EMIR and UKMIR Reconciliation and Delegated Reporting Solution

On the 12^th February 2014 mandatory reporting for EMIR came into force, but many corporate entities (“NFCs”) do not have the necessary resources in place to meet their regulatory obligations. On the 17th June 2019 the first phase of EMIR Refit Regulation came into force, which amended the requirements for NFCs who trade with EU based FCs and passed the responsibility to report to the FCs. NFCs who trade with Non-EU based FCs are still required to report. As of the 1st January 2021 UK entities are required to report under the post-Brexit UK mandatory reporting regime UKMIR. As of April 2024 the second phase of EMIR Refit came into play, which changed the format and number of fields required as well as introducing the requirement to report all transactions under an XML format. UKMIR Refit will start at the end of September 2024.

• EMIR and UKMIR is designed to catch every EU and UK entity that enters into any form of a derivative contract. This covers Financial Counterparties ("FCs") and NFCs, subject to EMIR Refit changes detailed above;
• Each NFC is required to obtain an IEI number from one of the authorised providers, the majority of banking counterparties will demand that this is in place prior to trading and may be unable to transact without it;
• From 12 February 2014, each entity must, on a next business day basis, report (or arrange to have reported) details of the derivative contract to a registered Trade Repository (TR);
• This applies to trades which have been freshly entered into, modified or terminated;
• Under UKMIR/EMIR Refit second phase these need to be reported in XML Format;
• There are up to 188 separate fields to be reported: and
• For NFCs trading with a non-FC counterparty, the reporting process can be outsourced to an independent third party (although the legal responsibility remains with the NFC) .

• All NFCs under EMIR and UKMIR have a responsibility to report and monitor outstanding positions;
• Internal procedures need to be in place and external processes agreed with counterparty banks to ensure that the dispute resolution process can be satisfied from the initial transaction date to each reconciliation date;
• The legal responsibility to report cannot be outsourced (unless under EMIR transacting with a EU-based FC or under UKMIR transacting with a UK-based FC);
• Timely confirmations - each new transaction has to be reconciled (or disputed) against the issued ISDA trade confirmation within the agreed timeline; and
• Portfolio reconciliation – on an agreed periodic timeframe each outstanding transactions detail (including a current market valuation) have to be reconciled (or disputed) within an agreed timeline (T+5 days for NFCs).

It is therefore incumbent on Company Directors to ensure that they have adequate IT systems, risk monitoring and dispute procedures and the staff resource in place to meet the requirements of UKMIR and EMIR, or to consider outsourcing.

For many NFC entities, especially post EMIR Refit, EU-based FCs are obligated to report derivative trades on their behalf. However, NFCs may not have this solution and may still be required to report because of the following:

• NFCs who have inter-group derivative trades will not be able to pass the obligation to report to a EU-based FC or Uk-based FC;
• Non-EU based FCs are not required to report under EMIR and and Non-UK based FCs are not required to report under UKMIR therefore have no obligation to report on your behalf;
• EU based FCs dealing with UK based NFCs are unlikely to be able to report just for the NFC in the UK system;
• UK based FCs dealing with EU based NFCs are unlikely to be able to report just for the NFC in the EMIR system;
• NFCs dealing with other NFCs will not be able to pass the legal obligation to each other; and
• NFCs have certain obligations under EMIR and UKMIR in relation to risk management including the need to have procedures in place for portfolio reconciliation, trade valuations and dispute resolution.

These house-keeping procedures can be of real benefit to a company in that they reduce the operational risk of holding derivative positions. However, in practice, NFC counterparties are rarely in control of the documentation and reporting process so they rely entirely on their FC to produce derivative contract notes and periodic valuation reports.

An alternative to report their own transactions is to appoint an independent third party with relevant derivatives expertise. This provides the NFC with a solution to delegate the reporting process and in addition independence of valuations and dispute resolution.

• Pegasus Capital LLP ("PegCap") was founded as a specialist derivatives consultancy in 2010 to provide independent expertise to assist financial institutions, corporates and their advisors navigate the complex world of hedging and derivatives; and
• PegCap’s services range from providing pre-trade advice, structuring and pricing of hedging strategies through to operational tasks including obtaining LEIs, submitting EMIR reports and calculating periodic MTM valuations on derivatives.
• PegCap is also able to offer transaction reporting under the new UK Post-Brexit regime UKMIR.

PegCap is set apart from other providers of EMIR services in 2 ways:

• PegCap is a FCA-regulated entity and has systems and controls consistent with its regulated status. PegCap’s Compliance team have a a legal and regulatory background and have a duty to keep informed on regulatory requirements; and
• PegCap’s market and operational team have long and broad experience across the fixed income and capital markets including trading, portfolio management and operations.

Most NFCs will not have access to the necessary derivative portfolio systems to be able to report transactions, reconcile and verify the valuations received or to dispute them within the 5 day timescale. This places a great deal of responsibility on NFCs to ensure that they agree with the figures provided and in doing so, it may prevent them from disputing such valuations at a later date.

PegCap has the necessary authorisations and systems to provide the required infrastructure to ensure EMIR and UKMIR requirements are satisfied.

PegCap’s reporting proposal is both flexible and adaptable. Based on our existing experience and operational platform, we can:

• Obtain an International Entity Identifier “IEI” for any entity that requires one; and
• Report to a Trade Repository “TR” that is currently registered and recognised by the European Securities and Markets Authority and UK regulatory Authorities.
• Report under both EMIR Refit & UKMIR Refit.

The reporting process itself can be achieved either through:

• The client extracting data from their trade systems to either an excel template provided by PegCap or to a CSV file; or
• The client supplying PegCap with the relevant ISDA trade confirmation for reconciliation – we believe this option is unusual in the sector and is made possible due to the long experience of PegCap’s team in the derivatives market;
• If required, generate a Unique Trade Identifier utilising the agreed ISDA protocol;
• Source Unique Product Identifiers (“UPI”) and Product classification codes; and
• Provide periodic valuations of all derivatives that have been reported to a TR.

• Allows clients the flexibility to fulfil all or part of their EMIR and UK obligations by delegating their direct reporting responsibilities to PegCap;
• The client, simply sends their ISDA trade confirmation to PegCap, and all other requirements will then be met by them;
• Reports using their in-house software, therefore the IT overhead for the client is minimal.
• Ensures new transactions are reconciled within the dispute resolution period;
• Ensure portfolio reconciliation (including valuation) is achieved within the dispute resolution period;
• Ensures that all necessary forms are completed correctly and submitted on time;
• Ensures new transactions are reported within the 1 business day period; and
• Provides bespoke client reports to ensure the necessary audit and internal requirements are satisfied.