ESMA Takes EMIR Reporting to the Next Level
by Folker Trepte, partner, and Sven Walterscheidt, senior manager, Corporate Treasury Solutions, PwC
The requirement to report derivatives transactions entered into, modified or terminated to a trade repository was one of the most significant developments of EU financial regulation in 2014. In 2015, the emphasis for ESMA and EU national regulators is on improving the quality of data submitted to trade repositories in order to address shortcomings with respect to their usefulness.
When ESMA introduced mandatory trade reporting in February 2014, market participants struggled with implementing a solution to report their derivative transactions within the specified timeframe to an approved trade repository of their choice. A number of aspects have been particularly challenging for market participants, such as the significant number of data fields to be correctly completed and interpreted, the implementation of processes to generate these data and the onboarding process to the trade repository. While they now have overcome administrative and technical hurdles and started focusing on streamlining the functioning of their reporting process, it is up to the supervisory authority to improve usefulness of data to provide national regulators with a true picture of risk in derivatives markets.
According to ESMA’s report on the supervision of Credit Rating Agencies and Trade Repositories, EU trade repositories have received and processed a total of almost ten billion trade reports since the start of the reporting obligation in February 2014. While ESMA paid attention to implementation in the run-up to the start of EMIR reporting, the authority has now shifted its focus for supervision to enhance data quality and provide national regulators with appropriate access to trade repository data.
One key step for achieving better quality of the data reported to the trade repositories was the implementation of harmonised validation rules (ESMA Level 1 validations). Trade repositories had been requested to reject reports not complying with these validation rules from 1 December 2014. For the second quarter of 2015, ESMA announced another set of validations (ESMA Level 2 validations), leveraging the experiences from Level 1.
The improvement of the inter-trade repository reconciliation process will now be a key field of action when it comes to ensuring better data quality. In light of low reconciliation rates, i.e., to a large extent data reported by the counterparties differ or are not represented in the same way, the process to reconcile data reported to different trade repositories needs to be streamlined, thereby focusing on standardising information and datasets exchanged as well as on the validation of certain key fields. Also, disclosure of conflicting values to counterparties will be central.
In addition, ESMA revised its technical standards in relation to the obligation to report derivatives trade information and asked for feedback from the industry. The revised version proposes slight adjustments to individual data fields of mainly technical nature. The changes being proposed reflect the set of Q&As issued by ESMA and updated on an ongoing basis to provide clarity on the interpretation of data fields.
While initially market participants feared that EMIR reporting would be more complex due to the initiatives recently announced, the current market sentiment welcomes the authority’s supervisory efforts since they will improve the overall trade repository landscape.