Monitoring the quality of transaction reports received under Article 9 of EMIR
Press release 21/11
This press release relates to the obligation for counterparties and CCPs to report to Trade Repositories (TRs) the details of any derivative contract they have concluded and of any modification or termination of the contract as set out in Article 9 of Regulation (EU) No 648/2012 (EMIR).
It informs on the quality and completeness campaigns that the CSSF conducted during the year 2020 as well as on the topics that are the subject of dedicated campaigns during the year 2021.
In this press release, references to a specific “Field” refer to the fields in Table 1 and Table 2 of the Annex of the RTS 148/2013.
1. Data Quality Campaigns 2020
a. ESMA EMIR DQR 2020
In 2020, following ESMA’s EMIR Data Quality Review (ESMA EMIR DQR), the National Competent Authorities (NCAs) in the EU/EEA have contacted the five largest reporting counterparties with highest number of:
- non-paired trades;
- outstanding trades;
- outstanding trades with the field [1.17 Value of contract] blank or equal to zero (FC/NFC+)1.
In Luxembourg, the CSSF contacted 13 counterparties. Those counterparties have been requested, inter alia, to justify the reasons for the shortcomings and the remedial actions that have been taken to avoid such issue going forward. Additionally, they were also requested to confirm that the information submitted to the TR match with the books of the entities (e.g. number of outstanding trades, notional amounts, valuation amounts, collateral fields).
The ESMA EMIR DQR experience, as well as other elements related to EMIR and SFTR data quality are covered in a dedicated ESMA data quality report. The report covers the progress made to date in improving EMIR data quality for regulatory and supervisory use and concludes that, while good progress has been made, additional efforts are needed by NCAs and ESMA to further improve EMIR data quality.
b. CSSF DQAP2020
In 2020, the CSSF launched multiple EMIR data quality actions, referred to as the CSSF Data Quality Action Plan 2020 (CSSF DQAP2020), which focused on the identification of data quality issues and follow-up with selected entities based on specific criteria until the issues are corrected or the abnormal values are justified.
The key principles of the CSSF DQAP2020 are:
- Ranking of entities: In order to ensure proportionality, the ranking of entities was performed by aggregating all the data quality issues occurrences for the 14 selected fields by reporting counterparty.
- Selection of entities: A selection of the top entities with the highest scores have been considered in each exercise.
- Communication with selected entities: The relevant CSSF department contacted the selected entities to clarify or correct identified issues (i.e. hits on data quality controls for the data fields in scope).
- Follow-up approach with selected entities: Entities have been requested to confirm or correct the identified abnormal values and to correct the identified issues to improve the quality of the data reported to the TR. In order to facilitate the correction of data quality issues and allow entities to fix the errors identified by the CSSF, some information such as the UTI, report submitting entity and fields in break have been provided by the CSSF to facilitate the timely correction of identified data quality weaknesses of existing trades and future trades.
Although the EMIR reporting started a few years ago, the overall quality of the data reported to TRs still leaves room for improvement. Among the most commonly identified reporting weaknesses made by entities the CSSF notes:
- Use of Client Codes instead of LEIs
With regards to the fields [1.3 Type of ID of the other Counterparty] and [1.4 ID of the other Counterparty], there remains entities that report client codes instead of LEIs when the other counterparty is in fact an undertaking. The CSSF wishes to remind the market that, as per TR Answer 10(a) and 10(b) of ESMA EMIR QA, LEIs must be used unless “customers are individuals not acting in business capacity”.
Where a trade is concluded between two counterparties subject to EMIR, meaning that both must report their leg of the trade to the TRs, the latter are expected to reconcile both sides of the submitted reports. The reconciliation is performed in two steps:
- Pairing: The pairing at the level of the TR is processed using the fields [1.2 Reporting Counterparty], [1.4 ID of the other Counterparty] and [2.12 Trade ID]. Hence, the CSSF stresses the importance of reporting a common Trade ID (UTI) for each transaction by both counterparties which is further detailed in Article 4a of ITS 1247/2012 which clarifies the responsibilities for UTIs generation, where no bilateral agreement has been agreed between counterparties.
- Matching: Once both sides are paired, the TR matches the various reporting fields.
Transactions that are neither paired nor matched could be considered as an indicator for unstable processes with regard to EMIR reporting duties.
- Inconsistencies in reporting
For fields like [1.7 Nature of the reporting Counterparty] and [1.16 Clearing threshold], many entities do not report consistently. The CSSF reminds the market that an entity’s nature can only be unique and that, should the entity change its status (e.g. from NFC+ to NFC-), it should modify all previously reports to report its new nature consistently.
- Absence of reporting of some fields
Pursuant to Article 9 of EMIR, as well as Articles 1 and 3 of CDR 148/2013, as amended by CDR 2017/104, and further clarified by TR Answer 3b of the ESMA EMIR QA, FC and NFC+ must provide a daily valuation for outstanding contracts. However, the CSSF noted that some FC and NFC+ leave the field [1.17 Value of contract] blank or report “0” whilst they should be populating it. It is unclear whether those are reporting mistakes or indicative of a breach of Article 11(2) of EMIR by those entities.
Pursuant to Article 9 of EMIR, as well as Articles 1 and 3 of CDR 148/2013, as amended by CDR 2017/104, and further clarified by TR Answer 3a of the ESMA EMIR QA, FC and NFC+ must provide a margin for outstanding contracts unless certain circumstances are met, e.g. an FC entering into derivative transactions with an NFC-. However, the CSSF noted that some FC and NFC+ leave the field [1.26 Variation Margin Posted] or [1.30 Variation Margin Received] blank or report “0” whilst the transaction is not reported as uncollateralised in field [2.21 Collateralisation]. They should be populating it. It is unclear whether those are reporting mistakes or indicative of a breach of Article 11(3) of EMIR by those entities.
The CSSF noted that some entities inappropriately interpreted the EMIR validation rules, in particular for optional fields like [2.27 Maturity date]. Following the TR Answer 20a and 20b of the ESMA EMIR QA, “all fields specified in the RTS are mandatory” meaning that, where the field is relevant, it shall be populated. With the exception of CFDs, the CSSF therefore expects entities to populate the maturity date.
- Abnormal/Unusual values reported
In some instances, entities report abnormally high amounts in fields [1.17 Value of contract], [1.26 Variation Margin Posted], [1.30 Variation Margin Received] or [2.20 Notional]. They can be caused by the wrong placement of the decimal separator, the reporting of the wrong currency or additional 0s added at the end.
- Late confirmation of trades
Some counterparties populate the field [2.32 Confirmation timestamp] with a date that is not the day following the execution of the transaction, which is the regulatory deadline as required in Article 12 of CDR 149/2013, which might lead one to consider either that the transaction was confirmed late or that the information is incorrectly reported. The CSSF draws attention to OTC Answer 5(c) of the ESMA EMIR QA which further clarifies that “the timely confirmation of OTC derivative contracts applies wherever a new derivatives contract is concluded, including as a result of novation and portfolio compression of previously concluded contracts”.
- Rejection Rates
Some entities show concerning levels of rejected reports. The CSSF considers high rejection rates as indicators of poor data quality by the entities.
Additionally, the CSSF reminds market participants that for a report to be valid, it must be accepted by the TR and that the simple submission of a report to a TR without ensuring its acceptation by the latter means that the transaction was never reported which is a breach of Article 9 of EMIR. The CSSF encourages market participants to actively follow-up on non-acknowledged (NACK) reports to ensure their timely submission and acceptation by the TR.
2. Data Quality Campaigns 2021
a. ESMA EMIR DQR 2021
In its 2021 Annual Work Programme, ESMA will further focus on the enhancement of the data quality and supervisory convergence with an objective to facilitate data-driven supervision at European level. This will lead to an increase in the data quality exercises performed by NCAs, including those by the CSSF.
Similar to the exercise performed in 2020, the CSSF will continue to participate in the ESMA EMIR DQR and request justifications from the top entities identified as well as continue to follow-up on the issues identified during the previous ESMA EMIR DQR exercises.
b. CSSF DQAP2021
In 2021, the CSSF continues to monitor the data quality issues identified in 2020 and will extend its monitoring to ensure proper reporting of fields (non-exhaustive list) like:
- [1.6 Corporate sector of the reporting counterparty] which the CSSF expects to be consistent across all reports
- [1.19 Valuation timestamp] where the CSSF expects valuations to be reported within the regulatory deadlines as defined in Article 11(2) of EMIR, as well as Article 3 of CDR 148/2013 as amended by CDR 2017/104.
- [2.37 CCP] as it appears that many counterparties report their Umbrella fund or another sub-fund as the clearinghouse.
Additionally, the CSSF will also monitor duplicated reporting (i.e. where a trade is reported twice by the counterparty with the same other counterparty and trade ID combination). Article 9(1e) of EMIR specifies that the details of derivative contracts are to be reported without duplication.
c. Ad hoc controls
In addition to the previously mentioned issues identified, the CSSF intends to launch ad hoc data quality review exercises focusing on individual fields.
The CSSF also warns entities to ensure that they report the details of any derivative contract they have concluded and of any modification or termination of the contract following Article 9 of EMIR. Any entity failing to comply with this obligation (e.g. with absence of reporting of its side of a transaction) is deemed to have committed a serious breach of the reporting obligation.
3. Monitoring to be ensured
For the 2020 campaigns documented above, only a limited number of entities were contacted. The CSSF expects all market participants to monitor on an on-going basis their EMIR reporting and to ensure the quality of the data reported to their respective TRs. If an entity notices that its reporting system does not ensure the quality of its EMIR reporting, it shall proactively take relevant steps to remediate the identified reporting errors.
Moreover, the CSSF draws attention to the fact that validation rules are not intended to identify all potential errors and omissions. Therefore, the fact that a transaction report was accepted by the TR does not necessarily mean that the submitted report was complete and correct.
1 FC: Financial Counterparties, NFC+: Non-Financial Counterparties above the clearing threshold, NFC-: Non-Financial Counterparties below the clearing threshold