ESMA Guidelines Consultation Paper

Last month, the European Securities and Market Authority (ESMA) issued a consultation paper on the draft guidelines for derivatives reporting under the European Market Infrastructure Regulation (EMIR), to complement last December’s Final Report on the draft technical standards under the EMIR REFIT Regulation (EMIR REFIT).

The consultation paper, which is open for public comment until the end of September, covers a wide range of areas, including reporting responsibility, reporting logic, data population and data access by authorities. It includes draft procedures to be followed by both the reporting entities and the Trade Repositories (TRs). The final guidelines are due to be published by the end of 2021, well in advance of the new EMIR REFIT rules implementation, which is currently expected to commence in H1 2023.

The Quorsus regulatory subject matter experts have been reviewing the paper in detail, and we have made some initial observations and spotted a number of challenges. A few areas immediately drew our attention, and we expect to report on many more in the coming weeks.


Monthly Reports by Financial Counterparties

ESMA considers whether a Financial Counterparty (FC) can provide its Non-Financial Counterparties (NFCs) with a monthly summary of the contracts the FC has reported on their behalf. This introduces a new burden on FCs, including the practical challenge of creating and distributing to their counterparties.


Unique Product Identifiers (UPI)

UPIs are one of the key CPMI-IOSCO global standards, due to be implemented by most G20 regimes over the next 2 years. In theory, UPIs should simplify reporting by removing a number of data fields, simplify reconciliations and increase the potential for data aggregation by supervisors. However, we immediately see challenges.

For example, when the UPI is implemented, multiple data fields that currently define a product will become redundant. Ideally such fields should not be reported at all (rather than made optional to report) to maintain data integrity, but this is not made clear in the consultation paper. The process of migrating to UPI itself needs to be carefully managed by reporting parties and the TRs. For example, firms will need to determine how they will access the UPI database; they will need to introduce new validation controls to ensure the correct UPI is reported; validation of the UPI by TRs upon receipt of messages needs to be considered (if a Rates trade is reported with an incorrect but valid Equity UPI, should it be rejected?).


Unique Transaction Identifier (UTI)

The consultation paper considers that where a party that generates the UTI fails to communicate it to its counterparty before 10:00 UTC on T+1, the other counterparty should ‘enquire’ about the process, rather than creating their own UTI.

In terms of determining the UTI generator, ESMA proposes following the CPMI-IOSCO waterfall. However, this requires an agreement on the interpretation of the ‘sooner reporting deadline’ with different suggestions for determining who takes precedence. As more jurisdictions adopt UTI, cross-border trades may require a time-zone based fall-back to agree who takes priority. Lack of a globally consistent approach will cause challenges.


Reporting of Issues to National Competent Authorities (NCA)

ESMA requires the Entity Responsible for Reporting (ERR) to report to the relevant NCA(s) and, if different, the relevant NCA(s) of the reporting counterparty, any issues that affect a ‘significant number of reports’, for example: technical problems excluding a large percentage of records from submission; systematic omission of certain fields in the reports; systematic reporting of incorrect or abnormal values in the reports. ESMA proposes different categories of reports and calculations for determining what constitutes ‘significant’.  The rules here are complicated: for example, whether a quantitative or qualitative threshold should be applied, and is based on the number of affected reports as well as the number of reports in a given period. As a result, firms will need to consider their KPIs.


FX Swaps

ESMA proposes significant updates to the way in which certain products are reported, including the suggestion that FX swaps are reported in one submission rather than multiple. Interestingly, in their own consultation paper, The Monetary Authority of Singapore (MAS) asks firms which is the preferred approach. This is one of many examples of potential jurisdictional mis-alignment, which will reduce the ability to perform aggregations, resulting in differing booking models and create problems in sharing UTIs (one party has a single UTI, the other may have two).


Critical Data Elements (CDE)

We already see regional nuances in the application of CDE guidance. For example, in the ‘clearing status’ field, ESMA does not permit counterparties to report the ‘intent to clear’ option, which is permitted by U.S. Commodities Futures Trading Commission (CFTC). Similarly, the ‘Trading Venue’ field value of ‘BILT’ (the CDE guidelines include this for when a counterparty cannot determine if the instrument is listed or not, and which CFTC do include) is not permitted under the new REFIT proposals, because ‘all instruments admitted to trading or traded on a trading venue are made publicly available in the Financial Instruments Reference Data System (FIRDS) on ESMA’s website’.  Whilst this particular example is relatively minor, it does highlight the need to be wary of the changes and not to simply assume that a move towards CDE by all jurisdictions will be consistent and smooth.

There are other areas in which we see challenges, and we shall expand on these in future posts – not least reporting of Contracts for Difference (CFD) as positions, the logic for reporting the direction of legs 1 and 2 across multiple products and new guidelines relating to Total Return Swaps.

As we work through the consultation paper, we will publish further thoughts on the challenges and impacts of EMIR REFIT and the draft guidelines.  We intend on following up with a more extensive review of the consultation paper as a whole, its key themes and discussion points. Our experts are able to help you understand the impact of these changes and to help prepare for the significant challenges ahead.


Link to the Consultation Paper: