ESMA Data Quality Report 2023: What does it say about EMIR?

As well as seeing the much discussed EMIR Refit, 2024 also marks 10 years of EMIR reporting. That’s 10 years of submissions, rejections, errors, omissions, reconciliations, assurance checks, process improvements, revised rules, webinars, seminars, conferences etc. 

As a general trend, Kaizen has seen (and helped facilitate) the improvement of reporting data quality, via assurance controls, improving industry understanding, checks and balances implemented, explanatory guidance and improvements to the validation rules. Yet this year’s 2023 Report on the Quality and Use of Data (DQR) focuses on the most basic of data quality concepts that firms should easily adhere to by now, accompanied with equally lacklustre expectations for meeting those reporting requirements. Whilst Kaizen are supportive of the DQR findings, we feel ESMA could have gone further.

Data quality indicators 

Many EMIR reporting firms will find this year’s DQR useful, as ESMA includes a reasonable range of data quality issues under scrutiny such as large notional amounts, incorrect maturity dates, mismatch of trades and positions between counterparties, and even late or missing valuations. Helpfully ESMA has also included a description of its implemented 19 Data Quality Indicators (DQIs) in Appendix 6.1.1, although reporting counterparties would greatly benefit from a little more granularity to quantify the empirical checks used, but for now, this is a good start.

The DQR provides useful descriptions and examples of how EMIR reporting is used in practice by national competent authorities (NCAs) as shown in Section 3. ESMA describes how the data influences a wide range of policy decisions, interestingly many of which differ from its original intended use of monitoring risk and derivative exposure. Critics that still question the benefits of EMIR reporting may take comfort in the non-exhaustive list of documents in Appendix 6.3 which show ways in which the derivative data is used.

Reconciliation issues

Firms should however not take comfort in the differing volume of outstanding transactions between counterparties. This notion of the number of open transactions between the two counterparties to the trade, is very basic, and after 10 years, firms should be getting this right. Reporting firms should have suitable reconciliations in place to monitor and remediate both the execution of derivatives vs those reported and to monitor the Inter-TR reconciliation reports, which highlights such discrepancies. The same can be said for position level submissions reported differences between counterparties. The submission of derivatives and agreement of how many trades or positions are to be reported is arguably the most basic part at the very origin of a firm’s reporting journey. Market participants, reporting vendors and ESMA (with regulatory oversight) should expect more, namely that firms are far more able to report matched reports to a trade repository.

Valuations and collateral

Valuations and collateral continue to be a data quality theme, as seen in all previous DQR iterations. ESMA notes a positive reduction in late and missing valuations, but again, such an improvement on a very basic aspect of EMIR reporting should not be applauded, but expected to be held at a higher standard to ensure the completeness, accuracy and usability of reported data. ESMA and NCAs should be asking why, after 10 years, can the simple notion of “daily valuation updates” not be easily achieved?  In previous years, ESMA used a 15-day calculation as an indication of late valuations in order to judge the change in data quality, rather than calculate using true daily updates required, and it would be useful to have a little more calculation transparency here too.

Maturity dates

ESMA comments on the issue of abnormal maturity dates, which admittedly is a little more advanced than some of the other data quality issues described. For maturity dates, the findings are not quite so favourable, as the abnormal maturities are not falling at a rapid rate, indicating data quality is not correspondingly rising for this statistic. ESMA does however miss a useful opportunity to mention EMIR reporting’s confusing notion of ‘optional fields’, of which ‘maturity date’ is one such example. Optional fields do not mean the reporter has a choice to complete that field, but that the field should be populated where relevant to the derivative executed. Optional fields are often (incorrectly) chosen not to be reported, and cause confusion over the true requirements of an already complicated reporting regime. Notably, ESMA also apportions blame for the notional values differences and number of trades outstanding between clearing members and CCPs on to this maturity date field on page 17.

Great expectations

The DQR describes overall NCA activity and targets of data quality discrepancies over the last 12 months. Unfortunately, expected standards are not necessarily shown to be any more rigorous.  For example, ESMA explains that when NCAs addressed with firms, only 34 of 163 identified issues were resolved. Then, to add insult to injury, of 116 issues not resolved, ESMA describes ‘substantial improvement’ in 15% of issues. Both statistics seem pretty mediocre, notably when, these are issues being actively chased by the regulators.

Such statistics erode confidence and motivation of market participants to pursue a high standard of data quality. However with the introduction of the EMIR Refit, firms can expect this to change and will see a much higher level of scrutiny for their EMIR reporting going forward.  

Over and under reporting

And finally, another reoccurring theme is the issue of over and under reporting when trade repositories relay reported data to ESMA. Whilst ESMA acknowledges this is a key issue, such occurrences must be stamped out. Market participants spend a huge amount of time, money and other resources to report these required derivatives, and as a minimum should have confidence that the reports will be routed correctly, according to agreed reporting mandates.

What’s next?

Overall, the detail included in the latest DQR is most welcome, and shows whilst there are some data quality improvements, such improvements have only been seen on the most basic of reporting requirements. As we head into year 11 of EMIR reporting and get to grips with the wholesale change under EMIR Refit, market participants should expect a high level of data quality scrutiny to be analysed, commented on and enforced by those with regulatory oversight.

• Read our analysis of the MiFIR aspect of the report from Matthew Vincent or the SFTR angle from Jonathan Lee.
• EU EMIR Refit is now live.  But is your reporting accurate? For an independent, forensic review of your firm’s new EMIR reporting, please get in touch.