What is the current state of play for refit implementation?
What’s important to remember is that the implementation isn’t about new rules, it’s about amending an existing regulation. It is a significant change and improvement of the existing Emir regulation which has been around now for more than 10 years.
The purpose of this change and the introduction of new the amendments is to raise data quality. Market participants will need to report – under EU and UK regulation – on whether the data is good, correct and transparent. There is still a lot of room for improvement around data quality and the means by which data is provided. This gives the authorities every right to carry out their supervisory activity.
Clearly, there’s a market need for this development. Refit is aimed at improving data quality, and translating this idea through implementation is essential.
Why is the regulation being implemented in the EU (April) before the UK (September)?
The reason lies in the separate regulatory landscapes. In the wake of Brexit, European Union and the UK have become increasingly complex. The UK, formally belonging to the European Union, previously fell under the same regulation . However, now another regulatory approach has been established, running parallel to the rest of Europe. Regardless of whether the UK regulation ends up mirroring the EU one, it remains that the UK is completely autonomous and independent now. These timelines therefore do not need to be linked – which is not necessarily a negative thing.
Implementing later puts the UK in an advantageous position from which to learn from any problems or errors. On the flip side, there is an additional threat because the period between April and September will require entities to follow two different procedures. Entities active under both legislations are going to need as much harmony and similarity as possible. Ideally, nothing would be different, but if it is, this means additional development, effort, cost, time. So, from that perspective, the more united the better.
What’s important to remember is that refit is happening independently of UK and EU activity. It forms part of a process to improve the Emir regulation that has been in the works for a decade, way before the implementation of Brexit. Therefore, there needs to be a conscious effort to prevent duplication of cost, effort, and overall burden on the industry.
Is there a readiness gap amongst market participants when it comes to Emir refit?
The readiness of market participants varies quite a bit. There is a huge community of entities who are obliged to carry out corresponding derivative trading reporting. This means that we’re talking about totally different clients and therefore the preparedness is quite different amongst them.
They’re all facing different challenges and there’s no straight answer as to how prepared the clients are. Some started preparing very early on, some have more capabilities in-house or access to external support and these firms are well advanced, with some rolled out already and early birds already testing for some time. We can see the number of clients who are starting to test increase. On the other hand, other entities are only just starting to look into this seriously.
An important thing to note is that it is the role of the entities offering services to market participants, to take over their reporting obligation from a technical perspective. Despite the presence of the intermediaries who are offering this service, which some players may outsource to, the responsibility, to perform correct reporting remains with the market participant. This is something which cannot be delegated.
Overall, the readiness level has increased in the last month or so and is continuing upwards. It’s important not to underestimate these changes.
What is the main thing market players should bear in mind when it comes to the regulatory changes on the horizon?
On the one hand, refit is not a new regulation, it is an enhancement, so you need to approach it from that perspective. Because of this, the supervisors carrying out their activities are not going to provide a grace period. It is not likely to be a case of ‘we have implemented this, and we understand that there are teething problems’. Rather, it is a case of starting to run with it as it is introduced. Regulators are expecting the market to perform their activities from the get-go.
Across refit, the main area emphasised is data quality and the way to pursue this is the introduction of ISO 20022 to ensure reporting consistency across market participants and TRs, use of ‘common data’ fields, removal of proprietary fields and consistent application of guidelines and rules.
The increase of the number of reportable fields to over 200 aims to contribute to this goal, and although I am a defender of “less is more,” perhaps in this case it would mean to look at this from the wrong perspective. The issues with data quality under the current Emir regime have often resulted from the room for interpretation. The new standard with the inbuild validations and the additional reporting fields will help to make this more prescriptive and precise.
So, from the perspective of how market participants should address this – the changes which are aimed at improvements to achieve a better data quality – focusing and understanding it should not be viewed as an additional burden of reporting, but rather as an opportunity.