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EMIR Reconciliations – What you need to know

By Ger Gilsenan

emir-reconciliations-process

On the 18th of June, we saw the passing of the first anniversary of one of the most impactful changes introduced by the EMIR Refit, as it relates to UCITS and AIFs.

It is now more than 12 months since the responsibility and legal liability for the reporting of details of OTC derivative transactions entered by a Fund, has passed from the Fund to its UCITS Management Company or AIFM, whichever is relevant.  

We thought it would be a great opportunity to revisit the requirements and outline how EMIR is impacting funds and fund managers.  

For clarity, we will refer to a UCITS or AIF as “Fund” and a UCITS Management Company or AIFM as “Fund Manager” in this article.

What is EMIR? 

The European Market Infrastructure Regulation (EMIR) was first introduced in 2012. It was designed to increase the transparency of European exchange traded and OTC derivative markets and to reduce systemic risk.  

The main requirements of the regulation are the:  

  • reporting of all derivative contracts (including exchange traded derivatives) to Trade Repositories (TRs),  
  • clearing OTC derivatives subject to the mandatory clearing obligation, 
  • risk mitigation techniques for non–centrally cleared derivatives, and  
  • setting out requirements for both Central Counterparties (CCPs) and TRs.

How does EMIR Refit impact Funds and Fund Managers? 

EMIR Refit came into force in June 2019 and amended the EMIR legislation intending to simplify the regime to make the compliance burden more proportionate. The changes impacted several areas, from clearing exceptions for small financial counterparties to the expanded scope of AIFs subject to EMIR rules, to new responsibilities for Fund Managers.   

Before EMIR Refit, a Fund itself was responsible for the reporting of details of both exchange traded and OTC derivative transactions to one of the centrally recognised TRs.  

After the EMIR Refit, and with effect from 18 June 2020, the Fund remains responsible and legally liable for reporting details of exchange traded derivative contracts. However, the responsibility and legal liability moved from the Fund to the Fund Manager, for the reporting of OTC derivative transactions.  

This created a few actions for Fund Managers who needed to, and should have, completed the following: 

  1. An assessment of the derivatives transactions carried out by each Fund under their management to determine which transactions the Fund will have responsibility for reporting and which transactions the Fund Manager will assume responsibility for.
  2. Where the Fund has delegated reporting to the other counterparty or third-party service provider, complete an assessment of the quality of the delegated reporting and decide as to whether that should continue or a change to the operating model is required. 
  3. Determine the adequate level of oversight and governance that is required to ensure complete, accurate and timely reporting and put the relevant procedures and systems in place.

When looking at the impact of the changes brought about by EMIR Refit, Fund Managers also needed to consider the guidance issued by the Central Bank of Ireland (CBI) in their “Dear Director” letter from February 2019 

In the letter, the CBI outlined several issues it had identified while making a series of quality checks it completed on EMIR data in 2018. These issues raised “particular concerns given their potential to hinder the objectives of EMIR namely, increased transparency, reduced counterparty risk and reduced operational risk.”  

Outlining the issues and their recommendations to resolve them, the CBI noted that counterparties should include compliance with EMIR Reporting as a standing agenda item for all board meetings and that they should take appropriate action to ensure complete, accurate and timely reporting.  

The key findings in the letter related to  

  1. Delegated reporting, 
  2. Completeness and accuracy of trade reporting, 
  3. Legal Entity Identifiers (“LEI”), 
  4. Unique Trade Identifiers (“UTI”) 

The key theme of the recommendations is that Fund Managers should have appropriate oversight in place to ensure reporting is complete and accurate. This is particularly important where delegated reporting is being used.

Earlier this year ESMA published its Final Report on EMIR and SFTR data quality and again highlighted the need for increased efforts to improve data quality.

Fund Managers can rely on reconciliation systems 

Fund Managers should regularly reconcile data being reported to a TR by its delegate with its internal book of record to ensure that all relevant trading has been reported and must also regularly check the completeness and accuracy of their reports to TRs.  

Depending on the nature of your business this could be a simple exercise or a real burden. If you only hold a handful of positions, a semi-manual, spreadsheet-based approach may work.  

However, the complexity of your requirements can rise rapidly, if there are multiple funds, multiple sources, and formats of data. Internal systems, external service providers and TRs all feed into the process and each will provide data in different formats.  

Your data needs to be collected and normalised so completeness and accuracy can be checked before beginning the reconciliation process. This is before you even think about having a robust audit process.  

As the complexity rises, so does the appeal of using expert software to automate the process. Data ingestion and normalisation can be automated, there is a complete audit trail, and you can manage by exception with oversight, rather than getting stuck in the weeds.  

To learn how Fund Recs can help you ensure reporting is complete, accurate and timely, please contact us here.

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