2024: A regulatory reporting perfect storm?

Article highlights

• Regulatory Reporting Challenges in 2024: The EMIR Refit and a series of other regulatory reporting changes scheduled for 2024 are set to present significant challenges for financial institutions and firms engaged in financial trading.
• Record Number of Reporting Changes: A record number of trade and transaction reporting ‘rewrites’ are slated for implementation by the end of the year.
• Quality Reference Data as a Risk Mitigation Strategy: To mitigate the risk of regulatory reporting failure and the potential consequences, firms should prioritise the quality of reference data used in mandatory reporting fields.

April 2024 heralds the implementation date for the EMIR Refit when rules for reporting derivatives trading activity within the European Economic Area (EEA), and with counterparties in the EEA, will change. This – like all other regulatory compliance obligations impacting financial markets activity and associated reporting workflows – presents a major headache for operations and compliance teams tasked with ensuring that new reporting rules are met from April, at risk of costly remediation, financial penalties and worse.

However, the headache doesn’t go away after the April EMIR Refit EU implementation deadline. Not only must firms ensure that EMIR reporting workflows continue to meet new, more rigorous, reporting requirements, with the increased threat and likelihood of regulatory sanctions for reporting failures, but also because EMIR Refit in Europe is only the first of a host of regulatory reporting changes tabled for 2024.

In fact, a record number of trade and transaction reporting ‘rewrites’ are required to be implemented before the year end: EMIR Refit in the UK in September, ASIC (Australian rules) Rewrite in October, along with MAS (Singapore) Update and proposed JFSA (Japan), CFTC Rewrite Phase 2 and SEC 10C-1 (both US) rule changes all have a direct impact on reporting of derivatives trades. So too do proposed changes to MiFIR-D (Markets in Financial Instruments Regulation and Directive) that will impact market data costs, derivative (and bond) market transparency calibrations and the introduction of the consolidated tape regime.

On the one hand these changes are intended to introduce a perhaps welcome element of standardisation in terms of the reporting format across reporting regimes, for example, with respect to the new ISO20022 XML reporting protocol that will replace today’s more random reporting choices. On the other, each Refit, Rewrite and Update mandates a completely different set of message format and field changes; unlike the eponymous ring in Lord of the Rings there simply isn’t ‘one rule to guide us all’ nor any quick fix whereby changes made for one reporting regime might be applied automatically to others. That would be too easy, right?

If all this wasn’t enough to be getting on with, let’s throw into the mix UK’s Designated Reporter Regime (DRR), another April 2024 deadline, which seeks to clarify (at an entity level) which party (seller or buyer) has the obligation to publicly report trades. Let’s also not forget new FCA Sustainability Disclosure Requirements that will apply in the UK from July 2024 requiring asset managers to create appropriate ESG disclosure frameworks for UK-based funds to mitigate ‘greenwashing’ and improve trust in sustainable investment products.

The EU is also considering changes to its SFDR (Sustainable Finance Disclosure Regulation) and CSRD (Corporate Sustainability Reporting Directive) ‘in the near future’ with an eye on greater global alignment – so that’s something else for fund manager operations and compliance teams to look forward to. 2024 also heralds new technical rules in Markets in Crypto Assets Regulation (MiCA), the EU-wide regulatory framework bringing crypto-related assets, issuers and service providers within the regulatory perimeter; from this June, new requirements will start to apply to stablecoins and asset referenced tokens.

All in all, 2024 is set to be a very challenging year for financial institutions and firms engaged in financial trading, and particularly for their already stretched operations and compliance resources. One thing that firms can do, however, to immediately mitigate the risk of regulatory reporting failure and the increased threat of penalties and sanctions, is to ensure the quality of the reference data used in mandatory reporting fields. Both the EEA and UK EMIR Refit rule changes mandate an increase in the number of reportable fields – from 129 to 203 in the EU, and 204 in the UK (which has thrown an extra field in, because why not).

Of course, not all these new fields are applicable to all products and contracts, nor are they all populated by reference data. Nonetheless, history – and industry research shows – shows that poor reference data is one of the major contributors to ‘operational risk of a financial institution’ both in terms of transaction failures per se and with respect to transaction reporting errors. In the main reference data ‘fails’ because there is no standardisation of reference data ‘descriptions’ – different data sources and vendors may describe the same things in completely different ways.

As with the introduction of original EMIR regulation, for some firms the 2024 EMIR Refit and other regulatory rewrites could herald a perfect storm, defined by Merriam Webster as “a critical or disastrous situation created by a powerful concurrence of factors”.

In our next blog we’ll look at the EMIR Refit and associated reference data obligations in more detail. In the meantime, find out how FOW can help get EMIR Refit ready.