As time ticks on in the implementation delay for MiFID II, regulators and firms are moving closer towards mutual understanding and delivery. There are still many creases to be ironed out in the run up to January 2018, especially with regards to transaction reporting, which is a major pain point for many firms. This article provides a brief overview of the key major issues and the current timeline surrounding MiFID II transaction reporting.
At the present, the industry has several expectations over the next few months. Clarity from the regulators on RTS 22, the technical standards for investment firms reporting to their National Competent Authorities (NCAs), is one of the major expectations. The timeline for this is likely to be late October to early November as the European Parliament and Council are in the process of reviewing it.
The guidelines on transaction reporting, order record keeping and clock synchronisation under MiFID II have recently been published by ESMA. This document is largely scenario-based; however, these scenarios do not often match with firms’ own scenarios. The latest document is likewise scenario based and the hope is that this document will be helpful in providing more clarity.
There are a number of developments occurring within the transaction reporting space. Industry testing for MiFID II transaction reporting is in development as Approved Reporting Mechanisms (ARMs) work to provide these facilities. The Financial Conduct Authority (FCA) is using a third party provider, Sopra Steria, for reporting services, which has been mandated to provide a platform for industry testing and should be especially useful for cross-industry testing. The timeline for this is likely to be July 2017, which is pushing ever closer to the go-live date.
One of the major concerns that the industry currently holds on MiFID II transaction reporting is the divergence of opinions from national competent authorities, which may complicate EU harmonisation and result in difficulties for firms operating across borders. An example of this can be seen between the FCA and BaFin on determining counterparties. For the FCA, the counterparty is the fund manager, whereas for BaFin it is the fund. It is these sorts of issues which will render implementation more complex. Similar situations have occurred for ARM regimes also, among other issues. At present, the hope is that these differing stances will be harmonised.
Another major issue which is proving difficult to avoid is the no LEI (Legal Entity Identifier), no trade stance of the regulators. Although firms have been collecting LEIs for EMIR, there are still concerns that clients outside the EU may not feel obligated to obtain an LEI, with whom firms would be required to not trade. There have been some positive steps made here as industry initiatives have been launched to provide a coordinated approach, continuing the theme of standardisation and cooperation that has been embraced in response to regulation in the recent years. However, although this may help towards a solution, it is still likely that there will be the unintended consequence of stopping service to small corporates that are less engaged, do not feel obligated, or will be put off by the initial and ongoing fees attached to LEIs. It is an especially sore point, as it seems as though the regulator will not budge: no LEI, no trade; so, it is important that the industry coordinates a solution to this.
There are a few ways firms can ensure they are on track for the implementation deadline. One key way of doing this is ensuring that the firm has access to the right expert understanding. Reporting is a specialised technical area so it is important that this knowledge be constantly developed. Trade associations are a resource of which it is especially important to make use as experts can speak to their peers, explore solutions together, and is particularly useful for smaller firms who may not have the fortune of having that expertise internally, although the crowd-sourcing approach is also beneficial to larger firms. Special interest groups, such as our MiFID Implementation Group, can also be an effective way of exploring interpretations and solutions together. It is important that this knowledge be then brought back into the individual firms. Internally, it is important to keep the same experts who develop their knowledge, who also should have a good understanding of the firm and the product. These are the same people who need to focus in on scenarios and map theirs to ESMA’s as they are released.
When carrying out implementation projects, it is essential to have an effective compliance function and that this communicates with the legal function to render transaction reporting as pain-free as possible. Firms should consider the very important element of following the spirit of the regulation, doing the ‘right thing’ in the eyes of the regulator; and in a similar vein, it is important to keep a record of this decision-making process so that the resulting decisions can be justified to the regulator.
Another important area to focus on is having the appropriate architecture. Whether a firm buys off-the-shelf or develops their own bespoke solution will be down to internal preference and there does not seem to be a clear-cut solution. There are certainly advantages to buying off-the-shelf such as some saving in reduction time, and it is likely that there will be plenty of options available for MiFID II reporting. It is likely that smaller firms may be more open to this option as it is usually a cheaper and easier option for less complex firms. With regards to developing one’s own architecture, it is important to think about the operating teams who may need to perform reviews or investigative reports and also the complexity of the regulation. Regardless of the choice, having effective architecture appropriate to the specific firm will be crucial complying with these obligations.
An area, which is frequently neglected at this phase of preparing for new regulation, is controls, and people often think that they can go live without them. However, for this regulation there will be a very low tolerance for error. In fact, the regulation itself mandates controls and not only requires reconciliation but lays out the sections of the report which must be reconciled. There is mandatory testing for MiFID II reporting and lack of compliance will not be tolerated, so for MiFID II/R having these controls in place should be a priority.
As with most areas of the financial services sector, there are also questions and concerns regarding Brexit with regards to MiFID II transaction reporting. It seems likely, however, that whether we have a hard or soft Brexit, ‘transaction reporting requirements will still be carried out’ is the message coming from regulators and also the approach many firms are taking internally. The FCA are likely to retain the reporting requirements, especially when one considers that they were a strong supporter, if not the leading voice, on transaction reporting, from MiFID I. It is important, then, that UK firms are prepared for these requirements and consider them as a long-term issue.
In the time remaining until application of the regulation there is still much to be done and the extra year reprieve is fast slipping away. It is important that the industry as a whole moves towards collaborative solutions and prepares early alongside each new wave of information from the regulators. Hopefully, effective communication and cooperation between firms, trade associations and regulators will lead to a smooth implementation for January 2018.