ESMA’s spotlight on data quality – Part 1: a missed opportunity for EMIR?

ESMA’s spotlight on data quality - Part 1: a missed opportunity for EMIR image

ESMA’s latest Data Quality Report (DQR) presents a noticeable change in style and content from previous years.  Out are the detailed areas of concern or ‘tellings off’, and in are optimistic future endeavours, coupled with over-comforting graphs and statistics, and importantly the promise of systematic warnings of data quality breaches!  This blog discusses the key EMIR aspects of this year’s DQR.

The best is yet to come

With high quality data absolutely essential for the monitoring of derivative exposures, and reporting data quality known to be lower than desired, substantial changes are needed to address the previously admitted shortcomings.

Change comes via the finalisation of EMIR Refit, bringing wholesale change to the reporting of derivatives in Europe, aligning standards more closely with the CDE guidance. Revised technical standards and a reasonable volume of guidance documentation will assist firms greatly, and ESMA is correct to highlight this important regulatory change.

ESMA highlights its own process and controls. Since May 2022, ESMA has been implementing a data quality ‘dashboard’, which uses 19 data quality indicators (DQIs) to compare EMIR data on a monthly basis against an ‘EU benchmark’, which focuses on metrics including:

  • Under/over reporting
  • Inconsistent reporting v the other counterparty
  • Incomplete key fields
  • Late reports
  • Abnormal values
  • Lack of correct identifiers of counterparties

Data is then shared with National Competent Authorities (NCAs), who in turn target and remediate ‘significant’ issues with entities, via a prescribed ‘NCA Engagement Framework’.  The framework aims to promote efficacy and efficiency of ESMA and the NCAs’ limited resources, stating that for remediation, they will focus on a ‘limited subset of entities with the highest volume of incorrect reports’.

So firms with reporting obligations will and are being targeted for data review and remediation with the implementation of ESMA’s DQIs and Engagement Framework.

Minor telling offs and comforting graphs

Previous versions of the DQR discussed targeted areas of concern, whereas the ‘key developments’ section this year provided a far more watered down view of issues seen in the last 12 months.

The majority of statistics provided a tale of decline in certain offending activities, such as late or missing valuations.  But this section misses a vital opportunity to critique existing reporting issues, such as the difficulty of reporting ‘CFI’ codes, poor interpretation of collateral fields, and unrealistic reported exposures.  Admittedly many of these areas will be targeted under EMIR Refit, but most entities are actively trying to remediate reporting issues well ahead of 2024, so that such problems do not become exponentially hard to fix once the regime is updated. More detailed examples of areas of concern are not easy for firms to hear, but provide important regulatory insight and help significantly with workload prioritisation for firms who are equally limited in resources.

Could do better

Overall, this year’s DQR represents a missed opportunity to give valuable insight into the key areas of concern for the quality of EMIR regulatory reporting.

Significant changes via the DQIs, Engagement Framework and EMIR Refit updates are clearly crucial for significant and accelerated improvements to data quality going forward, as ESMA and NCAs adopt a more data driven approach to their supervisory duties. Impacted firms will be systematically targeted for their data quality issues, from which NCAs will expect to follow remediation projects until resolution.

ESMA has provided some useful insights into areas of improvement, such as the completeness, timeliness and accuracy of submissions, but as a ‘flagship’ regular report in the regulator’s arsenal, future iterations would greatly benefit from more detailed examples of the issues across a much wider array of reporting topics.