Overview

Under the European Market Infrastructure Regulation (EU EMIR), counterparties established in the EU are required to report details of relevant derivative contracts entered into, as well as any change or termination to these trades, to a registered or recognised trade repository by the next working day. As part of the review of EMIR in 2019 known as EMIR REFIT, certain changes to the reporting requirements were introduced in order to take account of the guidance from CPMI-IOSCO on harmonisation of the unique transaction identifier as well as to address data quality issues and areas of uncertainty in the current reporting rules. The aim is that these new rules will lead to greater harmonisation of derivatives reporting, which should lead to greater quality of data needed for the effective monitoring of systemic risk. In addition, the hope is that more standardisation of reporting should lead to reduced costs for all the entities in the reporting chain.

As EU EMIR and the amendments to it under EMIR REFIT were retained as part of the UK's onshoring of EU legislation when the UK left the EU (UK EMIR), these new reporting requirements will also apply in the UK.

There was a 18 month implementation period under both EU EMIR and UK EMIR so the rules are only coming into force this year.

Background to changes under EU EMIR and publications

• In 2022, the European Commission adopted new RTS and ITS on reporting under EMIR REFIT that will repeal and replace the current RTS and ITS on reporting. In connection with these changes, ESMA published validation rules and reporting instructions for EU counterparties and trade repositories, in addition to new reporting guidelines.
• Some National Competent Authorities (NCAs) such as the Commission de Surveillance du Secteur Financier (the CSSF) have also issued guidance. The CSSF is of the view that there is sufficient time for stakeholders to implement the changes and any failure to do so will be considered a breach of the reporting obligation under Article 9 of EMIR.

Background to changes under UK EMIR and publications

• In 2023, the FCA and Bank of England adopted standards that will revoke the current RTS and ITS on reporting as they apply in the UK and replace them with new UK technical standards. The FCA has also published validation rules and XML schemes to support the implementation of the new UK requirements.
• The FCA and Bank of England have also recently published draft guidance in the form of Q&As ordered by topics. Before finalising the guidance, there is a short consultation period until 28 March 2024 in order to obtain feedback from the industry. 

Key changes in reporting requirements under both regimes

The updated reporting rules will apply to EU and UK counterparties for both new and outstanding derivative transactions. On the whole, the new rules under EU EMIR and UK EMIR are generally aligned although there are some differences, including the dates the new rules become effective, notification obligations for reporting material errors and validation rules.  The FCA has published a worksheet setting out the particular differences and its reasons for diverging from the EU approach. The rules will apply from 29 April 2024 (under EU EMIR) and 30 September 2024 (under UK EMIR), with reports for outstanding derivatives needing to be updated by 26 October 2024 (EU EMIR) and 31 March 2025 (UK EMIR).

Some of the key changes are:

• Increase in the number of reportable fields from 129 to 203 (or 204 in the UK)- Entities must submit reports using a common XML template based on ISO 20022 standards. This requirement is aimed at standardising reporting, reducing data quality issues and improving automation of reporting. 
• Reporting entities must notify competent authorities of certain reporting issues-   Under the EU rules, which are more prescriptive than the UK rules, a reporting entity must notify the NCA promptly of:
• any misreporting caused by flaws in the reporting systems that would affect a significant number of reports;
• any reporting obstacle preventing the report submitting entity from sending reports to a trade repository within the reporting deadline; and
• any significant issue resulting in reporting errors that would not cause rejection by a trade repository.

The ESMA guidelines set out key metrics and thresholds in order to clarify what should be considered "significant" by reporting entities. The reporting entities must promptly notify the relevant NCA and provide further information such as the type of error or omission, the reasons for the errors or omissions, steps taken or planned to resolve the issue, date of occurrence and the timeline for resolution of the issues.  The entity responsible for reporting has to provide the notification in a common template published on the ESMA website. This new notification requirement may mean that reports to various NCAs are needed and entities with delegated reporting in place will need to consider how to obtain this information.

The new UK reporting rules also require reporting entities to notify the FCA promptly of any material errors or omissions. However, unlike ESMA, the FCA has not clarified what constitutes "material", and has left it for reporting entities to decide and interpret based on their circumstances. The FCA has also stated that in the event of any uncertainty, the reporting entities should notify the FCA and the Bank of England, as relevant, of the error.

• Reconciliation processes and data issues- Reconciliation processes and data issues must be resolved based on trade repositories' feedback regarding reconciliation breaks. Under UK EMIR, any reconciliation breaks must be resolved as soon as practicably possible.  The ESMA RTS and ITS on data quality sets out the detailed requirements on data quality issues.
• NFC-s must provide FCs with specific information for mandatory reporting- FCs must ensure that arrangements with NFC-s for whom they report are in place so that they receive all the relevant information that the FC cannot be reasonably expected to possess including information relating to any change of status of the NFC- or any decision where the NFC- chooses to start reporting for itself. 
• NFC-s are responsible for ensuring that their LEIs are renewed in a timely fashion- However, FCs can assist with this, for example, by providing up to date information about the details of the derivative contracts that are outstanding at trade repositories.

Future changes

The European Systemic Risk Board (the ESRB) has recommended that there should be additional changes to EU EMIR to improve the quality of the reported data.  The ESRB has urged EU lawmakers to take its recommendations into account when considering the EMIR 3.0 proposal.

EMIR 3.0 does contemplate several changes including that counterparties will need to have appropriate procedures in place to ensure the quality of the data they report and ESMA is tasked with setting out guidelines with further details on this.  In addition, NCAs and ESMA will also have the ability to issue a fine consisting of a periodic penalty payment of up to 1% of average daily turnover for up to 6 months for breach of the reporting obligation where the details reported repeatedly contain manifest errors.

Final Thoughts

Reporting parties should consider how the upcoming changes will impact their reporting systems and update any internal procedures to comply with the new requirements. Firms that report under both EU EMIR and UK EMIR should be aware of the different start dates.  As the UK EMIR implementation date falls after the EU EMIR implementation date, there will be a five month period from 29 April 2024 to 30 September 2024 when entities reporting under both regimes will have to comply with the different reporting rules, as they will need to adhere to the new EU rules whilst still complying with the old UK regime.  In addition, although there is a 6 month transition period for the re-reporting of derivatives that were outstanding on the new reporting start date, the process of updating existing reports may be challenging for firms and in particular FCs that report on behalf of NFC-s, who will need to ensure that they have all the relevant information to do this.  This approach differs from the approach taken in 2017 when certain new reporting rules were introduced as reporting of outstanding trades was not required.

This note is for guidance only and should not be relied on as legal advice in relation to a particular transaction or situation. Please contact your normal contact at Hogan Lovells if you require assistance or advice in connection with any of the above.

Authored by Jennifer O’Connell, Isobel Wright, and Anvitaa Narayanan.