MiFID II adds significantly more layers of transaction reporting complexity. The MiFID II Directive and accompanying MiFIR regulation will have an unprecedented impact on financial market participants, from compliance and operations through front office execution and risk management and up to the executive boards being affected. In this context, operations, IT and compliance will be challenged to meet the revised transaction reporting requirements.
MiFIR imposes additional ‘market abuse’ reporting obligations that mandate the reporting of almost every trade in financial assets to a local regulator (National Competent Authority) either directly or via an Approved Reporting Mechanism (ARM). ARM reporting is already established in the UK – MiFID II extends and harmonises the concept across the European Union.
In summary, new transaction reporting obligations demand more reporting on more transactions in more instruments by more market participants. Specifically, they increase the number of reportable data fields from 23 to 65, with only 13 of the 23 current reportable fields unchanged. This much-expanded reportable dataset, harmonised across Europe, includes a more granular approach to identifying the decision maker behind the execution of a trade. It also introduces flags to identify short sales, indicators or pre-transparency waivers and algorithm identifiers. The aim is to provide local regulators like the UK’s FCA, with a detailed time frame into your – and the wider market’s – trading activities.
What is the deadline for MiFID II/MiFIR implementation?
The deadline for implementing MiFID II/MiFIR is January 2018*.
Despite the deferred date, reporting firms should take action now to be ready to meet MiFID II/ MiFIR obligations. This means identifying all transactions subject to new reporting rules and deploying an efficient process workflow to satisfy the obligation to report to local regulators “as soon as possible” and no later than T+1.
Who must report under MiFID / MiFIR?
MiFID II extends regulatory transaction reporting obligations to a much broader segment of financial market participants and to ALL investment firms including:
Investment managers providing advice and portfolio management to individual clients (e.g. managed accounts)
Market operators, including all trading venues
All financial counterparties under EMIR
All non-financial counterparties falling under Article 10(1)(b) of EMIR
Central Counterparties (CCPs) and persons with proprietary rights to benchmarks
Third-country firms providing investment services or activities within the EU
MIFID II does not apply to investment managers who carry out purely collective portfolio management of Alternative Investment Funds and UCITS. A CPM firm is out of scope, whereas a CPMI form is in scope, but in respect only of managed account activities. Importantly, in the UK, AIFMs and UCITS managers are subject to current MiFID I transaction reporting rules and it seems highly likely that the FCA will extend the obligation to fully include both of these categories.
*As at February 2016
What must be reported?
Current MiFID transaction reporting applies only to financial instruments admitted for trading on a regulated market (and to OTC derivative contracts linked to those instruments). MiFID II extends the scope of reportable instruments to:
Financial instruments admitted to trading or traded on an EU trading venue and to all financial instruments where the underlying instrument is traded on a trading venue. In addition to regulated markets, “Trading venues” now include Multilateral Trading Facilities (MTF), Organised Trading Facilities (OTF), and Systematic Internalisers (SI).
Financial instruments where the underlying instrument is traded on a trading venue. This essentially widens the scope to capture all OTC transactions in such instruments.
Financial instruments where the underlying is an index or a basket composed of instruments traded on a trading venue. This means that just one component of either an index or basket will bring that financial instrument under the reporting obligation.
The definition of Financial Instruments has been extended to include further products and asset classes including currency, commodity and interest rate derivatives, as well as emission allowances.
A transaction does not need to have been executed on an EU trading venue to be subject to the reporting requirement. For example, derivatives traded outside of the EU where the underlying is traded on an EU trading venue will have to be reported.
Investment firms must also report the details of any trade execution that changes a firm’s or its clients’ positions in a given product, for example, a short-selling flag for shares or sovereign debt. MiFIR also imposes specific reporting obligations relating to equity execution quality and commodities positions.
Key differences between MiFID I and MiFID II transaction reporting requirements
Increased reporting fields – from 23 to (at least) 65 with only 13 of 23 current reportable fields unchanged.
Increased Reference Data
Enforced migration to LEI (Legal Entity Identifier). Recent technical standards insist that no reportable transactions can be undertaken with any entity which is eligible for an LEI but doesn’t yet have one.
Requirement for natural person identifiers, dependent on domicile. As well as enhancing client on-boarding procedures, firms will have to access and link their HR systems to supply National Insurance and other personal identifiers for employees involved in transactions.
Product identifier reporting (mix of ISIN and EMIR-like description). Alternative Instrument Identifiers (Aii) for exchange-traded derivatives have been abandoned, in favour of the older ISIN standard, creating a new challenge in the maintenance of product reference data. Further, a complete and accurate CFI code (and up to 14 other fields) must be supplied for any product which does not have an ISIN contained in the ESMA “official list”.
Increased Product Range
Products traded on all organised markets now in scope: RM, MTF, OTF, SI. So, for example, CFDs on currency pairs, already traded on an MTF, must be reported wherever they are traded. No exemption for Interest Rate, Commodity and Forex products.
Extended Regulatory Perimeter
No automatic exemption for commodities brokers
No waivers for asset managers
Additional Information Requirements
Short sale flag
Algorithm identifiers (decision and execution)
Buyer/seller reporting model