ADVANCED

Transaction Reporting

Transaction Reporting

The recast Markets in Financial Instruments Directive (MiFID) and accompanying Markets in Financial Instruments Regulation (MiFIR) (together MiFID II) is one of the largest regulatory undertakings in the history of financial markets.

In this briefing, we highlight some of the important changes for Financial Services Firms including MiFID Managers and Brokers and Dealers in relation to Transaction Reporting. All commentary is based on the current available publications, and the Delegated Act has not yet been finalised.

The original Markets in Financial Instruments Directive of November 2007 (MiFID I) established the transaction reporting regime, however the obligation is now enshrined in MiFIR (and thus applicable directly without need for FCA rule-making). The scope of the reporting requirements have been significantly expanded in terms of both instruments and required data; meeting the obligations is likely to be a significant challenge for all firms executing transactions.

The obligation to report transactions was initially introduced to assist National Competent Authorities (NCAs) detect and investigate market abuse; for the FCA, this supports their operational objective to protect and enhance the integrity of the UK financial system. MiFIR has not changed this fundamental purpose and, indeed, has extended the requirement for NCAs to include the monitoring of fair and orderly functioning of markets within their remit as well as observing the activities of investment firms. This is consistent with broader regulatory changes, such as Market Abuse Regulation (MAR) that seeks to enhance the integrity of financial markets. The submission of complete and accurate reports is therefore of the utmost importance.

The meaning of ‘transaction’ is very broad. It covers the sale and purchase of reportable instruments as well as other types of acquisition and disposal in which there is the potential for market abuse. The Regulatory Technical Standards accompanying the reporting requirements (RTS 22) also exclude a number of activities from the definition of ‘transaction’, such as transactions arising for clearing and settlement purposes.

Under MiFID I, the reporting requirement arises only where transactions are executed on EU Regulated Markets, which was extended by the FCA’s Rules in SUP 17 to include Prescribed Markets. MiFIR transaction reports will be required for all transactions that have been executed in financial instruments where the instrument has been admitted to trading on an EU Regulated trading venue, where the underlying instrument references such, or where an admission request has been made. The extension of the application to EU Regulated trading venues brings into scope those transactions executed on Multilateral Trading Facilities (MTFs) and Organised Trading Facilities (OTFs). The consequence of this extension is an expansion of reporting requirements in the non-equity space, particularly instruments currently traded off-exchange such as many bonds and derivatives.

The European Securities and Markets Authority (ESMA) will maintain a publicly accessible list of all reportable instruments within a new Financial Instrument Reference Data (FIRD) system, which will collect information on a daily basis from approximately 300 trading venues across the EU.

RTS 22 also specifies what constitutes ‘execution’ by an investment firm which includes, among other activities, dealing on own account, executing orders on behalf of clients and making an investment decision in accordance with a discretionary mandate given by a client. Transmission of an order to another counterparty, in particular circumstances, is not considered execution. It is important that firms fully understand how their business activities map to the requirements and detail of their reporting obligations.

The volume of data that must be reported has almost trebled to 65 fields, the full details of which can be found in Table 2 of Annex 1 to RTS 22. The fields containing the fundamental details of the transaction are unchanged but a number of new data requirements have been added to enable NCAs to have full access to records at all stages in the order execution process for their market monitoring. These new fields include those to identify the buyer or seller, the execution trader and the identity of any decision maker – a portfolio manager or an algorithm. Identification of natural persons requires full names, dates of birth and national identifiers which are (jurisdiction depending) either national identifiers, passport or national identity card numbers or a prescribed concatenation of name and date of birth. Any entity that is a counterparty to a transaction will have to be identified using a valid, current and appropriately assigned Legal Entity Identifier (LEI) and firms are prohibited from providing a service that would trigger a transaction report without first obtaining this code from the counterparty. The way in which trading capacities are reported is changing from ‘Agent’ and ‘Principal’ to ‘DEAL’ (dealing on own account), ‘MTCH’ (matched-principal) and ‘AOTC’ (any other capacity) and details of any applicable waiver are required. There are also fields to include an indicator which relates to short-selling transactions, or OTC post-trade, Commodity derivatives or Securities Financing transactions.

The concession under MiFID I where UK investment managers were able to rely on their brokers to submit transaction reports to the FCA on their behalf is no longer applicable and has been replaced by the so called ‘transmitting firm‘ exclusion. This applies where a firm that communicates an order will be permitted to rely on a counterparty (the ‘receiving firm’) to make transaction reports but only where there is express agreement between the two parties that the receiving firm will report all the details of the transaction.

In addition to express agreement, the transmitting firm must supply the specified order details contained in Article 4 of RTS 22, which include items such as instrument identification code, direction, price, quantity, client details and decision maker details. The receiving or reporting firm is also obliged to review and validate the order details for errors or gaps before submitting a transaction report.

In the absence of an express agreement and provision of all the mandated order details, the order will be deemed to have not been transmitted and each counterparty will have to submit their own transaction reports. Brokers will need to consider if they wish to accept contractual responsibility for reporting on their clients’ behalf and if they have the IT systems capable of collecting and reporting the Order Details they receive, and investment managers will need to ensure they are capable of transmitting all the details in a timely fashion to enable the receiving firm to comply with the T+1 reporting requirement.

If firms are submitting transaction reports under the European Markets Infrastructure Regulation (EMIR) which contain all the required information to satisfy their MiFIR obligations, and the Trade Repository (to whom those reports are submitted) is also an Approved Reporting Mechanism (ARM), then MiFIR provides that the obligation has been complied with. The practical application of this remains to be seen.

Transaction Reports under MiFIR can be submitted to NCAs directly or via an ARM or trading venue and must be submitted as quickly as possible, but not later than close of the following day. In the UK the concept of an ARM is not new and the FCA currently only accept transaction reports via ARMs; it is not expected that this will change but the use of ARMs throughout Europe is expected to increase.

Accuracy and completeness of transaction reports is paramount and firms must have in place arrangements to ensure this, which include regular testing and reconciliation of the reporting process. ESMA has recently published its final Guidelines on Transaction Reporting, Order Record Keeping and Clock Synchronisation under MiFID II (aka EuroTRUP) to assist the industry in meeting its obligations. These guidelines are a comprehensive guide for Investment Firms, Trading Venues, ARMS and NCAs on compliance with the relevant provisions of MiFIR and ‘are designed to ensure consistency in application’ [1]. The EuroTRUP is focused on the construction of transaction reports in various trading scenarios and, although not exhaustive, encourages firms to apply the ‘elements of the most relevant scenario to construct their records and reports.’ [2]

There is no doubt that the changes introduced by MiFIR are significant and the FCA has already implicitly questioned (via Market Watch 50) firms’ ability to meet these more complex transaction reporting requirements when they are still encountering issues with firms’ compliance with the existing regime. Cordium would encourage all firms that may be impacted by these changes to ensure their MiFID II plans address these requirements comprehensively.

For those firms that have existing infrastructure for MiFID II and EMIR reporting with respective connections to an ARM and a Trade Repository, the transition to MiFID II transaction reporting could be an incremental upgrade, albeit one that requires new integration with personnel or CRM systems for trader identification. However, for firms who previously relied on their sell-side brokers to report transactions but are now obligated to do so themselves, the operational burden will be greatest. The complexity of the MIFID II data rules, the submission format, the timeliness of the submission and the accuracy of items such as date-time stamps (via clock synchronisation) all stack up to a point that a manual process is not viable and an automated technical solution must be employed. This is a significant undertaking for any firm.

 

[1] Page 10; ESMA Guidelines on Transaction reporting, order record keeping and clock synchronisation under MiFID II; 10 October 2016|ESMA/2016/1452

[2] Page 11; ESMA Guidelines on Transaction reporting, order record keeping and clock synchronisation under MiFID II; 10 October 2016|ESMA/2016/1452