Dechert On Reg

UK EMIR Reporting Changes: Need to Know with a Month to Go

• Dechert LLP • Episode 11

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Changes to the UK’s EMIR derivatives reporting regime take effect on Monday September 30, 2024.

Dechert On Reg host Angelo Lercara is joined by Richard Chapman and Karen Stretch to discuss the changes, how they differ from those for EU EMIR that took effect earlier in 2024 and how in-scope firms can make sure they are prepared.

Show Notes: 

EMIR Reporting: Changes Afoot - What You Need to Know – Dechert On Reg Episode 5 (Nov. 30, 2023)

Angelo Lercara:

Hello everyone, and welcome to Dechert On Reg, the podcast where we explore the ever-changing landscape of financial regulations and the key issues that are shaping the future of asset management. I'm Angelo Lercara, a partner at Dechert and co-head of our regulatory product line. And in each episode, we'll be joined by expert colleagues and guests to explore the most pressing issues in financial regulation. In today's episode, we are revisiting an important topic for derivatives users, the EMIR derivatives reporting obligation. So whether you're an industry insider or simply interested in the world of financial regulation, you don't want to miss this episode of Dechert On Reg. I'm excited to welcome back two of our esteemed experts, Karen Stretch and Richard Chapman, and let's dive right back in. Hi Karen, Hi Richard.

Karen Stretch:

Hi, Angelo.

Richard Chapman:

Hi, Angelo.

Angelo Lercara:

Karen, we last discussed this topic in detail late last year. Tell us why we are here again and what is ahead of us.

Karen Stretch:

Thanks, Angelo. When we last spoke, there were indeed just over six months to go until the EU EMIR reporting changes took effect. In that session, we took a detailed look at EMIR, the new requirements and certain specifics of the reporting obligation. So why are we here again today, you might ask, and you did ask. Well, because only one of the key

dates has since passed:

the "go live" for the EU EMIR reporting changes. At the end of September 2024 - specifically on Monday, the 30th of September, 2024 - the UK EMIR reporting changes will take effect. And it's those changes that will be the focus of today's session. At a high level, we encourage listeners who want more detail, generally, on EMIR and the changes, to revisit the previous session. You can consult our other resources or, indeed, you can reach out to either of us to ask any questions you have. So just to set the scene a little bit to start, I've got five key items that I will run through, just to give a little bit more background. So, timing. I mentioned already some of the key dates, but just to recap, EU EMIR, 29th of April, 2024, was the key date when the changes took effect. Derivatives users then have 180 days - so until the 26th of October, 2024 - during which historic trades need to be updated to the new standards. For UK EMIR, I mentioned the 30th of September, 2024, already, and that's the go live for the new requirements under UK EMIR. And then those entities in scope for UK EMIR then have 180 days or so to upgrade historic trade. So that's until the 31st of March, 2025. Just a quick word on

outstanding trades:

They will be needed to be upgraded sooner if there is a modification, including a life cycle event or a correction to the trade. And in practice, actually, you will hear this if you listen to any trade repositories speaking about these outstanding trades. Many outstanding trades have actually already been upgraded to the new standards. So that's timing. Scope. We are talking today, just to repeat, mainly about the UK EMIR reporting obligation. So, entities that are in scope - this is a global issue, it doesn't necessarily mean that every single entity in scope is incorporated in the UK. A kind of very typical example, and a classic example for us is where you have a Cayman fund with a UK manager. The changes. I like to bundle the changes into three key areas that we're going to touch upon, I expect, during today's session. So, fields and format, increase in the number of fields- there are a lot of new fields. It's essentially an overhaul. Secondly, trade repository verification and reconciliation. There are new processes and new reports that will be produced. And importantly, the new requirements include a requirement for counterparties, entities responsible for reporting and reports submitting entities to have in place arrangements to ensure that feedback on reconciliation failures from trade repositories provided pursuant to the new rules is taken into account. For UK EMIR, it is expressly specified that any failures identified in that feedback are resolved where possible, as soon as practicably possible. Fourth item, just at high level, is the notification requirement. We spoke at length about this in the last session, but that is a new requirement, and it is different across UK EMIR and EU EMIR. Fifth and very important, these two regimes - so UK EMIR and EU EMIR - they are very similar, and there are many common aspects, but they are two separate regimes. And it's important, even if you are in scope of both regimes, to consider them separately and your obligations under each. So, that's the scene.

Angelo Lercara:

Very good. Thank you very much. And, by the way, we're going to add a link into the show notes to the previous episode so that the listeners can refresh their minds and listen to what you said in the first session. But looking at the law, Karen, and also the supporting guidance, in the last session we mentioned - or you mentioned - a lot of the ESMA guidelines on EMIR reporting. And where can we find the routes for UK EMIR reporting, and are there also guidelines, maybe, available that would help the listeners to implement the rules?

Karen Stretch:

That's a good question Angelo, because there are differences. So, the rules for UK EMIR reporting are found on the FCA website that actually has various very helpful EMIR reporting pages and resources. More specifically and substantively, there is a key policy statement, which is a joint FCA and Bank of England policy statement that was published in February 2023 - PS 23/2 - and that includes in that policy statement the final FCA standards instrument containing the technical standards and also the new rules for trade repositories. So, you have the policy statement that includes the technical standards and the trade repository rules, and then alongside that, you have validation rules, and you also have the XML schema, which are for the incoming messages and the outgoing messages. So, compare and contrast that with EU EMIR. So, you find a lot of helpful resources on the ESMA website, but for EU EMIR, the new requirements are housed in six implementing and delegated regulations which supplement EMIR. And together, of course, you mentioned the guidelines. So, you have the ESMA final report and the final guidelines on EMIR reporting. As you said, Angelo, we mentioned the guidelines a lot last time. We still consult the guidelines. An important development for UK EMIR is the new FCA guidance in the form of the Q&A. And, actually, since we last spoke at the end of last year, the FCA has not only consulted but they have also published some final Q&A which cover 11 areas. And two key items to note. So, I've spoken about where you find the law, the differences between the UK and the EU law. But firstly, yes, there are different places. They're housed in different instruments. But actually the differences are really, at a high level, few. So, I spoke about the notification requirement. The notification requirement is different. I spoke at the get-go about the fields and the format of reporting. One key difference with UK EMIR is that there is an execution agent field that does not appear in the EU EMIR schema. So, and the guidance, obviously, I just spoke about the FCA, Q&A, you have the final guidelines versus the FCA Q&A. There are also some more subtle differences. I just mentioned the XML schema. There are differences in the schema. There are also certain differences with some of the trade state reports. One piece of jargon and a term that we use a lot, and that is actually used a lot in relation to the new requirements, and that we consider as important - and I think sometimes there is some misunderstanding - is the term ERR or entity responsible for reporting. And that is referencing the legal entity that is responsible for reporting under EMIR. In the last session, we mentioned the 2020 EMIR refit changes, and they changed some of those responsibilities. So, for a lot of our client base, for OTC derivatives, the AIFM became responsible for EMIR reporting. And for example, for UCITS, the UCITS ManCo became responsible for EMIR reporting for OTC derivatives. The ERR is also a brand-new field in the new reporting regime for OTC derivatives only, so just two key more items that we wanted to flag.

Angelo Lercara:

Okay, thanks. And let's focus a bit on these Q&As. Richard, could you please elaborate on the Q&As - what they cover and what you consider to be the key aspects that we should be aware of?

Richard Chapman:

OK, so the February 2023 policy statement that Karen's just mentioned envisages that there would have been supporting guidance to be provided to support the implementation of certain of the updated UK EMIR derivative reporting rules. And, consequently, the FCA and the Bank of England duly ran two consultations that covered a series of different topics, with a further shorter consultation on spread betting. And following the industry feedback, and all those consultations, we now have published the full set of questions and answers, or Q&As, that constitute that supporting guidance. And these will apply from 30th of September this year. As Karen said earlier on, it covers 11 separate topics, which results in about 90 questions. And this will assist all those in scope of the UK EMIR reporting regimes in how to apply the UK rules. And it's also providing some useful colour on the regulator's approach to certain issues with respect to UK EMIR reporting. Now, although these Q&As are published jointly by the FCA and the Bank of England for everybody other than central counterparties, the relevant regulator in the context of UK EMIR reporting is going to be the FCA and the closest equivalent document to the Q&As under the EU EMIR reporting regime are the guidelines for reporting published by ESMA. But the UK Q&As are about 35 pages long, whereas the ESMA guidelines weigh in at nearly 250 pages. So, clearly there's a difference in the scope of coverage and the granularity between the EU and the UK approaches to supporting guidance. That said, many of the UK Q&As are very detailed and technical in nature. And I think at this stage, I just really want to cover three of the topics that the Q&As touch upon. The first of those is topic one on transitional arrangements. As Karen mentioned a little bit earlier, for any trade entered into before the 30th of September, there's a six-month period for entities responsible for reporting to update those reports to the new standards. The Q&As make it clear that that's an expectation of the FCA. It's not a reasonable efforts test, and if there's any risk of non compliance, then there needs to be early engagement with the FCA. So for all those listeners who have delegated reporting to counterparties, you need to ensure that this will happen. Second topic is on data reconciliation, and the Q&As serve as a reminder that counterparties and entities responsible for reporting, and also those who are submitting the reports to the trade repositories, must have arrangements in place to ensure that the feedback they receive from the trade repositories on reconciliation failures is taken into account, and that breaks are resolved as soon as practicably possible. Finally, and perhaps one of the more important Q&A topics is topic three, which covers the notification of errors and omissions in UK EMIR reporting. The operative provision for this comes from Article 10 of the relevant UK EMIR technical standard, which states that entities responsible for reporting must notify the relevant regulator of any material errors or omissions in its reporting as soon as it becomes aware of them. So, just breaking that down: firstly, the notification must be made by the entity responsible for reporting. So, it's key to identify who that is, which is a facts-and-circumstances test. And the Q&A made clear that any entity can actually complete this notification, but that only the entity that's in scope of the UK EMIR reporting requirement can actually submit it. And the Q&A say the timing for this is as soon as practicably possible. Secondly, notices must be made to the FCA, and the current process for submitting notifications can continue to be used, and the relevant UK EMIR notification form is available on the FCA's UK EMIR reporting obligations homepage. And then, lastly, it's only material errors and omissions that are to be reported, which begs the question: what constitutes materiality? So, if we look back at the February 2023 policy statement, the FCA had said that in determining what's material, it'll be up to the counterparty to judge that, taking into account their own circumstances and circumstances of the error. But if there was any doubt, err on the conservative side and notify. So the Q&As give us a little bit more colour on this, on the errors and omissions in reports, and they say that the ERRs, the entity responsible for reporting, must remediate all errors and omissions in reports for both live and mature trades, and in determining what's material when making a notification to the FCA, ERRs, must assess the materiality of errors based on the size, the nature and the complexity of their business. It also goes on to note that when you're looking at identifying errors and omissions in the reported data, the absolute minimum expectation from the FCA is that ERRs will have systems and controls in place to ensure the timely and complete reporting in accordance with UK EMIR. And the FCA then go on to additionally note that entities responsible for reporting should have effective governance to oversee the UK EMIR reporting, effective systems and controls to identify and remediate errors and omissions, and arrangements with counterparties to address reconciliation breaks. And the Q&As also note the importance of using the trade repository reconciliation reports that will be received to validate what's been submitted and to check the trade repositories warning messages to ensure that the reports are accurate, and also to inform whether you should be investigating any potential issues. So, to summarize all of that, the FCA is stressing proportionality when determining materiality and taking a conservative approach when making that determination. What it doesn't do is it does not set out a detailed, prescriptive set of criteria or methodology for determining when that materiality threshold is actually crossed. And that stands in quite a contrast to the approach in the EU, where under the EU EMIR notification requirements set out in the ESMA guidelines there's a lot more detail. And Karen, I wonder, actually, if you could just let listeners know a little bit more about the EU approach.

Karen Stretch:

Yeah, of course. And I think, actually, to borrow some of your words, Richard, it is a prescriptive approach. So, the new EU EMIR notification requirement. Firstly, it's a change in approach under EU EMIR reporting. And there is actually a three-prong test set out in the legislation. Two of the limbs use significance as a key reference point, and the other limb, which is the second limb in the legislation, is effectively where there is an inability to report. Alongside the legislation and this three prong test, the ESMA guidelines, which we spoke a lot about today, provide information on a quantitative test for significance. So, again, compare and contrast. You have this materiality and thinking about proportionate on your own business. And then, here, for one of the limbs under the EU EMIR rules, you have a quantitative test. Under the EU EMIR regime notifications, the guidelines state that the notifications will be on an issue-by-issue basis. For timing, the legislation refers to promptly notifying as soon as it becomes aware. There is reference in the ESMA guidelines to a notification being made without undue delay. Richard mentioned already with respect to process the FCA breach form, which has been around for some time. Again, compare and contrast. Now, well, I guess it's almost consistently now, now under the EU EMIR regime, and actually housed inside the Excel spreadsheet that has the EU validation rules, there is a form of the notification and an example. Certain national competent authorities have developed their own forms, eg, the CSSF. A slight word of

warning:

if you are an entity that is in scope of both EU EMIR and UK EMIR, or if you're just familiar with the EU process and those quantitative tests and the other information that's provided in the guidelines, this is not a direct read-across. I mentioned at the get-go, these are very much two separate regimes. And whilst we think it seems sensible to use and is not unreasonable, in our view, to lean into those quantitative tests and the other guidance that's provided by the ESMA final report and the final guidelines that they're not the same test. You have to apply judgment. And there is no affirmative statement from the FCA or otherwise that you can definitively lean into that European advice.

Angelo Lercara:

Right. Interesting. Thanks, both. You also mentioned earlier the execution agent field. Sounds interesting, at least. What is it and is it important?

Richard Chapman:

Yeah, so the execution agent field in the reports is the reason why UK EMIR reporting regime has 204 reportable fields where the EU EMIR regime has just a mere 203. It's an optional field, and it's intended to identify the entity that executes the transaction on behalf of the counterparty to the trade, and binds the counterparty to the trade, but is not a broker. So in an alternative fund space, this will often be the investment manager who, if they're a UK AIFM as well, will be the entity responsible for reporting in respect of OTC derivatives. And if an execution agent is specified, then a relationship record is submitted as well, which ties the agent to the particular relevant counterparty. The reason this is interesting is that a particular issue has been spotted by the industry in that the margin and collateral schemas don't have an execution agent field attached to them, although the main trade validation rules do. So, the practical significance of this is that the execution agent may not end up being able to have oversight of the margin and collateral reports, which may have a knock-on effect on reconciliations. And the FCA are aware of the issue, and they're considering what to do in terms of next steps. But it's probably a good idea, Karen, maybe just to let listeners know or remind listeners why it's important that they can have access to reports.

Karen Stretch:

In my mind, the importance of accessing reports boils down to three core items and, ultimately we go back to the primary requirements of EMIR. So, firstly, the reporting obligation itself. So, you need to make the report on a T+1 basis, and you need to do complete reporting. So, to be able to satisfy your obligation you need to be able to access the reports in some forms. Secondly, you've just spoken, Richard, about the new notification requirement for material errors and omissions. Well, again, to be able to determine if you need to make that notification, then you need to access the reports and get the information in relation to your derivatives transactions. And thirdly, both of us have spoken today already about this new requirement to have in place arrangements to ensure that feedback on reconciliation failures is taken into account, that failures are resolved where possible, that they're identified, that they're resolved where possible as soon as practicably possible. So again, this points to having access to the trade repository, having access to the report, somehow, and also, I guess, practically making sure that you can ingest that data in the new format that we've spoken about. I think in particular, there are a few of the FCA Q&A that are particularly helpful. So on reconciliations, and, I guess, accessing reports generally and what's expected. So you might have the access, but then what's expected? In particular, I think that 2.4 of the Q&A is particularly helpful. And again, it goes to reconciliation. It does make clear that the FCA does not intend to publish prescriptive guidance with respect to reconciliation, but importantly and consistently with what we've said today with respect to the notification, it does say that the expectations are to have arrangements in place to remediate breaks that are, I quote from the Q&A,"appropriate to the nature, scale and complexity of their business." And also accessing reports, particularly 3.3 and 3.4 and you mentioned it already, Richard, about validating the contents of your reports with counterparties, and receiving and taking into account the warning feedback messages, which actually are used to monitor their accuracy of the reporting.

Angelo Lercara:

Thank you very much, Karen. So, if I may recap in my own words, and I hope that I get it right. So, important takeaways seem to be to very much treat the UK EMIR reporting regime as separate. Then, to be familiar with the notification requirement, in particular for those subject to both EU and UK EMIR. And I understand it's also advisable to get familiar, of course, with the FCA Q&A that we've heard about today. So, many managers delegate reporting, and we discussed delegation last time. I think we spoke a lot about delegation last time, specifically voluntary delegation. Is there any news with that regard, or any special takeaways that our listeners should be aware of?

Karen Stretch:

Many of the items are items that we flagged before, but I think we would like to impress a couple of items. I think, firstly, on delegated reporting generally, it's a crucial tool for many market participants and, as you mentioned, for a lot of our client base. Richard and I spend a lot of our time guiding clients in relation to delegated reporting and reporting agreements. But I think the critical item is that even when you do delegate, and EMIR expressly provides for voluntary delegation, legal responsibility remains. So, it's not because you delegate you don't have to do anything else. And what we have said today, for example, with respect to accessing reports and the minimum expectations that set out in the Q&A, it's not that they don't apply because you delegate, but I think what's important, and the key takeaway is that you might delegate, but then you still have the responsibility, you look at your own arrangements, have in place your own processes relevant to your setup to ensure that, yes, you delegate, but that you are in a position to meet the requirements and the expectations. For those that do delegate, or for those that use a third-party service provider to undertake EMIR reporting, if you haven't already, then we would suggest that you just open up a dialogue with that third-party service provider or your counterparties to discuss what needs to be done, what information is required, any new systems put in place, relevant permissioning for this reconciliation feedback, what form it's going to come in to you, if your systems can actually handle that information- the real, practical, nitty gritty items. On the delegated reporting agreements themselves, we have seen a bit of activity in relation to those, and some updates for new delegated reporting agreements at the end of last year. So, I think it was just after we recorded last time there were some updates to the template master regulatory reporting agreement to cater for these changes. The key takeaway there is your legal responsibility remains. So yes, delegate by all means, it's important, but you still do have to look at these new requirements and consider what you might need to do.

Angelo Lercara:

Right. Richard, wrapping up today's sessions, any final wise words you would like to add for our listeners?

Richard Chapman:

Yeah, just two things. So the first is, don't forget the importance of having the necessary systems, procedures, policies and arrangements that UK EMIR requires. These are crucial. You must have these in place. And remember, there's a wealth of resources out there on compliance with the UK EMIR reporting regime. Particularly of relevance, perhaps, is the expected publication by ISDA of their suggested operational practices document for UK EMIR. They did one for the EU regime, now there'll be an equivalent one for the UK regime. And of course, Karen and I have had lots of experience helping clients navigate the new EU reporting regime and the build-up to the UK EMIR reporting regime. And I'd really encourage listeners just to reach out with any questions and queries you might have about your compliance ahead of this 30th of September "go live."

Angelo Lercara:

Thank you very much. Karen, Richard, a big thank you for joining us and sharing your insights on the reporting obligations today. We really appreciate your expertise, and it's been great having you in the conversation. Thank you very much.

Richard Chapman:

Thank you.

Karen Stretch:

Thanks, Angelo.

Angelo Lercara:

As we wrap up today's episode, I'd like to extend my thanks to our incredible production team. It is their dedication and hard work behind the scenes that make this podcast possible. So, here's to our talented producers, audio engineers, and everyone else involved in bringing this show to life. To our listeners, thank you for tuning in to our financial regulatory podcast. We hope that you found today's episode informative and engaging. If you enjoyed the show, please consider subscribing, rating and reviewing us on your favorite podcast platform. See you next time.