What does the cost-benefit analysis carried out by the consultancy firm cover?

The analysis focuses on the impact of potential reforms on the main groups affected by reporting obligations: non-financial counterparties (NFCs), buy-side firms, sell-side firms, market infrastructures and trade repositories⁵.

With regard to the long-term solution, Deloitte concludes that Option 2a, based on the application of the report once principle to MiFIR, EMIR and SFTR, would generate a positive net present value for all the stakeholders analysed and enable the investment to be recovered within approximately three to four years⁶. In this regard, the analysis indicates that this scenario could result in: (i) annual net savings of between 250 million and 1 billion euros; (ii) a reduction in recurring costs of between 22% and 24%; and (iii) discounted cumulative net profits over 10 years of between 1.2 and 4.9 billion euros.

However, the study also points out that certain market infrastructures would face increased costs and, in some cases, a reduction in revenue due to the decline in the volume of information submitted.

⁵ Thirty entities participated in Deloitte’s cost-benefit analysis: four non-financial counterparties, 11 market infrastructures, five buy-side firms and 10 sell-side firms.

⁶ The analysis considered a 10-year period and a discount rate of 3%.

What does the cost-benefit analysis carried out by ESMA cover?

This analysis, prepared by ESMA, focuses on the impact of the reform on public authorities and was carried out in collaboration with 18 national competent authorities (NCAs), the European Central Bank and the European Systemic Risk Board⁷ .

With regard to the report once principle (option 2a), envisaged as a long-term solution, the NCAs anticipate initially incurring one-off costs arising from the necessary technological adaptations, the modification of data models, the establishment of new information flows and the review of validation frameworks. Added to this would be the costs associated with testing, training, transition and coordination activities. However, once the implementation of the new model is complete, a cost reduction of between 9% and 11% is estimated.

Furthermore, the NCAs consider that a centralised EU platform for the reporting of information could improve the quality, consistency and harmonisation of data. It would also facilitate cross-border supervisory cooperation and help to reduce existing duplication in the processes of reporting, routing and validating information.

In any case, the NCAs consider that the success of any centralised platform will depend on ensuring full and unrestricted access to data, high system performance, reliable connectivity, sound governance, effective operational processes, sustainable funding and sufficiently detailed technical specifications.

⁷ The results show that the costs associated with receiving and processing information reported under EMIR, MiFIR and SFTR are concentrated amongst a limited number of authorities, with six of them accounting for 71.7% of the total costs. Furthermore, activities related to MiFIR require the greatest allocation of resources.

What recommendations does ESMA make to the co-legislators?

The report presented by ESMA focuses on the structural changes that should be implemented in the MiFIR, EMIR and SFTR regulations (so-called Level 1) aimed at the report once principle, accompanied by separate intermediate measures. In any case, ESMA emphasises the importance of taking the industry’s perspective into account throughout this process.

With regard to the report once principle (option 2a), a key consideration is how information is submitted to the supervisor and exchanged between supervisors. Three alternatives are proposed:

• Current model: the collection, validation, processing and storage of information remain at national level.
• Hybrid model: the collection of information remains at national level, whilst validation, processing, storage and analysis would be centralised at EU level.
• Centralised model: all channels and functions would be integrated into a single hub at EU level.

In any case, the ESMA report merely presents the alternatives and does not make a specific recommendation. Regarding this matter, the Authority acknowledges that a more in-depth assessment is required by both the authorities and the industry.

Among the intermediate measures proposed for Level 1, ESMA suggests extending the circumstances under which the obligation to communicate or report information on contracts entered into between financial and non-financial counterparties may be delegated. In this way, the responsibility for reporting would fall on the financial counterparty, without prejudice to the non-financial counterparty’s obligation to provide accurate information to the financial counterparty. More generally, ESMA argues that reporting obligations should be assumed by the entity best placed and most capable of fulfilling them efficiently.

Another key aspect of the proposal is the flexibility it offers when determining reporting responsibilities for transactions involving either two financial counterparties or two non-financial counterparties. Specifically, this will be based on the Level 1 principle of mandatory delegation to the ‘more sophisticated counterparty’, whilst also mandating ESMA to define what constitutes such a counterparty at Levels 2 and 3, depending on the specific trading scenario.

Furthermore, ESMA proposes centralising the notification of intra-group exemptions at European level using a standardised template, which would subsequently be distributed to the NCAs, thereby allowing the information to be submitted on a once-only basis. Under this proposal, the exemption would apply from the moment receipt of all the information necessary for its assessment is confirmed. ESMA also proposes reducing the frequency with which parent companies report aggregated positions, from weekly to monthly.

With regard to the Level 2 and 3 intermediate measures, ESMA proposes reducing the back-reporting period from five to three years. However, the competent authorities would retain the power to require information covering a longer period, of up to five years, where there are specific, duly justified circumstances.

Furthermore, ESMA proposes various simplification measures across the different reporting regimes. Within the scope of MiFIR, it proposes introducing exemptions for certain transactions of limited use for the supervision of market abuse, as well as reviewing the relevance of some optional fields. Under EMIR, it proposes excluding certain fields from reconciliation obligations and simplifying the framework for reporting errors and omissions.

Finally, amongst the Level 3 measures, ESMA proposes exempting certain transactions affected by settlement failures from the reporting obligation under SFTR.