EMIR: Oversight of Delegated Reporting

Gerard Gilsenan (Fund Recs), and Daniel Lawlor (Aquest) highlight key points on the oversight of delegated EMIR reporting, which covers relevant regulatory requirements and expectations. The article sets out thoughts on how Irish authorised fund management companies (‘ManCos’) might approach the oversight of EMIR reporting where the task of submitting reporting has been delegated to a third party.

Introduction

The regulatory surge in the wake of the 2008 financial crisis included a plethora of new reporting obligations. These were designed to equip financial regulators with the data they required to monitor financial stability and identify if there appeared to be a build-up of systemic risk. Amongst this cohort of new reporting obligations was EMIR – the European Market Infrastructure Regulation – which required financial counterparties (FCs) to report details of all derivative contracts to trade repositories. FCs are allowed to delegate the task of submitting EMIR reporting to another party, but they remain responsible. A significant number of Irish authorised funds and fund management companies (‘ManCos’) avail of this flexibility with EMIR reporting typically being delegated to the investment manager, broker or counterparty (the ‘Reporting Delegate’).

EMIR REFIT

Never satisfied to stand still, the European regulatory landscape has advanced such that EMIR has been revamped by EMIR REFIT which comes into effect in the EU on 29 April 2024. One of the changes introduced is a clarification that ManCos bear responsibility for EMIR reporting on behalf of the investment funds they manage. EMIR REFIT introduces changes to harmonize the classification of AIFs and to include an exemption from the clearing obligation for FCs below a certain volume threshold.

EMIR REFIT also increases the number of reportable fields to 203 and changes the nature and format of information submitted to trade repositories under EMIR reporting requirements. Trade repositories will have increased responsibility to report breaches and reconcile exceptions to reporting entities.

Central Bank Messaging

In tandem with pushing the EMIR reporting obligation on ManCos, the Central Bank of Ireland (‘Central Bank’) has been beating the drum (with the tone of that beat becoming gradually more ominous) about the quality of the data reported and the ManCo’s oversight of the Reporting Delegate. EMIR data is increasingly being used for monitoring and market supervision purposes by teams right across the Central Bank. So, with more eyeballs on the reported EMIR data, it is ever-more important that this information is of good quality and correct.

With that in mind, the Central Bank highlighted EMIR reporting data quality and oversight as areas of particular interest in both its 2022 and 2023 Securities Markets Outlook Reports. In 2022, the Central Bank advised:

“Firms can expect increased engagement with the Central Bank in respect of data quality issues. This engagement may take the form of supervisory action where it has been identified that firms do not have sufficient frameworks in place in order to meet their reporting obligations and to ensure data is reported in a complete, accurate and timely manner.”

In the recently published 2023 edition, the Central Bank noted improvements in data quality but said it is still seeing data quality issues in a number of key areas. It reiterated what it expects from firms:

• Submit accurate data on a timely basis in line with their obligations;

• Have appropriate oversight of data reporting from Board level down (including where data reporting is outsourced);

• Ensure escalation channels are in place to promptly address data reporting issues; and

• Engage with the Central Bank as soon as possible after any data issues are identified. Failure to do so may warrant supervisory intervention up to and including enforcement action.

Oversight of Delegated EMIR Reporting – Regulator’s Expectations

Our recent White Paper on the oversight of delegated EMIR reporting brings together what the Central Bank has said about how a ManCo should oversee its delegates both in general terms (via CP86 and the Cross-Industry Guidance on Outsourcing) and in relation to EMIR reporting specifically (via its 2019 ‘Dear Chair’) letter.

From the Central Bank’s perspective, it is important that ManCo’s perform due diligence on the Reporting Delegate both prior to appointment and on an ongoing basis thereafter. ManCos must also closely oversee the activities of the Reporting Delegate on a day-to-day basis including through receipt of reporting from the Reporting Delegate and through independent verification, where practicable.

ManCos should:

• clearly identify and approve the appointment of a delegate for any task and document the delegation arrangement in writing with reporting requirements and key performance indicators; and

• allocate responsibility for oversight of the delegated task to a specific Designated Person and ensure they receive regular comprehensive reporting from the delegate. The Designated Person should constructively challenge delegates and escalate material issues to the board immediately. The frequency of oversight should be tailored based on the level of activity in the relevant fund.

ManCos should also consider instances where relying on compliance confirmations from delegates might arise and how it could be mitigated.

Oversight of Delegated EMIR Reporting – Practical Approach

The White Paper also sets out some thoughts on how ManCos might go about overseeing Reporting Delegates in a way that meets regulatory requirements and the regulator’s expectations and broadly aligns with industry practices. The suggested approach to oversight of EMIR reporting includes:

Appointment of Reporting Delegate

• The appointment of a Reporting Delegate should be consistent with the ManCo's documented outsourcing strategy, business strategy, and risk management framework.

• Due diligence should be carried out by the ManCo on the Reporting Delegate, both prior to appointment and on an ongoing basis which could in the form of an annual compliance review. This process should ensure that the Reporting Delegate can perform EMIR reporting function reliably and professionally.

• The performance of the delegate should be documented in a written agreement that includes regular reporting of key performance indicators and rejection reports.

Oversight of Delegate

• Oversight of compliance with EMIR reporting obligations should be assigned to a specific Designated Person who is experienced, expert, and has the capacity to carry out the oversight role effectively.

• The Designated Person should review the completeness and accuracy of the reports, receive and review regular reporting from the Reporting Delegate, and reconcile data reported to the trade repository by the Reporting Delegate with the ManCo's own internal systems.

• The Reporting Delegate and the Designated Person should provide quarterly reporting which can be used by the Board and which contains sufficient detail to enable the board to properly understand and oversee the delegated EMIR reporting.

Policy on Oversight of EMIR Reporting

• A ManCo should have an Oversight of EMIR Reporting Policy that could be stand alone or part of a broader compliance policy.

• This oversight policy should identify which Designated Person is responsible for overseeing the Reporting Delegate, set out the ManCo’s approach to due diligence and oversight and describe the ManCo’s approach to errors and breaches, including escalation parameters.

The White Paper could be a starting point for collating industry best practices regarding how ManCos might approach the oversight of EMIR reporting in a way that ensures compliance with EMIR reporting obligations and meets regulator expectations.