Monitoring the quality of transaction reports received under Article 9 of EMIR

This communiqué concerns 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 2021, as well as on the topics that are the subject of dedicated campaigns during the year 2022.

In this communiqué, references to a specific “Field” refer to the fields in Table 1 and Table 2 of the Annex to RTS 148/2013.

In 2021, following ESMA’s EMIR Data Quality Review (ESMA EMIR DQR), the National Competent Authorities (NCAs) in the EU/EEA contacted the 5 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 11 counterparties. These counterparties were requested, inter alia, to justify the reasons for the shortcomings and the remedial actions that had been taken to avoid such issue going forward. Additionally, they were also requested to confirm that the information submitted to the TR matches that of 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.

In 2021, the CSSF launched multiple EMIR data quality actions, referred to as the CSSF Data Quality Action Plan 2021 (CSSF DQAP 2021), which focused on the identification of data quality issues and follow-up with selected entities based on specific criteria until the issues were corrected or the abnormal values were justified.

The key principles of the CSSF DQAP 2021 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 27 selected fields by reporting counterparty.
• Selection of entities: A selection of the top entities with the highest scores were 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 were requested to confirm or correct the identified abnormal values and to correct the identified issues in order 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, the report submitting entity and fields in break were provided by the CSSF to facilitate the timely correction of identified data quality weaknesses of existing trades and future trades.

In addition, in 2021 the CSSF initiated an ad hoc data quality control (CSSF DQAP Adhoc) focusing on very few selected reporting fields for a larger number of entities. During this exercise the CSSF focused on the fields [1.6 Corporate sector of the reporting counterparty], [1.7 Nature of the reporting counterparty] and [1.16 Clearing threshold].

Although 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 regard to the fields [1.3 Type of ID of the other Counterparty] and [1.4 ID of the other Counterparty], there remain 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 QA², LEIs must be used unless “customers are individuals not acting in business capacity”.

• Incorrect identification of the CCP

With regard to the field [2.37 CCP], many counterparties provide the LEI of their bank or broker, which is incorrect, as the expected value is that of the unique code for the CCP that cleared the contract.

• Reconciliation

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 the UTIs generation where no bilateral agreement was 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 the previous reports to report its new nature consistently.

For the field [1.6 Corporate sector of the reporting counterparty] many entities were identified as reporting inconsistent values. The CSSF wants to highlight that the value that needs to be reported in this field for NFC shall be based on the statistical classification of economic activities in the European Community (NACE), as defined in Regulation (EC) No 1893/2006 of the European Parliament and of the Council, of the reporting counterparty (i.e. not that of the group)³.

In addition, the CSSF reminds the market that the above-mentioned fields and other fields⁴ are expected to be provided by the NFC- to the FC reporting on its behalf pursuant to Article 9(1a) of EMIR as amended by EMIR REFIT considering that the latter cannot be reasonably expected to possess this information. In fact, as per TR Answer 54(a) of ESMA EMIR QA, “it is understood that the FC cannot not be expected to possess the reportable details characterising the NFC- itself (e.g. sector of the counterparty) nor the details of the execution and clearing arrangements entered into by the NFC itself (e.g. identity of the NFC’s broker or of the NFC’s clearing member)”.

• Absence of reporting of some fields

Pursuant to Article 9 of EMIR, as well as Articles 1 and 3 of RTS 148/2013, as amended by RTS 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 these entities.

Pursuant to Article 9 of EMIR, as well as Articles 1 and 3 of RTS 148/2013, as amended by RTS 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 must populate it. It is unclear, whether those are reporting mistakes or indicative of a breach of Article 11(3) of EMIR by these 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]. This may be caused by the wrong placement of the decimal separator, the reporting of the wrong currency or additional zeros added at the end.

• Late valuation/confirmation of trades

For the field [1.19 Valuation timestamp], we note that some FC as well as NFC+ do not report daily valuations as defined in Article 11(2) of EMIR, as well as in Article 3 of RTS 148/2013, as amended by CDR 2017/104. The CSSF reminds the entities in scope of this obligation to report daily the mark-to-market value of their outstanding contracts. Where market conditions prevent marking-to-market, reliable and prudent marking-to-model shall be used.

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 RTS 149/2013. This might lead one to consider that either 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.

In its “2022 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 data quality exercises performed by NCAs, including those by the CSSF.

Similar to the exercise performed in 2021, 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.

In 2022, the CSSF continues to monitor the data quality issues identified in 2021 and will continue to perform data quality controls leveraging tools and practices experienced in the previous years.

The CSSF observes that supervisory pressure and close monitoring of the implementation of remedial actions are needed to ensure a material long-term impact on the improvement of the quality of data by all relevant entities.

For the 2021 campaigns documented above, only a limited number of entities were contacted.

The CSSF expects all market participants to have processes, systems and controls in place to ensure completeness, accuracy and timeliness of the reported information. Furthermore, they are expected to actively engage in detecting and resolving any identified report rejections, reconciliation breaks and other data quality issues in the already reported data.

The CSSF 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 the absence of reporting of its side of a transaction) is deemed to have committed a serious breach of the reporting obligation.

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.

Counterparties are strongly encouraged to leverage on the data required by regulatory reporting regimes in their own internal processes (e.g. risk management and compliance control). In doing so, counterparties will have the appropriate incentives to report accurate data and will be in a position to better exploit the benefits of consistent data reporting across the regulatory frameworks.

Finally, where breaches of EMIR obligations are identified, the CSSF will take any necessary supervisory measures⁵ that it deems appropriate, taking into consideration the nature and seriousness of the infringements as well as the fact that they are not solved promptly.