When MiFIR is implemented in 2016, all of the pain experienced in preparing for EMIR’s transaction reporting regime, which went live earlier this year on 12 February, is likely to be rekindled. Thankfully, at least this time around the industry has significantly more time to get prepared.
Hopefully, that means enough time to resolve potentially problematic issues around data standards and protocols well in advance of the go-live date. One such potential problem, which has already been identified on RegTech, is around client identification standards – with MiFID requiring transaction reports to identify “persons and the computer algorithms within the investment firm responsible for the investment decision and the execution of the transaction ”. This will make the whole issue of algo flagging even more complicated – threatening to trump measures already introduced via the German HFT Act.
But algo flags are just the tip of an operational iceberg that could see MiFIR’s transaction reporting regime turn into a titanic challenge. ESMA is due to open consultations on technical standards this summer and, to prepare for that process, we have highlighted the top 10 areas to look out for when those consultations begin:
- “The [transaction reporting] obligation … shall apply to financial instruments which are admitted to trading or traded on a trading venue ”; “financial instruments where the underlying is a financial instrument traded on a trading venue ” and “financial instruments where the underlying is an index or a basket composed of financial instruments traded on a trading venue ”. These mean the scope of MiFID’s transaction reporting obligation has been drastically widened, creating areas of overlap with EMIR’s trade reporting regime.
- “Investment firms shall have responsibility for the completeness, accuracy and timely submission of the reports which are submitted to the competent authority ”. Although the Level I text states that firms will not be liable for errors attributed to a firm’s chosen Approved Reporting Mechanism, they will be on the hook for checking and verifying their reports.
- “Data standards and formats for the information to be reported … and arrangements for reporting financial transactions and the form and content of such reports ”. Standards governing the content submitted as part of MiFIR’s transaction reports will be crucial. Whether or not fields will be the same as EMIR’s reporting regime, and how new fields will be standardised, will have a big impact on the ease of implementation.
- “The criteria for defining a relevant market … to ensure that the competent authority of the most relevant market in terms of liquidity for those financial instruments also receives this information ”. Essentially, this technical clarification will help to define which authority needs to see the reported transactions for which instruments.
- “The references of the instruments bought or sold, the quantity, the dates and times of execution, the transaction prices, the information and details of the identity of the client, a designation to identify the clients on whose behalf the investment firm has executed that transaction, a designation to identify the persons and the computer algorithms within the investment firm responsible for the investment decision and the execution of the transaction, a designation to identify the applicable waiver under which the trade has taken place, the means of identifying the investment firms concerned, the way in which the transaction was executed, data fields necessary for the processing and analysis of the transaction reports …” While many of these elements are fairly standard components of transaction reports – such as instrument identifiers, quantity/volume, price and timestamp – other aspects will pose new problems in terms of client identification, given requirements to identify the persons or computer algorithms responsible for each trading and investment decision.
- “The designation to identify short sales of shares and sovereign debt ”. Many of the technical standards for classifying and reporting short selling have already been highlighted by ESMA and the European Commission.
- “The relevant categories of financial instrument to be reported ”. This will be key, as ESMA seeks to clarify what is in scope for MiFIR’s transaction reporting regime. The MiFIR text currently states that regulatory reporting applies to all financial instruments traded on a trading venue, in addition to derivatives that reference instruments, or indexes/baskets of instruments that are traded on a trading venue – even when the trade itself is not conducted on a trading venue.
- “The conditions upon which legal entity identifiers are developed, attributed and maintained … and the conditions under which these legal entity identifiers are used by investment firms … for the designation to identify the clients in the transaction reports ”. Whether or not this provides an opportunity for ESMA to authorise the use of the LEI remains to be seen. With or without such a mandate, client identification standards will invariably remain a challenge given the level of granularity is being extended to individual persons and algorithms.
- “The application of transaction reporting obligations to branches of investment firms ”; “what constitutes a transaction and execution of a transaction ” and “when an investment firm is deemed to have transmitted an order ”. Technical advice relating to all of these issues will help to clarify obligations around who needs to report what and by when.
- “Data standards and formats for the instrument reference data … including the methods and arrangements for supplying the data … and the form and content of such data ”. Accurate instrument reference data will always be a problem, given there are still some issues around the Unique Product Identifier (UPI) taxonomy governing EMIR’s trade reporting obligation, and considering the scope.
So, in summary, there are an awful lot of technical details that need to be clarified by ESMA this summer to determine the precise ‘who, what, when and how’ of transaction reporting. Defining areas of overlap and underlap with existing EMIR (and MiFID I) reporting regimes will be key for operations staff, as firms try to build on existing processes where possible. Similarly, if any areas of ambiguity still exist in specific data standards and protocols, MiFIR provides ESMA with an opportunity to clarify those. That’s what we hope, at least! Stay tuned for more CDMG activity.