedicated fields:

Asset class CO = Commodity
CR = Credit
CU = Currency
EQ = Equity
IR = Interest Rate
Contract type CD = Financial contracts for difference
FR = Forward rate agreements
FU = Futures
FW = Forwards
OP = Option
SB = Spreadbet
SW = Swap
ST = Swaption
OT = Other

Fans of the interim taxonomy will note that “OT=Other” has been removed from Asset Class. ESMA explains this as:

“Article 4(3)(c) of ITS 1247/2012 establishes the following principle: for cases where a derivative does not fall into a specific derivative class or type, counterparties need to agree on the derivative class and type to which the derivative contract most closely resembles.”

Also two new values (“SB=Spreadbet” and “ST=Swaption”) have been added to the previously supported interim taxonomy values for the new field Contract Type.

The non ‘Interim taxonomy’ values of UPI and ISIN/CFI have been split across 4 new fields:

Product classification type C = CFI
U = UPI
Product classification ISO  10692  CFI,  6 characters alphabetical code
Endorsed UPI
Product identification type Specify the applicable identification:
I = ISIN
A = AII
Product identification For product identifier type I: ISO 6166 ISIN 12 character alphanumerical code
For product identifier type A: Complete AII code in accordance with Article  4(7)

Action Type & Level

For Action Type the previous value of “O=Other” has been deprecated due to confusion around it’s prescribed usage. In addition two new values have been added:

  • R=Correction
  • P=Position Component

The ‘P’ value has been introduced to prevent the same day double reporting of ETD reports that are compressed into a position, first with Action Type = N and then with Action Type = Z. An entirely sensible move considering the well documented concerns around the volumes of ETD transactions to be reported.

In addition a new concept of Level has been introduced as a new field to differentiate between Position level reporting and Trade level reporting. At first glance this makes sense for ETD but it remains to be seen in practice how well this will work alongside Action Type.

Complex trade component ID

And finally for this article a new field called Complex trade component ID has been introduced by ESMA in order to support the reporting of complex derivatives as more than one report (i.e. when separate components of the same trade are reported as different UTI’s because the components cannot be properly described in one report). The different UTI’s for each component are then linked together by the use of a common identifier within this new Complex trade component ID field.

Risk Focus will enhance Validate.Trade to support our clients testing and development needs across the new EMIR RTS along with other upcoming regulatory trade reporting challenges including MIFIR and SBSR (SEC) reporting.

 

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