Industry Perspectives Q&A for the DSB Newsletter
Questions for Authorities - ESMA
Name: Joanna Lednicka
Title: Policy Officer for ESMA
1. What is your view on the importance of data standards and what benefits are seen as a result of standards adoption?
Harmonisation of reporting and use of, where available, international standards have always been at the heart of ESMA rulemaking. The use of standards certainly brings important benefits, as well as considerable cost efficiencies to the industry if the same type of information is to be provided to the regulators always in the same way. From the regulatory use perspective the standardisation increases very tangibly the quality and usability of the data.
2. Tell us about the role of ESMA in standards development and implementation, both locally and globally?
ESMA has been at the forefront of the standardisation of transaction reporting. For example, with regards to derivatives reporting, already the first version of the technical standards developed in 2012 relied on the use of international standards for reporting (LEI, ISIN, other ISO standards to identify or specify venues, currencies, dates and timestamps). While these were steps in the right direction, the practical implementation of EMIR reporting in 2014 proved that this is not sufficient and only a full standardisation of reporting messages can ensure consistent reporting and highest quality of the data. Leveraging on that experience ESMA launched in 2016 a centralised system for provision of the data from the Trade Repositories (TRs) to the authorities, which is using a common technical format, ISO 20022 XML. Initially, this standardisation was limited only to the TRs-authorities channel, with a view not to pre-empt the results of the ongoing work on the global guidance on harmonisation of reporting of OTC derivatives to the TRs. In the end, the regulators agreed at international level that such guidance should also be brought under the umbrella of ISO standards via the development of an ISO 20022 message covering all globally agreed data elements. Message developed previously by ESMA served as a starting point for this global message.
ESMA is using also ISO 20022 messages for reporting of transactions and instrument reference data under MiFIR as well as for reporting of securities financing transactions under SFTR.
3. Given the breadth of enhancements to regulatory reporting over the last decade, and the continuing evolution, what is the role of harmonisation and supervisory convergence?
The continuous efforts to ensure harmonisation of reporting are equally, if not even more important in these circumstances as the parallel non-coordinated developments could result in divergences and reduce the benefits from the harmonisation goals that were already achieved. Thus we see the global harmonisation as a continuous collaboration rather than as a one-off exercise.
Similarly, the supervisory convergence with regards to the implementation of the global guidance is important to ensure a level-playing field and to fully exploit the benefits of the harmonisation.
4. The Unique Product Identifier (UPI) is currently being developed for global adoption and implementation. Why is the UPI necessary? How will it help the industry? How will it complement existing standards that are in use?
UPI is one of the cornerstones of the global agreements on the harmonisation of the reporting of OTC derivatives. From the regulators perspective it is an indispensable element to enable consistent and efficient data aggregation.
We firmly believe that implementation of an international IP-free standard for a unique identification of derivative products will also help the market participants to address challenges stemming from the current data fragmentation in this area.
It is also worth mentioning that in the EU many derivative instruments are already identified with an ISO standard, namely 6166 ISIN code, pursuant to the requirement under MiFIR under which all derivatives admitted to trading or traded on a trading venue as well as certain derivatives traded on a systematic internaliser must be identified with an ISIN. Having this in mind, ESMA decided that those derivatives should continue to be identified in a consistent manner under both MiFIR and EMIR regulations so that the entities reporting in the EU can rely on a single code to identify a given product. Furthermore, given the strict hierarchy between the OTC ISIN and the UPI, use of the OTC ISIN as an identifier in the report to the TR, would not obstruct the possibility to still rely on the UPI for the global aggregation, while retaining consistency of the reporting in the EU.
Where UPI comes into play on its own, is the identification of the remaining OTC derivatives that so far were not required to be uniquely identified in the regulatory reporting under EMIR. In this context the use of UPI will be a critical enhancement and will complement the descriptive information that was reported so far (CFI classification and certain attributes of the products).
5. What are the next steps for UPI implementation in your jurisdiction and what is the expected timeframe for the mandate coming into effect?
ESMA has enshrined the requirement to use UPI in the implementing technical standards on reporting under EMIR REFIT (available here). These standards will become applicable on 29 April 2024. From this date, the reporting entities will need to use UPI to identify the relevant products (as well as to comply with all other requirements introduced in the revised rules, such as reporting to TRs using standardised ISO 20022 XML messages).
ESMA is currently finalising its work on the Guidelines on reporting and on other accompanying technical documentation to support industry implementation of the new rules. The full package of guidance and technical documents is expected to be released before the end of this year.
6. As many firms will have multi-jurisdictional reporting obligations, what efforts are being made to minimise the impact of diverging reporting requirements?
As mentioned above, the global harmonisation is not a one-off exercise, but rather a continuous collaboration to ensure that developments in market practices or new questions on interpretation of the internationally agreed rules can find, to the extent feasible, a consistent regulatory response across the globe and bring an increased data quality for authorities, while keeping the costs for the market lower. This cooperation and coordination in the area of derivatives reporting is performed by CDIDE, a sub-committee under the ROC.