EMIR, MiFID, and Dodd-Frank: What have we learned and what comes next?

EMIR, MiFID and Dodd-Frank struck fear into the heart of financial institutions in the years following the 2008 financial crisis. Whilst many in the industry recognised the need for reform, they were also wary of the practicalities and challenges of implementing regulatory change projects.

Technology providers were just as new to the rules as banks were. With few specialist vendors around, firms were driven to urgently build their own reporting systems. It may have worked in the interim, but this process has ended up causing more questions than answers for organisations.

In this blog, we will explore the EMIR vs MiFID regulatory impacts since then, the future trends shaping compliance systems, and the technology demands for a smarter process.

What is EMIR? A Further Look Into the Key Compliance Challenges

Fast forward to 2024, and regulatory changes remain firmly in the spotlight. ESMA has rolled out updates to EMIR REFIT with significant revisions enhancing transparency and standardisation in derivatives reporting.

For EMIR, key challenges include:

• Mandatory clearing obligations for OTC derivatives.
• Stringent reporting requirements for systemic risk reduction.
  
  

A real-world example of this is: a mid-sized asset management firm relying on outdated legacy systems may struggle to comply with EMIR’s stringent transparency requirements. Delays in adapting these systems to handle revised reporting obligations could result in non-compliance and ultimately lead to significant regulatory fines.

Additionally, small financial entities benefit from simplified reporting requirements, as they no longer have to submit double-sided reports in specific cases. This eases their compliance burden.

MiFID II: Driving Transparency in Financial Market

MiFID II and MiFIR have introduced measures to improve market data access and efficiency.

Key focus areas for MiFID compliance include:

• Consolidated tape for market data accessibility.
• Focus on investor protection and cost transparency.
  
  

MiFID II introduced the consolidated tape, centralising real-time market data. This makes data more affordable for smaller trading firms, with the aim of levelling the playing field.

EMIR vs MiFID: A Comparison of Regulatory Impacts

EMIR and MiFID differ significantly in their regulatory objectives and impacts on financial institutions. Below we highlight these distinctions:

Under EMIR:

• Mid-sized financial institutions must invest in clearing house memberships or clearing brokers, which increases operational costs.
• Firms require robust systems for managing derivatives transactions and reducing systemic risk.
  
  

With MiFID:

• Firms must adjust execution policies to ensure ‘best execution’ for clients, leading to potential restructuring of trade processes.
• Trading venues face pressure to make market data accessible at competitive prices.
  
  

If we use these instances, a derivatives trading firm must adjust its operations to comply with EMIR’s clearing requirements, while a trading venue operating under MiFID II faces challenges in standardising and lowering market data costs.

Impact of Non-Compliance

Non-compliance with EMIR and MiFID can result in serious repercussions for financial institutions. Organisations that fail to meet these regulatory requirements may face substantial fines, exclusion from key financial markets, or extreme damage to their reputations. 

Reporting inaccuracies under EMIR could lead to hefty penalties, while failure to meet MiFID II’s transparency rules might result in a loss of client trust and competitive positioning in the market. These risks underline the importance of carefully-planned and resilient compliance strategies.

Practical Implications for Financial Institutions Under EMIR Versus MiFID

Firms complying with EMIR need strong collateral management systems to meet margin requirements. On the other hand, MiFID compliance requires granular reporting on execution quality to demonstrate client value. 

EMIR compliance might also demand integrating risk management systems for clearing and margin reporting, while MiFID compliance often involves adopting new client-facing technologies for investment advice or to make sure that trading platforms comply with transparency rules.

Differences in Technology Requirements for EMIR and MiFID Compliance

EMIR and MiFID compliance present unique technological challenges such as:

• EMIR: Solid systems for trade repositories and margin to handle the complexities of derivative transaction data.
• MiFID: Platforms for managing consolidated tape data and monitoring client trades for compliance.
  
  

With these challenges in mind, a large asset management firm operating across the UK and EU must navigate dual reporting requirements under EMIR while also guaranteeing its investment advisory services meet MiFID II standards for transparency and fairness. 

EMIR demands back-end IT infrastructure to handle high volumes of derivative transaction data, but MiFID II’s requirements often result in the adoption of front-end trading solutions for market surveillance and best execution tracking.

Jurisdictional Differences

Post-Brexit, the UK and EU have adopted distinct regulatory paths, which has created additional compliance challenges for firms operating in both jurisdictions. For example, while the EU continues to adhere to the full scope of MiFID II and EMIR, the UK has chosen to relax certain rules, such as research unbundling under MiFID. 

This divergence complicates compliance for firms, requiring them to develop dual reporting and operational frameworks to meet differing regulatory standards in the two regions. These jurisdictional differences can increase costs and operational complexity for cross-border institutions.

New Measures Taking Shape

MiFID II and MiFIR have also seen amendments that introduce measures like a consolidated tape to improve market data access and efficiency. The consolidated tape is designed to centralise market data from trading venues and approved publication arrangements with the aim of enabling smaller trading firms to access real-time data at a lower cost. 

As a result,  there’s more market transparency and a level playing field for smaller participants, who previously faced significant barriers due to high data fees.

Meanwhile, political shifts are driving divergence. The UK and EU are moving down separate regulatory paths post-Brexit, with the UK adopting its own stance on areas like research unbundling.

A Shift in U.S. Oversight with Dodd-Frank Reporting Solutions

Across the Atlantic, the current U.S. administration has revisited financial oversight, with renewed focus on the principles of the Dodd-Frank Act. This marks a significant departure from its predecessor's deregulatory approach. This landscape may change again, however, with the predecessor back in the White House. 

Future Trends and Updates Shaping EMIR and MiFID Compliance

Both EMIR and MiFID are expected to evolve with broader trends in financial regulation. For EMIR, future updates may focus on expanding the scope of derivatives to include emerging financial instruments such as crypto-assets. Similarly, MiFID II compliance challenges could grow as regulators push for greater integration of sustainability-related data into trade reporting standards.

The rise of advanced RegTech tools, such as AI-driven reporting solutions, will likely continue to streamline compliance for financial institutions. By automating processes like margin calculations for EMIR, or real-time trade data aggregation for MiFID, these innovations could reduce operational burdens and enhance compliance accuracy.

Why RegTech is the Answer to MiFID II Compliance Challenges

After several years from the first introduction of these rules, you would expect organisations to be in a stronger position to tackle any changes. And in a sense, they are. They have had plenty of opportunity to practice interpreting and applying new regulatory requirements and launching regulatory change projects. 

Feeling the pressure of regulatory compliance:

In light of recent events, however, firms are under more pressure than ever to meet any new requirements with minimal resources. As the current state of the economy starts to bite, budgets will come under pressure. Even relatively small updates to regulations can require significant changes to systems and technology, but it can be hard to make a compelling case for investment when the business doesn't understand the level of complexity generated by change. 

In-house legacy systems feels their age:

Moreover, the in-house legacy systems used first time around are now struggling to keep up, increasing the risk of reporting failures or inaccuracies, costing companies money as they pour more IT resources into maintaining them.

Adopting a RegTech solution, such as a single reporting platform capable of managing multi-jurisdictional compliance requirements, could significantly alleviate this burden. Firms could streamline their reporting workflows and guarantee timely submissions for both EMIR and MiFID compliance, while reducing manual intervention and associated errors.

RegTech comes of age

The difference now is that technology providers have caught up with the regulatory landscape. The growth of RegTech means there is simply no need for organisations to struggle when it comes to building their own solutions. 

Why devote scarce and expensive IT resources to building something that a specialist partner can deliver for you? Not only is it likely to be more cost-efficient, but you’ll be up and running quickly and smoothly.

Standards Spark Smarter Reporting

With regulatory change continuing to increase, regulators and industry participants are seeing the value of a more strategic approach. Regulators are beginning to settle on a common language for reporting, increasingly shifting towards the ISO 20022 standard (which presents another practical challenge in itself). 

Financial institutions are also now looking to embed this standardised approach in their own reporting programs, adopting consistent methods across the numerous jurisdictions and regimes that they operate in.

This brings us back to efficiency.

As the pressure is on to do more with less, firms will need to optimise their regulatory reporting programs to make the most of the resources that they have. 

By far the more effective way to do this is looking at any future regulatory changes as part of a wider, holistic regulatory change program and working with a trusted partner who can support this approach.

A single platform for all your reporting

To discover how Gresham works with organisations to deliver one, streamlined system for regulatory reporting across multiple jurisdictions and regimes, connect with a member of our team today.

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