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Regulators put the ‘Fear’ in MiFIR at transaction reporting conference

JWG analysis.

European regulatory agencies were clear: firms may already be too late if they haven’t started their MiFIR implementations that need to be tested and ready in summer 2016.

Speaking at a two day ‘MiFIR Reporting & Beyond’ conference attended by JWG last week, regulators, trade associations, consultants and industry practitioners we all on message: be afraid, be very afraid.

JWG found this conference both helpful and disconcerting. As reflected in our coverage of the 10 known unknowns of MiFIR a year ago, and MiFID II implementation last quarter, we couldn’t agree with the European Commission, ESMA and the FCA more: the industry cannot afford to repeat the reporting mistakes of EMIR.

We are talking about billions of reports that, if done right, give regulators transparency to the markets and a 21^st century surveillance capability. Clearly, the industry is much further along than a year ago, but this change is enormous and affects thousands of firms and their suppliers. With the countdown clock ticking loudly, we are also a bit nervous that we are slipping down the EMIR reporting path again.

As the regulation accompanying the MiFID II Directive, MiFIR’s transaction reporting requirements create new, onerous obligations:

• Broadens the existing reporting regime to all instruments that are traded on a venue (the scope of which now includes MTFs, and OTFs)
• Increases the number of data fields to be reported by 250% (for most of Europe) to 81 including: national identifiers for people or committees, trader IDs, algo IDs, etc.
• Requires more ‘context’ about the trade – for example the counterparty’s LEI, nature of the counterparty, broker, clearer and even a ‘transaction reference number’
• Imposes an obligation on firms that receive and transmit orders (without executing them), to transmit order details to the receiving firm, or to report the order themselves
• Most importantly for the buy-side in the UK, the SUP 17.2.2 exemption will be removed and broker and portfolio manager reports will require identification of client and decision maker/trader.

As a regulation, MiFIR will be directly applicable to all firms operating within the EU, with no scope from national regulators to alter or upgrade the rules. This means that 28 regulators need to be much more aligned on their expectations and mechanics than ever before.

Another important mechanical change in this brave new world is the regulator that receives the report. In 2017, a French bank will need to report its UK trading activity to the AMF, who will pass it to ESMA. If the FCA wants to see it, they will get it from Paris and then follow-up with the UK entity for more detail. Sounds like we will have lots of opportunities to reconcile any anomalies!

JWG sees the top 10 MiFIR hurdles to clear as:

1. Conduct the gap analysis of what they have today vs what they will need for 2016 integration testing
2. Define the business requirements for all businesses in scope
3. Implement relevant changes to front, middle and back office systems and databases
4. Connect to an Approved Reporting Mechanism (ARM)
5. Implement an effective control framework around governance, accountability and evidence-based compliance
6. Inform clients of the changes and collect new client data specified by the reporting fields
7. Conduct internal simulations and review systems
8. Conduct testing with the relevant ARM (s) they are connected to
9. Conduct full front-to-back testing from transaction to regulator
10. Go live

There are quite a few obstacles to clear and many involved in this race. Given that there is less than 350 business days until the January 2017 go live date, to be ready firms will need to have completed their business requirements definitions by Q4 this year, connected to their ARM by Q1 2016, finalised testing by the end of Q2 2016 and sought feedback (and amended where necessary) from the regulators by the end of Q4 2016.

Regardless of final specifications due 2 months from now, the 81 data fields that need to be reported will be significant challenge to implement. LEIs, trader IDs, Algo IDs, waivers applicable, and short sale flags are some of the data items that will need to be reported – and sourcing and validating the data will be a significant challenge.

For instance, collecting LEIs from the in-scope clients will require a massive client outreach effort. Reviewing who needs an LEI, whether it is still valid, or convincing clients to pay the (approx.) €133 fee for LEIs will be an extensive effort. As will identifying which transactions constitute a ‘short’ or defining what algorithms they are using and whether they need to be identified. Aside from the data collection, firms will then need to account for data security, data privacy and data quality requirements on the information collated from across a multitude of disparate systems.

There is good news, however. Regulators have learned from the EMIR process and are being much more granular in the information requirements in a way that should (we hope) leave less room for interpretation of the data required. Fingers crossed for a ‘EuroTRUP’ (Transaction Reporting User Pack in the UK)!

However – it’s not just MiFIR you’ll need to account for. In addition to REMIT reporting this year, the EMIR review is coming up with new requirements, and the Securities Financing Transactions Regulation (SFTR) has its own transaction reporting regime that will have its own challenges in the MiFIR/ MAD implementation windows. Maybe ‘GlobalRIP’ (reporting information pack) is more the order of the day?

Want to channel your anxiety? Get your target operating model for reporting sorted now. Your choice is simple: invest in building strategic solutions now, without the full set of standards, and face future change requests with flexible and ‘best of breed’ solutions or wait until the standards come out and rush to implement cheap, tactical, basic compliance solutions and risk higher cost/income ratios. There are merits to both approaches – but doing nothing is dangerous.

Whatever you chose to do, firms need to be working with the industry *and* regulators to get this right. The regulator is there to clarify where they can, and as one said at the conference, ‘We may fine – but we don’t bite.’

We promise that we won’t even fine. Follow these links for more information about how JWG can help with:

• MiFID II offerings and how we approach training, join our MiFID II LinkedIn group to be part of the online dialogue
• KYC regulatory reform
• Regulatory implementation training

Good news, the industry needs all the help it can get!