One working day to go until the ESMA Level 1 Validations go into effect – how will it go?

Monday sees the rolling out of the ESMA “level 1 validations”. This is a new set of constraints on the fields that must be sent to Trade Repositories under EMIR. The rules on which trades can be blank, which ones can’t (and sometimes instead have to contain an “NA”), and also some other rules, such as what to put in the Beneficiary ID field, will be tightened up.

The primary motivation behind the new validations is the extremely low reconciliation rate experienced with EMIR reporting so far, especially when inter-TR reconciliation is involved. This has arisen because of a lack of clarity as to what goes into each field.

The validations will go some way towards resolving those, but many questions remain. ESMA are clearly aware of this because a new consultation was recently launched looking at a far larger overhaul of the fields.

There are two things to be concerned with around Monday’s deadline:

  • Will it work? We can expect many systems to struggle with the new formats and we can also expect quite a few rejections over the first days (even with testing).
  • Reconciliations bringing issues “out of the woodwork” – with more trades being presented for reconciliation, we can expect to get much more information about which fields are being rejected and when they don’t match. That is likely to kick off another round of discussions about what goes in each field. Counterparties will try to agree values with each other, but they will struggle to come up with a consistent approach across all parties.

For us in the energy and commodities area, life is more complex. There is still no consensus in what to put into many of the fields, particularly those relating to physical delivery. The topic is not completely covered either by the validations, or in the consultation (although there is a reference to “using the REMIT format”). But despite this we will see many differences in fields finally being discussed between counterparties.

Once the dust has settled and trades are properly flowing into the TRs the discussions about field content will begin. Hopefully by the time the consultation closes for the next round of changes, any new issues will have come to the foreground, so that they can be fed back to ESMA.

If they don’t, we will likely see yet another round of changes in 2016 (after the ones next year). If they do, we may be in a better place in a year’s time once the results of the consultation take effect.

Either way, on the energy and commodities side, there is still a great deal to resolve. REMIT will go some way towards better defining how to send a gas or power trade. But other commodities still require a much clearer definition.

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