AGEFI Luxembourg - mars 2024

Mars 2024 5 AGEFI Luxembourg Economie / Banques E MIR REFIT (EMIR REgulatory FITness Program), the large- scale, mandatory regulatory update to the existing European Market Infrastructure Regulation (EMIR) derivative transaction re- porting rules, will soon come into effect on 29 April 2024. With this im- minent go-live date, Luxembourg financial and non-financial firms with derivative exposure need to ensure they are compliant with the new reporting rules. The requirements apply irrespective of whether firms report directly to a trade reposi- tory or delegate their obligations to a third party. InJune2022,newstandardsforEMIRreportingwere adoptedtoenterintoforceinApril2024.InDecember 2022, the EuropeanSecurities andMarketsAuthority (ESMA) also published extensive supplementing guidelines (1) forreportingunderEMIR(EMIRGuide- lines) aimedat further enhancingharmonizationand standardizationof reporting across theUnion. ItisalsoimportanttonotethatUKlegislatorsareper- forming their own review of EMIR, commonly re- ferred to as UKEMIR, whichwas onshored intoUK legislationpost-Brexit.Luxembourgfirmswhichhave derivativeexposureinboththeEUandtheUKshould considertheimpactsofthesenewsetsofrulesontheir reportingmodels,aswellasbeawareofthedivergent requirements anddelivery timelines between theEU andUKEMIRREFITprograms. Three key areas of change to reporting rules More than just an update, the new rules entail in- creasedtechnicalchallengesandcomplexityofreports requiringsignificanttechnicalandoperationalimple- mentation efforts. Newdata needs The number of reportable fields will increase from the current 129 to 203. Beyond this, the definitions and expected values of multiple existing fields de- mandareviewofthecurrentreportinglogic.Specific examples include new “action type” fields and the additionofthe“eventtype”informationaimedatin- creasing the transparency around the exact purpose and specification of a transaction.Another challenge lies in the newfields relating to counterparty details, such as the nature, corporate sector, and clearing thresholdof the counterparty to the trade, as someof this informationmay, as of today, not be available in firms’ client information databases. The new reporting guidelines finally address the issue aroundexact product classificationandrelated reference data, an issue that has caused significant ambiguity in the reportingof someOTCderivatives in the past. The Classification of Financial Instru- ment (CFI) code pertaining to the instrument must be included for all trades, irrespective of whether theyare executedona regulated tradingvenue (Ex- change TradedDerivatives (ETD)) or entered “over the counter” (OTC). For ETD, an additional ISINwill be required, while for OTC transactions, a unique product identifier (UPI)will be become amandatorypart of the report to be submitted. ISO20022 implementation To further harmonize technical reporting standards, compliance with the ISO 20022 XML format will be mandatory for the transmission of data to a trade repository. While this allows for richer and more structured data, implementation will be challenging for companies stillworkingwithCSV (comma-sepa- ratedvalues),FpML(FinancialproductsMarkupLan- guage) andother legacy formats. Phased approach Beside the need to comply with the updated UK EMIR REFIT framework, all existing open positions (including those entered before the go-live) must be uplifted to the new expected standards within six months after the go-live. Any post-trade lifecycle events on open positions, such as valuation updates ormodifications,mustalsobereportedusingthenew reporting standards introducedbyEMIRREFIT. Hence, while impacted firms currently focus their transformation efforts on new trades, a second im- plementation phase is likely to be needed after April of this year. Governance and controls:Acritical area of attention for Luxembourg firms Large parts of the Luxembourg financial industry, inassetmanagement, relyonderivative counterpar- ties or other thirdparties toperformEMIRreporting on their behalf. Thesefirmsmaynot be impactedby the full extent of theabove technical changes, but still need to put in place appropriate governance and control arrangements to ensure the reporting per- formedontheirbehalfcomplieswiththenewreport- ing guidelines. This is particularly important given the new requirements on notifying the CSSF about under-, over- or misreporting – an obligation to which professionals in regulatory roles, such as boardmembersandconductingofficers,shouldpay particular attention. To address associated risks, a proper governance framework, developed with the involvement of key stakeholders andseniormanagement, isnecessary to monitor key metrics around data quality and issue resolution. Appropriate committees are also needed to make decisions on the key issues to be com- municated to theCSSF. Consequence of Brexit: Divergence of EUandUK EMIR timelines and requirements Following Brexit, many practitioners were wary that aUKoutside theEUwill lead to reg- ulatory divergence and result in operational complexity in the mid to long term for firms operating on both sides of the Channel. As previously indi- cated, UK legislators are also performing a review of the UK EMIR equivalent transaction re- porting regime. In February 2023, the Financial Conduct Au- thority (FCA) published final TechnicalStandardsandnewrules fortraderepositoriesregardingupdatesto the derivatives reporting framework under UK EMIR, along with draft UK EMIR validation rules andXML schemas. (2) With a confirmed go-live of 30 September 2024 and differing requirements, firms will need to prepare for significant divergence be- tween EU andUKEMIR reporting regimes. After 29 April of this year, there will be differences in reporting requirements and supporting technol- ogywhile UK EMIR remains on existing rules until 30 September. Entities which report under both regimeswill haveafive-monthperiodduringwhich theyarerequiredtocomplywiththenewEUregime andtheoldUKregime.OncebothEUEMIRandUK EMIR REFIT have been implemented, there will be anongoingdivergenceinreportingrequirementsbe- tween the two markets, for example one field with several different validation rules. Considering the UK’s strong financial services ties with Luxembourg, many local firms stand to be im- pacted by the new reporting rules. The good news is that Luxembourg firms active in the UKmarket still have time to prepare for these requirements. How- ever, this divergence in rules adds considerable com- plexity to implementationandongoing supportmay be required in production, including resource man- agement, testing, client reference data consumption and storage. What is comingnext? Thego-livedateformandatoryimplementationisfast approachingandmarketparticipantsinLuxembourg needtoensuretheyareonschedulewithregardtothe newregulatoryrequirements.Facedwithasignificant amount of work to update existing models and processes, as well as considering deviating regimes whereapplicable,Luxembourgfirmsshouldprepare for these changes as amatter of priority. Looking ahead on the regulatory change agenda, this is not the end of the developments in relation to EMIR. In December 2023, the Council of the EU adoptedamandatetostartnegotiationswiththeEu- ropeanParliamentonareviewoftheEuropeanMar- ket Infrastructure Regulation. The review aims to make theEUclearing landscapemoreattractiveand resilient, to support the EU’s open strategic auton- omyand topreserve theEU’sfinancial stability. The text is currently under discussion by the Parliament which has announced that the expected sitting date will be at the end of April 2024. Depending on the date of adoption, EMIR III may already apply in 2025.Thus,EMIRREFITshouldnotbeseenasaone- time exercise but rather as a preparation for the up- coming EMIR III which will, by no doubt, bring operational changes to entities in scope. Jens SCHMIDT EY Luxembourg Partner, Wealth & Asset Management Consulting Leader Clément ROBERT EY Luxembourg Senior Manager, Regulatory Compliance 1)GuidelinesforReportingunderEMIRFinalReport,ESMA,14 December2022 2)Reportingobligation,FCA EMIR REFIT: What do you need to know ahead of the 29April go-live date? INVESTMENT FUNDS IN LUXEMBOURG Neue kompakte deutsche Version

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