There are now only a few days to go until the second, and final, reporting deadline under REMIT, on 7th April. From that date, all “REMIT” contracts, generally physical and financial gas or power trades (with some exceptions) need to be reported to ACER, the regulator, via an RRM (Registered Reporting Mechanism). There are an additional 90 days in which to “backload” trades and contracts that are already in place and still in delivery.
This deadline comes just over two years after the EMIR reporting deadline, which covered all derivatives. For many in energy and commodities, EMIR was the first experience of a “banking style” reporting regime. Looking back it also seems like it was the start of a rather long marathon project in data discovery, extraction, cleaning, transformation and communication. Now that the second REMIT deadline is nearly behind us, does that mean that we are “done” in regulatory projects? The short answer is, for the most part, no.
This is for three main reasons:
- More rules
- Other regulatory streams
It has already been made clear under both EMIR and REMIT that revisions are coming. ESMA issued the latest version of the proposed new Regulatory Technical Standards (RTS) for reporting last November. The new format contains over 40 new fields (although many of these do not apply to our market). It is likely that this new format will go into effect towards the end of the year, or possibly the beginning of next. It is clear that there is still quite a bit of “tweaking” to do for EMIR reporting.
Even before REMIT reporting is complete, ACER have already announced a “schema change” in spring 2017. This will learn lessons from the current implementation, of which there are already many, and result in new and different data needing to be reported.
The regulatory onslaught continues and several rule sets will add to the reporting requirements. In particular, MiFID II will add some reporting requirements. Some market participants will lose their current exemption under MiFID and be required to set up a “regulated entity”. This exposes them to the full requirements of MiFID II which has extensive reporting requirements.
Those who keep their exemptions will not have to comply with the “main” MIFID II requirements, but will still need to support the position limits and reporting regime. This will add to the reporting overhead.
Other rules, such as the Securities Finance Transaction reporting (SFTR) rules, will keep up reporting momentum.
Other regulatory streams
So far, we have only considered reporting, which is only one facet of the regulations, although is it the one that has received most of the attention so far. In general one can conceive of the regulations having 4 streams:
- Data Reporting – Under EMIR, REMIT, MiFID II etc.
- Risk Management – Specific rules such as portfolio reconciliation which is found under EMIR.
- Anti-Abuse – Rules which prohibit market abuse and manipulation such as REMIT and MAR.
- Clearing and Capital – Rule that require heavier use of capital such as EMIR, CRD IV and CRR.
The anti-abuse element of REMIT has been in force for some time. In November one company was fined 25M Euros for a breach of these rules. It should not be forgotten that the purpose of collecting data under REMIT is so that regulators may use it to monitor the market for suspicious activity. We can therefore expect more cases and investigations in the near future.
MAR (Market Abuse Regulation) comes into force on 3rd July and outlaws manipulation not only in on venue derivatives contracts, but also any OTC contracts and spot commodity trades that could influence their prices. With heavy penalties for abuse and a requirement that market participants introduce effective monitoring, it is worth taking note of these rules as soon as possible.
In general, it is necessary to be ready for the anti-abuse element of the rules with an effective organisation, procedures and technology, as soon as possible.
Having said this, the stream that is likely to be the most expensive is the clearing and capital stream. Mandatory clearing under EMIR has already started, although it has not hit the energy and commodities sector widely yet. Capital will eventually be required to support the inevitable move to clearing, even for those who remain under the “clearing threshold”.
For those who lose their exemptions under MIFID II, rules such as CRD IV and CRR will only increase the capital requirements. And even those who keep their exemptions may well find that they breach the clearing threshold due to proposed changes to the rules by ESMA.
CTRM and system strategy – thinking strategically
Many have approached the rules so far on a tactical basis, looking at each project in turn. This approach is likely to get expensive very quickly, not only because of the constant changes in rules, but also because of the need to have access to all data in on place. This is for several reasons, such as pulling together the data to feed a surveillance system or being able to optimise capital. And on the reporting level so that the stream of changes can be managed centrally.
Market participants who haven’t already done so will be well advised to think carefully about how to meet the regulatory requirements that are coming in the next years. We are now at the point in the regulatory cycle where failure to consider this can be very costly.
What is next?
With REMIT reporting up and running, there are likely to be two immediate areas of focus:
- Monitoring and surveillance – the start of MAR, collection of REMIT data and general attention of financial and energy regulators means that we can expect an increased focus in this area starting in the next few weeks
- MiFID II assessment – we do not yet know the final rules around exemption calculation under MIFID, but are likely to in May. Gathering the data for the calculation is not going to be easy, and so it is recommended that any appraisals are carried out as soon as possible.
It therefore would seem that, while the next “big” reporting project will not start soon, the work is on-going. On top of this, surveillance is next on the agenda, and there is more to come. Regulators have made it clear that they are going to be focusing more on the commodities and energy sector 9with some carve outs for very small companies). We therefore need to get used to the idea that a “regulatory stream” is a permanent feature.