Did you secure your compliance with EMIR Refit?

Written by Haseena Khodadin , Armand Gransier , Ruud Bulkmans

Introduction

EMIR Refit entered into force as of 29 April 2024 with the aim to revise European Market Infrastructure Regulation (EMIR). EMIR Refit enforced by the European Securities and Markets Authority (ESMA) will enhance the harmonization and standardization of derivative reporting. This update expands upon the original EMIR guidelines, aiming to increase the transparency and stability of EU derivative markets.

Facing recent developments of derivative regulations, are you confident that your compliance strategy is as resilient as the markets you navigate?

Key changes of EMIR Refit

EMIR Refit applies to all EU derivative trades and introduces four major changes:

1. The number of reporting fields has increased from 129 to 203, which implies that the definitions and expected values in existing reporting fields require a review of current reporting logic to be in line with EMIR Refit. Additionally, the updated EMIR Refit reporting template requires additional input regarding the trade counterparty.
2. The extended report must be filed using a common XML template, aligned with ISO 20022 standards, which will be mandatory for the transmission of data to the Trade Repository.
3. Reporting to the Trade Repository now requires Unique Product Identifiers (UPI) and Unique Trade Identifiers (UTI). For Exchange-traded derivatives, an ISIN will be required when reporting to the Trade Repository. For OTC derivatives, the UPI will be mandatory.
4. There is a greater emphasis on having robust processes in place to notify regulators in cases of delayed or non-reporting of new, adjusted, or terminated OTC derivatives. This implies that the relevant competent authority must be notified within the T+1 deadline in the event of misreporting caused by flaws in the reporting system.

It is also crucial to perform the required clearing threshold calculation. This calculation determines whether you, as a holder of OTC derivatives with an EU-based counterparty, are classified as a Financial Counterparty (FC) or Non-Financial Counterparty (NFC), either "plus" or "minus”. Failure to perform this calculation results in an automatic classification as an FC or NFC "plus“, leading to more stringent reporting requirements and the obligation to clear OTC derivatives through a Central Counterparty (CCP).

Applicability to large corporates

Large corporates mainly enter into derivatives for hedging purposes of the financial risks that are inherent to the operational activities. Therefore, most large corporates are considered non-financial counterparty “minus” (NFC-) in line with the definition of EMIR. Assuming an NFC- status for large corporates, EMIR Refit has the following implications:

Reporting and outsourcing: Through the implementation of EMIR Refit, it is important to consider the updated reporting template, that consists of an increased number of fields and an updated template that is aligned with ISO 20022 standards.  While you can outsource reporting activities towards Trade Repositories to your trade counterparty or another third party, you remain responsible for ensuring timely and accurate reporting by the contracted third party of new, amended, or terminated OTC derivatives. For this reason, it is important to consider whether appropriate mechanisms are in place that ensure timely and accurate reporting of derivative trades to the Trade Repository.

Risk mitigating activities: Given the NFC- status for most large corporates, centrally clearing derivatives through a CCP is not required. It is often not considered, however, that certain risk mitigating activities must be in place for non-cleared derivatives. Implementing effective risk mitigation activities, along with the necessary processes and controls, is recommended to manage the risks associated with non-cleared OTC derivatives. Those risk mitigating activities include:

• Timely confirmation of OTC derivatives, no later than T+1;
• Portfolio reconciliation and, if possible, portfolio compression;
• Dispute resolution mechanisms and controls;
• Daily mark-to-market valuation of OTC derivative positions;
• Collateral management and collateral exchange processes and controls;
• Adequate and effective risk management procedures; and
• Keeping record of OTC derivative trades for at least 5 years (after expiry / termination).

Is your organization compliant with EMIR Refit?

The table below provides a high-level self assessment by means of which you can determine your organization’s compliance with EMIR Refit standards. Note that there might still be intermediate steps to be performed in order to become compliant with EMIR (Refit) requirements that are applicable specifically for your organization, that are not listed in the table below.

Are your current state responses not in line with the compliance requirements?  Feel free to reach out to us and we are happy to support you further!