EMIR REFIT: Significant or Material Reporting of Issues to the Regulator

This fourth instalment in a series of blogs on wholesale conduct topics, discusses EMIR REFIT and the criteria for regulator notifications.

Introduction

With both EU and UK EMIR REFIT now live, the substantial uptick in reportable fields has heightened the potential for reporting issues.

Whilst EMIR REFIT has placed onus on trade repositories to notify and provide feedback¹ to reporting firms on reconciliation breaks, firms need to be pro-active in self-identifying errors and omissions. Reporting firms should be ensuring that a robust control framework is in place to identify and respond to reporting issues.

Notably, for EU reporting entities, ESMA has introduced the requirement to report ‘significant issues’ to regulators under EMIR REFIT. For UK entities, the requirement of reporting errors and omissions predated EMIR REFIT and the FCA refers to the concept of ‘material’ reporting of issues.

In this blog, we delve into what could constitute a significant or material reporting issue, the EU and UK approaches, the regulator notification process, and what firms should be doing to prevent reporting issues.

Significant or material reporting issues

The EU is more prescriptive in how they seek to define what a significant or material issue could relate to. The EU Implementing Technical Standards (ITS)² set out potential scenarios where a reporting issue could be significant and therefore would be notifiable to a regulator:

• Completeness: Any misreporting caused by flaws in the reporting systems that would affect a significant number of reports;
• Timeliness: Any reporting obstacle preventing the report submitting entity from sending reports to a trade repository within the reporting deadline; or
• Accuracy: Any significant issue resulting in reporting errors that would not cause rejection by a trade repository.

In contrast, the FCA Technical Standards simply note that the entity responsible for reporting should notify the relevant regulators of ‘material’ errors or omissions ‘as soon as it becomes aware of them'.³

Significant or material reporting issue criteria

Quantitative

ESMA has been prescriptive in setting out how and when a reporting issue becomes significant and notifiable to a regulator. At the core of the approach is a threshold calculation which determines whether a ‘significant number’ of reports have been impacted by a reporting issue and meets the threshold for notifying a regulator. The calculation looks to determine what proportion and percentage of the monthly average number of report submissions have been impacted by a reporting issue. Further details along with example scenarios can be found in ESMA’s guidance.⁴ When assessing if a significant number of reports have been impacted, ESMA requires that the reports analysed are split into three categories, grouped by action type.⁵ If there is a significant number of reports in one of the categories impacted by an issue, then the regulator(s) should be notified of the issue.⁶

Qualitative

Supplementing the impacted report threshold calculation, ESMA also provides guidance on qualitative criteria for example, issues that stem from errors and omissions related to key trade economics fields such as the notional amount and currency.⁷ Whilst any qualitative assessment is to be undertaken in tandem with the threshold calculation, it would be prudent for reporting firms to exercise sensible judgement within the parameters of their governance and risk framework, to determine if an issue may be ‘significant’ even if it may not impact a large number of trades. For example, any misreporting of a trade that misrepresents a reporting entity’s exposure such as an incorrect notional value.

The UK approach accommodates for such scenarios as it places emphasis on reporting entities exercising their own judgement when determining whether a reporting issue is material rather than adopting a threshold approach. The FCA permits firms to apply judgement according to the ‘size, nature, and complexity of their business’.⁸

Significant or material issue notification process

Notification obligation and delegated reporting considerations

When a significant issue is identified, ESMA requests that entity responsible for reporting should ‘promptly (as soon as it becomes aware of them)’ notify its respective regulator and if different, the regulator of the reporting counterparty.⁹ Therefore, assessment of any delegated reporting relationships is a key consideration to confirm entities responsible for reporting do not miss notifying regulators.

Information for the notification, format, and timing

On timing, firms should be mindful to avoid a rushed, inaccurate notification which does not present a sufficient picture of the issue and, importantly, firms should provide an anticipated timeline for remediation. A balance needs to be struck between alerting the regulator in time and sharing enough information. ESMA stipulates that the notification should at a minimum contain:

• Information on and identification of the issue(s), including the date the issue was identified
• The reporting parties
• The number of impacted reports
• The type of error or omission
• The root causes of the issue(s)
• A remediation plan and timeline for submission of the corrected reports

The reporting template can be found on ESMA’s website. Further, each unique data quality issue that has its own root cause, should have its own notification. If there are issues linked to the same root cause, then the related issues can be disclosed in the same notification.¹⁰

For UK EMIR, firms should use the FCA’s Errors and Omissions form (E&O) when a material issue is identified.¹¹ The form expects details on any delegated reporting relationships, root causes, plan for remediation, and ongoing monitoring/governance. Notifications should be submitted via the FCA’s ‘Connect system’ as soon as the entity responsible for reporting is aware of the material issue. However, firms should ensure enough information is available to answer the E&O questions in sufficient detail.

Preventative controls

In our experience, firms tend to concentrate on detective reconciliation controls and spend less time and resources on pre-submission controls. However, those firms that do focus and invest in a more holistic, preventative reporting control framework, certainly benefit and are able to react more quickly and effectively when a reporting issue is encountered.

Here are some considerations when building, developing, and enhancing an effective control framework:

• Pre and post submission verification checks: documented pre and post submission data, interpretation and logic checks for interdependent data fields.
• Data accuracy and completeness: pre and post checks in place to ensure all reportable data is accurate and complete in line with regulatory requirements.
• Data flow: controls designed to ensure that sourcing of data for the generation of reports is not compromised.
• Escalation/change management: well governed processes to provide timely and controlled adaptation to the reporting logic due to regulatory, business, or operational changes that impact the reporting obligations.
• Regular review process: periodic reviews of controls conducted across the three lines of defence (3LoD), including consideration of horizon scanning for changes to requirements and updated guidance.

Conclusion

Firms should be investing in preventative as well as detective controls to mitigate the likelihood of issues and regulatory breaches. Further, firms that fulfil both EU and UK EMIR REFIT reporting obligations may wish to consider adopting a harmonised approach when assessing the significance or materiality of reporting issues. This could include adopting a threshold calculation approach in line with ESMA’s guidance, complemented with qualitative criteria to identify significant or material issues that don’t necessarily impact a high volume of trades. Finally, the criteria for identifying significant or material issues should also be defined, documented and calibrated to the size, nature, and complexity of a firm’s business to ensure appropriate internal and external escalation of issues.

If you would like to discuss the regulators’ expectations and your requirements further, please contact the authors of this blog.

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References:

¹ ESMA Final Report: Guidelines for reporting under EMIR, para 382, p.183
² Article 9(1) of the EU implementing technical standards (ITS) (2022/1860)
³ Article 10(1) of the FCA technical standards (2023/4)
⁴ ESMA Final Report: Guidelines for reporting under EMIR, paras 392 and 395, pp.185 - 187
⁵ ESMA Final Report: Guidelines for reporting under EMIR, para 390, p.185
⁶ ESMA Final Report: Guidelines for reporting under EMIR, para 391, p.185
⁷ ESMA Final Report: Guidelines for reporting under EMIR, para 398, pp. 187 - 188
⁸ FCA: UK EMIR reporting questions and answers, question 3.2
⁹ ESMA Final Report: Guidelines for reporting under EMIR, para 384, p.183
¹⁰ ESMA Final Report: Guidelines for reporting under EMIR, para 386, p.184
¹¹ FCA: Reporting obligation, UK EMIR errors and omissions notification form