Listen to the Article: How is the OTC Derivatives Market Prepared for the Upcoming EMIR Refit?

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On October 7, 2022, Fazzaco reported on the Technical Standards of the European Market Infrastructure Regulation Amendment approved by the European Parliament and Council​. This regime, known as EMIR Refit, will officially come into effect on April 29, 2024.

EMIR Refit introduces three significant changes worth noting. As per the regulations set forth by the European Securities and Markets Authority (ESMA), all over-the-counter (OTC) derivatives, i.e., derivatives traded outside trading venues, will utilize a unique product identifier (UPI).

With April 2024 quickly approaching, there is less than two weeks until the final deadline. Have the EU traders adequately prepared for the provisions regarding the OTC derivatives market in the upcoming EMIR Refit?

UPI: A Solution to OTC Derivatives Trading Risks Post-2008 Financial Crisis

The global financial crisis of 2008 witnessed the collapse of numerous large financial institutions or their government takeover, triggering a worldwide economic recession. In the aftermath, in 2014, the Financial Stability Board (FSB), an international organization, proposed a globally unified Unique Product Identifier (UPI) scheme to assist regulators in identifying systemic risks in OTC derivatives trading.

Subsequently, UPI became an ISO standard. According to Fazzaco's report, the Derivatives Service Bureau (DSB), which was designated as the service provider for the future UPI system, launched this service in October 2023. Henceforth, all OTC derivatives trading data will be aggregated into trade repositories. G20 nations have also made commitments to implementing UPI. As of now, the United States has taken the lead by implementing mandatory Unique Product Identifier reporting in January of this year, becoming the first G20 jurisdiction to do so. The EU will be the second to implement this regime.

EMIR Refit: Is the OTC Derivatives Market Prepared?

Unlike other jurisdictions, the EU's EMIR Refit, which is coming into effect at the end of this April, will not only introduce the aforementioned UPI but also maintain the use of International Securities Identification Number (ISIN) codes for OTC derivatives reporting (which also applies to derivatives traded within trading venues or internal systems). Hence, there is often confusion as to why two sets of identifiers are being used simultaneously. ESMA's explanation is to ensure cross-regulation consistency and lower reporting burdens for firms.

Both the EU and the UK currently use ISIN in their three sets of reporting standards, including the Markets in Financial Instruments Regulation (MiFIR) for price transparency and market abuse detection purposes, as well as EMIR. Therefore, after the introduction of UPI at the end of April, its provider DSB will collaborate with market participants, ISO, as well as EMSA and the UK FCA to ensure the ISIN design is consistent and complementary with the UPI. In other words, existing ISINs will effectively also be UPIs, ensuring global convergence and coordination.

So, is the OTC derivatives market prepared for this? The fintechs have responded enthusiastically: Fazzaco learned in March that the provider of financial reference data, SmartStream Reference Data Services (RDS), has introduced an enhanced derivatives data service designed to deliver in-depth insights into futures-related transactions to help meet EMIR Refit reporting requirements​.

Additionally, in January, the licensed Bulgarian investment firm DeltaStock partnered with TRAction to assist DeltaStock in complying with the latest requirements of EMIR.

Other Changes Worth Mentioning in the Upcoming EMIR Refit

In the upcoming EMIR Refit to be formally implemented in the European Union, besides the OTC derivatives UPI mentioned above, two other changes also deserve market attention: First, the new ISO 20022 XML data format. EMIR Refit requires that XML schemas developed in line with ISO 20022 methodology are used not only for communication between the trade repositories and authorities but also for reporting from trade repository counterparties. A fully standardized format for reporting will eliminate the risk of discrepancies due to inconsistent data; Second, data fields changes. With EMIR Refit, reportable fields will increase from 129 to 203, including 174 reporting fields and 29 for collateral/margin data. Among them, 41% are newly introduced fields, 19% are existing fields being updated, 105 are Common Data Element fields, moving close to international data harmonization.

The entities falling within the scope of EMIR, which are impacted by these technical standards, are required to comply with such changes by April 29 2024. At which point, firms will then need to report details on their derivative transactions under the new standards and start upgrading outstanding derivatives to this new format.