EMIR Refit Reconciliation: more than just reconciliation!

Since the entry into application of the EMIR Refit reporting framework on 29 April 2024, the term “reconciliation” has been used in several different contexts. This may lead to increasing complexity for market participants, particularly when they delegate the reporting to the counterparties of their derivative transactions. 

Three distinct reconciliation concepts are particularly relevant under EMIR. They are detailed in 2 Articles of the Regulation (EU) No 648/2012: Article 9 and Article 11.

First Article 11(1)(b) that concerns portfolio reconciliation as a bilateral risk-mitigation obligation for non-centrally cleared OTC derivatives. This Level 1 requirement is supplemented by Commission Delegated Regulation (EU) No 149/2013, in particular Article 13, which specifies the portfolio-reconciliation arrangements, including the key trade terms to be reconciled and the applicable reconciliation frequencies.

Second, Article 9 concerns transaction reporting and the quality of data reported to trade repositories. Under Article 9, counterparties and CCPs must ensure that details of derivative contracts, and any modification or termination, are reported to a trade repository. Article 9 also requires financial counterparties, non-financial counterparties and CCPs subject to the reporting obligation to put in place appropriate procedures and arrangements to ensure the quality of the data they report. 

Third, Article 9 has been supplemented by the Commission Delegated Regulation (EU) 2022/1858, notably Articles 3 to 5 on TR reconciliation and data-quality verification, and Commission Implementing Regulation (EU) 2022/1860, Article 3, requiring relevant entities to have arrangements ensuring that reconciliation-failure feedback is taken into account.

Finally, where reporting is delegated, the market participant should not treat delegation as a transfer of its regulatory responsibility.

In practice, EMIR refit is meant to bring improvement in the completeness, consistency and usefulness of derivatives data reported to trade repositories (“TRs”). In fact, EMIR Refit is all about data quality.

For the purposes of this article, three separate processes should be distinguished. 

• First, portfolio reconciliation under Article 11 is a bilateral risk-mitigation process for non-centrally cleared OTC derivatives. 
• Second, TR pairing and reconciliation compare the reports submitted for the two sides of a derivative where two-sided reporting applies. 
• Third, an entity’s internal reconciliation of its books and records against TR data, which is an oversight and data-quality control.

From what we observe in the market, in order to ensure the data quality obligation, market participants are focusing mainly on the following actions:

• Ensuring follow-up on TR reconciliation status feedback (where TRs reconcile the 2 reported legs of each transaction in the case of two-sided reporting).
• A practical data-quality control whereby the entity responsible for reporting compares its internal books and records with TR data.

1. Reconciliation is a data governance framework

Under EMIR Refit, a reconciliation framework cannot be limited to comparing a TR extract. The framework must enable the market participant to establish whether its derivatives population is complete, whether the data reported to the TR is accurate and whether TR feedback, including rejected reports and reconciliation failures, is investigated.

2. Matching internal data against TR data

This involves verifying that the data reported to the TR accurately reflects the data recorded in the market participant’s internal books and records. Ensuring consistency between internal systems and TR data is one of the key challenges arising from EMIR Refit. 

It implies processing different files from different sources (investment manager trade data, fund administrator accounting files, valuation information, collateral database …) that may be challenging to link together. The capacity to link the files determines the capacity to build an accurate reconciliation framework. 

The UTI is the primary matching key but even if more and more Fund Administrators include the UTI in their reports, it is still often the case that the UTI is not provided in the accounting files. In that case a matching logic must be put in place such that it is sufficiently flexible to identify potential breaks without creating excessive false positives. 

A reconciliation tool or managed-service provider should therefore support pairing diagnostics, configurable matching rules and an auditable record of how a match was established. This documentation process is crucial and should be updated accordingly along with any changes like new products matching or files structure changes.

3. Lifecycle event reconciliation

Lifecycle reporting is also one of the most difficult areas of EMIR reconciliation. The reconciliation framework must be able to flag any discrepancy between the reported events during the life of a product. Dependencies between reports create difficulties. For example, a Modification can generally be processed only if the original new report has been accepted, and a report submitted after a cancellation must be consistent with the derivative’s reporting status. Rejected or missing reports may therefore affect all subsequent lifecycle events and create a chain of reconciliation breaks.

The CSSF has highlighted rejected-report issues relating to reporting timestamps, immutable fields, action types and the appropriate use of “Revive” reports. 

This illustrates why rejection monitoring, and lifecycle validation must be embedded in the reconciliation framework, rather than treated as separate technical matters.

4. Valuation, collateral and tolerance level

For many Management Companies and AIFMs, the most material addition relates to Valuation. Valuation fields are particularly sensitive because reconciling them does not only require comparing two numerical values. It also requires understanding how the value was produced, which data was used and which model or methodology was applied.

Valuation field is sensitive to reconciliation because there are numerous possible root causes for valuation discrepancies, including different valuation methodologies, valuation timestamps, market-data sources, yield curves, volatility surfaces, FX rates, pricing models, or the use of mark-to-model rather than mark-to-market. This sensitivity is also reflected in the EMIR framework: Article 11(2) EMIR requires financial counterparties and NFC+ counterparties to mark-to-market the value of outstanding contracts on a daily basis, or to use reliable and prudent mark-to-model valuation where market conditions prevent marking-to-market. 

As a result, valuation reconciliation requires both regulatory reporting expertise and derivatives valuation expertise. A robust process should be able to identify whether the discrepancy is caused by a reporting error, a timing difference, an incorrect data feed, a model difference, an inappropriate valuation input, or a genuine disagreement between counterparties. This may require access to trade economics, market data, valuation models, pricing assumptions and historical valuation records.

In practice, the reconciliation process should therefore be supported by professionals capable of challenging the valuation source, recalculating or independently assessing the value where necessary, and explaining the root cause of the break. For complex or illiquid derivatives, this analysis may require specialist modelling capabilities and a thorough understanding of the relevant product features. Where the discrepancy gives rise to a dispute with the counterparty, an independent third-party valuer may be useful to provide an objective view and help the parties reach an agreed position.

Similarly, collateral information may differ because margin is calculated at portfolio or netting-set level, also because of timing differences in collateral calls, or because the parties use different collateral-recording conventions.

Regarding tolerance level, market participants may use the ESMA reconciliation tolerances applied by TRs as one relevant reference point when designing their exception-management framework. However, internal thresholds should reflect the purpose of the control, the materiality of the relevant field and the entity’s data-quality and risk-management objectives. Internal controls may therefore be stricter than the TR tolerances and should not automatically disregard differences merely because they fall within a TR matching tolerance. These arrangements need to be documented as part of the reconciliation process for auditability reasons.

5. Delegated reporting to counterparties

As it is the case for numerous asset managers / Management Companies, a market participant may rely on its counterparty to submit the EMIR report on its behalf. This can reduce operational effort, particularly for smaller buy-side entities or funds with limited derivatives activity. However, the market participant remains exposed to reporting risk if the counterparty submits incomplete, late or inaccurate data.

The key difficulty is that the market participant may not control the reporting process and therefore may not be aware of discrepancies. 

For this reason, delegated reporting should be supported by a documented oversight framework. The market participant should be able to obtain evidence that reporting has occurred and should receive sufficiently detailed information to identify missing, rejected or inconsistent reports.

Article 9(3) of Commission Implementing Regulation (EU) 2022/1860 requires counterparties, entities responsible for reporting and report-submitting entities, as applicable, to have arrangements ensuring that feedback on reconciliation failures provided by the TR is taken into account. The CSSF has expressly highlighted this expectation and reminded market participants to take appropriate action to investigate and remediate any identified discrepancies.

The market participant should not assume that a counterparty will proactively resolve all issues.

6. Managed Service dependency

Where a managed-service provider performs the reconciliation, the market participant should assess not only the functionality of the platform but also the provider’s regulatory-change process, support model, data-security arrangements, implementation approach and ability to explain reconciliation outcomes to auditors and regulators.

The critical control question is whether the market participant can demonstrate ownership of the outcome. Outsourcing the reconciliation process may be appropriate, but outsourcing should not result in a loss of visibility over exceptions, reporting quality or remediation. 

EMIR reconciliation should not be viewed as a single process or as a purely technical comparison of data files. Three separate but connected processes should be distinguished: portfolio reconciliation under Article 11, pairing and reconciliation performed by trade repositories under the Article 9 reporting framework, and the internal reconciliation of a market participant’s books and records against TR data.

Together, these processes contribute to a broader data-quality framework. They enable market participants to assess whether their reporting population is complete, whether the information submitted to the TR accurately reflects their internal records, and whether differences between the reports submitted by the two counterparties are appropriately identified and resolved.

Implementing such a framework may be particularly challenging where reporting is delegated to counterparties as data is sourced from several internal and external systems. Market participants must be able to collect and link data from multiple sources, interpret TR feedback, identify the root causes of exceptions and monitor remediation through to completion.

There is no single operating model that will be appropriate for every market participant. Depending on the scale, complexity and organisation of its derivatives activity, an entity may develop the necessary reconciliation capabilities internally, rely on a specialised managed-service provider, or adopt a combination of internal governance and outsourced operational support.

A managed-service model may provide access to dedicated technology, regulatory expertise, configurable matching rules and established exception-management processes. It may also facilitate the consolidation of data from different counterparties, administrators, investment managers and trade repositories within a consistent and auditable framework. This can be particularly valuable for entities that do not have the volumes, resources or technical infrastructure required to build and maintain a comprehensive reconciliation solution internally.

However, the use of a service provider should form part of the market participant’s control framework rather than operate as a substitute for it. The respective responsibilities of the market participant, its reporting counterparties and the service provider should be clearly defined. The market participant should retain sufficient visibility over reporting outcomes, material exceptions, recurring issues and remediation progress to demonstrate effective oversight.

Ultimately, the objective is not merely to produce a reconciliation result. An effective framework should transform data received from internal systems, counterparties and TRs into actionable information, support timely investigation and remediation, and maintain an auditable record of the controls performed. Whether operated internally or with the support of a managed-service provider, the framework should enable the market participant to demonstrate that EMIR reporting quality is actively monitored and appropriately governed.