EMIR REFIT: ESMA & FCA Divergence

With ESMA go-live fast approaching (29th April 2024) and the FCA go-live several months later, (30th September 2024), it’s understandable why the focus is on ESMA. In fact, although the gap in reporting obligations may create some operational migraines if not suitably accounted for, the overlap between FCA and ESMA reporting requirements mean that all effort is relevant effort.

That said, when comparing key documents (for example the validation rules, XML schemas and technical standards) between the FCA and ESMA EMIR REFITs, there are some subtle, and less subtle, divergences which are talked to below. Following this, there is merit in pulling resources to analyse FCA and ESMA reporting in tandem to assess the level of additional build effort based on the divergence of requirements.

A thematic summary of the divergences is as follows:

ISO Schemas

• Flexibility – Although ESMA and FCA are aligned when it comes to the trade activity report (with a strict version to be used as soon as the regulations go live), the FCA differs when it comes to the trade/margin state reports. ESMA only recognise a relaxed version of the trade state reports which facilitates the generation of the report in both legacy (the current EMIR reporting rules) and REFIT format. Conversely, the FCA stipulate that the relaxed versions must be used by Trade Repositories during the 6-month transition window. After this time, “strict” versions of these schemas, that allow reporting in Refit format only, will be used.
• Conditionality – FCA have embedded parts of the validation rule logic within the XML schema definitions itself to facilitate an earlier layer of accuracy. For example, certain elements are now mandatory in the schema which enforces the same outcome that is held within the validation rules. As well as the enforcement of optionality, there are also formatting requirements that have been moved into the XML layer.
• Streamlining – Removed and streamlined the XML schema definitions by removing unnecessary fields – for example if the technical standards stipulate a price cannot be reported in Yield, then this format is removed as an option

Validation Rules

• Execution agent has been added as an optional field (so where it is relevant in the transaction, is indeed required). This has been added within the Parties to the derivative section of the validation rules. This shows the FCAs attempting to align with CDE (Critical Data Elements) guidance. Note, it has recently been confirmed that ESMA will instead have Execution Agent as an entirely optional data input within the ISO wrapper, which bridges the gap somewhat.
• Fields and data required that refer to underlying regulations for definitions are directed at UK based regulations as opposed to the European Union. This will require some internal due diligence to assess any impact.
• Fields pertaining to dates differ due to catering for the FCA’s different implementation timeline
• To cater for Brexit, the rules allow for different validations depending on whether the trade was concluded before or after the UK left the EU.
• Additional conditionality has been added, where the FCA believe it makes sense for a field to be conditional on others or a divergence whereby ESMA may stipulate a field is optional whereas FCA say conditional.

Process and Controls

• The FCA grant an additional three hours for trade repositories to make available the information necessary for counterparties to review their UK EMIR reporting submissions. The end of day response mechanism deadline for ESMA is T+1 06:00, whereas for FCA it’s T+1 09:00.
• Methods and arrangements for reporting – the FCA are vague in stipulating that any ‘material’ error or omission must be notified to the FCA whereas ESMA provide more separate and distinct definitions with numerical thresholds provided for in the Final Guidelines.

The impact of the divergences between the reporting regimes will depend entirely on each firm’s build. Overall, the FCA are promoting both the ease of implementation (for example by aligning reconciliation tolerances with ESMA) and global harmonisation efforts, however, are not shy in diverging where they believe enhancements are made. There are of course nuances with most global REFITs/Rewrites when compared to one and other and it would be no shock to see regulatory prerogative being used to further rationalise their reporting regimes in the coming years

If you need help with regulatory interpretation, data governance, technical delivery or controls implementation; First Derivative can help you get it done. Contact us today.

Emon Tabrizi Senior Consultant Emon Tabrizi LinkedIn profile