Navigating the waters of EMIR MiFIR and SFTR
January shed some light on the European regulatory reporting timelines but provided a mixture of both relief and pressure.
January shed some light on the European regulatory reporting timelines but provided a mixture of both relief and pressure on EMIR MiFIR and SFTR
The industry breathed a sigh of relief when it became apparent that SFTR transaction reporting will most likely commence in Q4 instead of Q1 of 2018. The relaxation was short-lived though, as the European Commission then fired the starting pistol on the EMIR Article 9 RTS rewrite with a compliance date of November 1st 2017. The elephant in the room for both of these reporting regimes is the January 3rd 2018 MiFID II date and their potential proximity to it.
Smooth-sailing or choppy seas
The SFTR relief came courtesy of ISLA (the International Securities Lenders Association) who published an opinion on the timelines associated with the implementation of article 4 of SFTR with an estimated compliance target date of Q4 2018, based on the remaining steps within the EU legislative procedures. The trade association for securities lending industry participants cautioned that these estimates are based on “a smooth-sailing scenario” and could move, based on issues in the adoption process. Bearing in mind that the EMIR RTS rewrite date has edged so precariously close to the MiFID II date because of delays within the adoption process for that RTS, it would seem prudent to consider the possibility of choppier seas ahead.
The original Q1 2018 timeline for SFTR has to me seemed in doubt ever since the one-year delay was granted for MiFIR/MiFID II. The extra year to deliver MiFID II was granted so that firms would have more time to update their systems. To do so and then compound it by having something as large as SFTR transaction reporting coming only a few months later would therefore seem highly counter-productive. Though if the EMIR RTS rewrite had followed the original anticipated timelines through the corridors of Paris and Brussels, we would have been looking at a Q2 2017 compliance date, rather than only 2 months before MiFID II.
A date for the journal
The EU Commission publication of the revised EMIR RTS & ITS in the official journal of the European Union on January 21st has finally provided a compliance date for all the firms reporting under EMIR to work towards. Wednesday the 1st of November at least avoids one much-feared suggestion (or conspiracy theory) that suggested that the revised EMIR reporting would go live in the same month or even the same day as MiFIR transaction reporting. A bullet has been clearly dodged here, but for banks, asset management firms, and many other firms with obligations to report under both regimes, the challenge of scheduling development, testing and implementation of reporting solutions and control frameworks for two very different projects that have a significant overlap will be very daunting.
Many of the banks with obligations to report under both EMIR and MiFIR will also have obligations to implement the HKMA Phase 2 reporting changes this summer. The Hong Kong Monetary Authority is introducing reporting of three new asset classes (Credit, Commodities & Equities) as well as additional sub-product types for the FX and Interest Rate asset classes already reported. This is due to commence on June 16th and, given the HKMA’s well-known lack of tolerance for reporting errors, is a considerable undertaking in its own right. There is also the SEC’s Securities Based Swap Reporting (SBSR) which is the US Securities regulators outstanding section of Dodd-Frank reporting. After many delays, the exact timeline for SBSR is still unclear but is presumably sometime in 2017. Although as one wit suggested to me at a recent event, perhaps the SEC is holding off to see if ‘the Donald’ repeals Dodd-Frank first!
For banks with a global footprint there are also derivatives reporting requirements in Switzerland, Israel and South Korea to deliver this year. So, whilst the sheer breadth and scale of MiFID II will undoubtedly continue to hog the limelight, there is a considerable challenge to meet some or all of these reporting requirements, whilst also initiating SFTR projects.
Scope and overlap
Let’s consider the scope and similarities of these regimes to better understand the overlap and conflicts that might arise.
EMIR requires the reporting of all OTC and ETD derivatives transactions and is focussed on systemic risk. The focus is on which entities have done which trades with each other as well as reporting the transaction or any material changes to each trade (the lifecycle events). Entities will be required to provide daily reports of the collateral and valuations of the trades.
MiFIR (MiFID RTS 22) requires the reporting of all transactions including OTC and ETD derivatives and cash equities, bonds, ETFs as well as pretty much anything traded on or tradable on a European venue. The focus here is more on market abuse and the reports are therefore centred far more on who the parties and decision-makers involved in the transaction are. As the intent in RTS 22 is to report executions made for investment purposes the lifecycle-events are generally out of scope (unless they create a new trade), likewise the collateral information and the valuations aren’t required.
SFTR could be described as ‘EMIR for Security Finance Transactions’ as the focus is on systemic risk. ESMA is deliberately following the model implemented under EMIR and is aiming to reuse as much of the existing framework as possible, including the Trade Repositories. Similarly, to EMIR, SFTR requires firms to report transactions, lifecycle events, collateral details and valuations.
When the time comes to implement SFTR, the work that the firms reporting will be doing on their EMIR solutions this year may well have impact on their future SFTR solutions (where the firms are seeking to utilise as much of their EMIR reporting systems and governance as possible). For example, the EMIR RTS rewrite involves significant changes to the way that collateral is reported and since collateral will also need to be reported under SFTR, it therefore makes sense to consider the SFTR requirements as well, whilst determining what changes to implement now in the collateral management and accounting systems.
Identifiers and classifications
For MiFIR and EMIR, the overlap is derivatives (OTC and ETD) as these are reportable under both regulations, but in very different formats and for different purposes. The EMIR RTS rewrite involves a considerable revision of the product identification and classification system. Firms will need to manage how they make changes to how they report the Asset Class and Contract Type fields without impacting related fields such as CFI code – which is reportable under both regulations.
Another interesting dynamic is the ISIN. Currently under EMIR, ISINs are only reported on Exchange Traded Derivatives, and the firms need to populate either an ISIN or an Alternative Instrument Indicator (Aii) (exchange code) based on whether the venue they traded on supports ISINs or Aii codes. On the other hand, OTC derivatives are reported using the so called ‘interim taxonomy’ which effectively describes the type of instrument rather than the actual instrument, for example, FX-FR for ‘Foreign Exchange Forward’. Much has been written about ESMA’s controversial decision to endorse ISINs for OTC derivatives within MiFID II. Details are still emerging of how this will work in practice and the ANNA Derivative Service Bureau (DSB) solution is slowly taking shape. The potential usage, or not, of ISINs for EMIR reporting could be an interesting one to watch. ESMA is due to publish a final version of the Validations document that relates to the new EMIR RTS and it will be interesting to see if there is anything further on this.
Aii codes is also an interesting and fairly painful one for firms. On November 1st when the new EMIR RTS goes live, firms can populate either the ISIN or the Aii code that the exchange they traded on supports. However, two months and two days later when MiFID II goes live, European exchanges will all be required to use ISINs and the Aii code will no longer be acceptable under EMIR. I’m wondering if any big ETD clients are pressuring the exchanges to bite the bullet and migrate to ISINs before November 1st to avoid any issues when they cut over to ISINs. One scenario would be that a firm reports a transaction in December with an Aii code and then needs to modify it in January and needs to determine whether to submit the original Aii code or the replacement ISIN.
Clarity and planning
More clarity should arise when ESMA publishes the final version of the Validations document for the new EMIR RTS, which I’m told should be soon. Likewise, when the final version of the SFTR RTS is published (in March, according to ISLA’s best guess). In the meantime, it is clear that 2017 is going to be a very demanding year for regulatory transaction reporting and the last three months in particular are looking very busy. My advice is to be mindful of how the designs and decisions put into place on one regulatory work-stream may impact those on other/future work-streams. It is crucial for firms to think about the overall control framework to best support all regulations once they’ve passed from the project phase into live. Finally, we are all worrying about the next challenge. MiFID III anyone?
This article was first published in edition 9 of Rocket, our magazine. Download available Rocket editions here, and save your up to date address in your profile to to indicate your interest in receiving a printed copy of the magazine. Copies are also available to purchase and subscribe to via the shop.
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