A peer review into the supervisory actions of six national competent authorities (NCAs) surrounding the quality of data reporting under the European Market Infrastructure Regulation (EMIR) has called on the UK’s Financial Conduct Authority (FCA) to overhaul its supervisory approach.
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The review, conducted by the Board of Supervisors (BoS) at the European Securities and Markets Authority (ESMA), assessed a selection of criteria including the data quality of outstanding derivatives contracts as expressed by the share of non-compliant reports, and the significance of the derivative market in the jurisdiction.
The top six jurisdictions outlined by the latter criteria were the UK, the Netherlands, Germany, France, Cyprus and Ireland. Of the NCAs for those jurisdictions, the FCA was ranked last for EMIR supervision.
“The peer review considers that in light of the sophisticated derivatives marketplace in the UK the FCA should review, revise and overhaul its current supervisory approach to EMIR data quality,” the report states.
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According to the review the FCA has “developed an insufficient supervisory approach to EMIR data quality supervision based on the size, scale and complexity of the UK’s derivative market.” It continues that “the policies and procedures in place are unlikely to provide a supervisor with the tools needed to supervise EMIR data quality.”
However, the FCA’s ranking does not mean that the UK regulator is breaching EMIR. According to ESMA, it means that based on the peer review’s experience, expertise and knowledge, the NCA did not meet the supervisory expectations.
Despite this, the review document recognises the fact that the FCA took the largest action of any of the six NCAs tested when it came to enforcement. “For this specific sub-criterion, the peer review assessed the FCAs enforcement action as satisfactory – the highest grading when assessing a specific sub-criterion.”
Overall, the ESMA document outlines the FCA’s approach to EMIR data quality supervision as “reactive”.
The FCA supervises a complex and sophisticated derivatives marketplace. Of the six NCAs listed it has three globally systemically important banks (G-SIBS) under its shared supervision with the UK’s Prudential Regulatory Authority (PRA).
The FCA also informed the peer review that there are over 9,000 counterparties reporting under EMIR in the UK.
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An FCA statement, provided to ESMA, reads: “We do not agree with the ratings given to the FCA by the peer review Assessment Group (AG), and we do not believe these findings are supported by the evidence and explanations provided during the review process.”
“In particular, we do not agree with the AG’s assessment of the FCA as regards the integration of EMIR data into our overall supervisory approach. In our view, this does not fairly account for the way in which EMIR data has been and is used across different areas of the FCA – such as internal analysis and policy research, public discussion and research papers, or as part of prudential supervision.
“EMIR data is also used extensively by the Bank of England, in particular with regard to its financial stability mandate. That said, we welcome the examples of other NCAs’ data use provided in the report as we develop our own approach.”
