Brexit Divergence a Year Later: Update on EMIR, MIFIR and SFTR Changes
After years of buildup and worry, when Brexit went into effect last January, divergence between EU and UK versions of EMIR, MIFIR and SFTR transaction reporting regulation was minimal. There were a number of changes. Most notably, firms needed to ensure submissions of UK reporting entities were sent to UK licensed Trade Repositories (TR) and ARMs and vice versa for the EU.
Looking at the specific regulations, in SFTR, the UK exempted non-financial counterparties (NFCs) from needing to report when the EU expanded the regulation to included them in January 2021. For EMIR, UK trading venues were excluded from the EU’s list of equivalent markets. Thus, a derivative traded on a UK exchange is reported using its MIC code or XOFF under UK EMIR and XXXX for its venue for EU EMIR submissions. Brexit also led to the EU and UK managing separate FIRDS lists of ISINs under scope for MIFIR transaction reporting.
Not being changed were reporting specifications and validations across the split EU and UK regimes. This made it easier for firms to comply with Brexit as it removed the major hurdle of needing to maintain separate reporting formats for the two regulations.
Fast forward a year. We are beginning to see how Brexit divergence can get more complicated in the future.
A good example is SFTR where both the EU and UK are applying new validation changes to the ISO 20022 XML format used for report submissions (more on the changes). While both regimes are applying the same updates, the go-live dates are different. EU TRs are set to apply the new validations at the end of January while they will only go into effect on April 14th in the UK.
The timelines divergence is one of the fears industry professionals worried about with Brexit. Even as regulations are aligned, differing go-live periods require firms to maintain temporary dual processes for creating and submitting reports.
Elsewhere, another small change was proposed by the FCA that effects MIFIR and SFTR. The UK regulators proposed to widen the exemption of security finance transactions (SFT) under MIFIR. Currently, SFTs with central bank counterparties are exempt to be reported under EMIR but required under MIFIR transaction reporting. Under the FCA’s proposal, starting from March 31st, 2022, all SFT will be exempt under UK MIFIR. SFTs with a non-UK central bank counterparty will be reportable under UK SFTR. SFTs with the Bank of England will be exempt to both UK MIFIR and SFTR.
In much anticipated news, the FCA answered questions about the future of UK EMIR with the publishing in December of their EMIR REFIT consultation paper. In the EU version, ESMA introduced 40% new fields for a total of 203, lifecycle changes and adoption of the ISO 20022 XML format. For their part, the UK had more or less fully adopted ESMA’s version of the new reporting standards for the REFIT. The one notable change is a wider definition of what is classified as an exempted Intragroup Transaction to include entities in 3rd party countries which differs from ESMA’s proposals.
Timing wise, we don’t yet have a definitive date from either ESMA or the FCA when the reporting standards under REFIT will go live. Expectations are a Q3 2023 start date from ESMA. In regards to the UK, in their Consultation Paper, the FCA acknowledged industry feedback that favored aligned standards for both the EU and UK. Therefore, it can be assumed that the UK may elect to sync its go-live period with that of the EU to mitigate data quality risk due to timing divergence.
Overall, reviewing past and proposed changes, we are able to gain a perspective of two divergence trends. One is that the FCA has favored widening exemptions in areas they don’t believe pose much risk. So far these exemptions only affect a small percentage of the market. However, they could become wider ranging if for instance the FCA decides to exempt small NFCs like they do in SFTR or remove ETDs from EMIR reporting entirely as is the case in other jurisdictions. On a similar move, it is worth noting that the FCA also took a lenient approach in regards to the Best Execution reports under MIFID II for RTS 27 and 28 where they removed their obligation. This differs from ESMA where the regulator elected to amend the required fields under RTS 27.
The second trend is that the FCA has shown it is listening to industry participants but will move at its own pace. This is seen via the above mentioned different timelines to the XML formats under SFTR and could mean that similar time divergence will exist for EMIR REFIT.