Trade reporting regulations such as EMIR, SFTR and MiFIR articulate key requirements which aim to reduce systemic risk and market misconduct. The architecture of these regulations is not merely a single piece of regulation but contain other layered components, together working as an interconnected framework. EMIR and SFTR (for both EU & UK) essentially have the same framework and there are similarities with MiFIR (EU & UK).
These regulations have various levels within their framework.
For European regulations:
- Level 1 consists of the law itself
- Level 2 consists of the Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) which elaborates on the law.
- Level 3 is made up of guidance, opinions and tools
- Level 4 includes annexes and appendices on the technical templates to assist firms with the technical details associated with their trade reporting.
Layers of the regulation and their application
Level 1: Core Regulation
This level is legally binding and sets out the core obligations and framework of the regulations. Firms are required to report their in-scope transactions to a trade repository or authorised reporting mechanism (ARM) (as applicable).
The core obligations of the below European regulations deal with the following;
- EMIR – clearing requirements, reporting to trade repositories, risk mitigation for non-cleared derivatives and trade repository supervision;
- SFTR – transparency of securities financing transactions (including repos and securities lending transactions); and
- MiFIR – transparency and transaction reporting to ARMs and national competent authorities (NCAs) and trading of instruments on regulated platforms.
Compliance does not stop at this level. Market participants are to observe and comply with all the layers below. It is within this level where the proposal of the regulation commences with the European Commission (EC) and then goes to the European Parliament and the Council (EP&C) for debate, amendment and adoption.
Level 2: Details Obligations
This level is legally binding like Level 1 and consists of delegated legislation dealing with the detail of the standards on transparency (listed below), transaction reporting and trading obligations:
- RTS: The RTS assists by showing how to comply with Level 1 obligations and are extremely prescriptive.
- ITS: The ITS specifies information on the XML format and submission process.
At this level, ESMA is provided with the powers to provide practical details. Drafts of the RTS and ITS prepared by ESMA are provided to the EC for adoption. The EC may also consult with the EP&C who has the right to veto or scrutinise.
Level 3: Interpretation
This level sets out materials such as guidelines, opinions and validation rules. (For example, for EU EMIR, see ESMA’s Guidelines and Q&As). Such materials serve as tools for interpretation and explanation of the obligations and standards i.e. how to set out, validate and submit the reports that are required pursuant to Level 1 and Level 2.
This level is within the scope of ESMA i.e. there is no involvement of the EC or EP&C. Level 3 (and below) is not legally binding. However, in practice, firms are required to follow the Validation Rules and Guidelines as trade repositories and NCAs enforce them.
Annexes and Appendices: Technical Detail
This is where there is raw technical detail, which can be analogous to being the ‘nuts and bolts’ of the whole framework. It consists of the actual table detailing the reportable fields (currently 203 fields for EU EMIR). For example, for EU EMIR, this level contains the annex on XML schemas and ISO messages and also the Validation Rules which are published as excel appendices setting out conditions when fields must be populated together and allowable codes or formats (e.g. UTI format and product identifiers).
How can TRAction assist?
If you need assistance in understanding how EMIR, SFTR, MiFIR, ASIC or other regulatory trade reporting regimes apply to your firm or if you require any other help with your trade reporting, please contact us.
