MiFID II reporting five years on: a retrospective

MiFIR transaction reporting is five years old this month. In the first of a three-part blog series on MiFIR, Kaizen’s regulatory subject matter expert Matthew Vincent looks back at the origins of the regulation and some of the significant changes that have occurred since go-live.

Let’s start with some positives. The additional data captured by MiFIR transaction reporting has improved regulators’ ability to monitor and detect for market abuse whilst firms have made significant efforts to get their reporting correct and remediate mistakes of the past.

On the flip side, whilst the regulation may have harmonised reporting requirements which was positive for the industry, differences of interpretation still arise which could potentially be resolved more quickly. In addition, the changes and centralisation have resulted in a loss of flexibility and responsiveness to change. 

There is no doubt that the industry has congratulated regulators for their efforts in producing the reporting guidelines however, as experience has shown, you can never quite find a guideline that matches the exact scenario that you are trying to report.

Why transaction reports?

For UK and EU regulators transaction reports are essential to allow them to monitor for market abuse and maintain orderly financial markets. Without reports regulators would be blind to any market abuse that might occur.

“Accurate and timely reporting of transactions is crucial for us to perform effective surveillance for insider trading and market manipulation in support of our objective to ensure that markets work well and with integrity.” – FCA, April 2015

Transaction reporting within the European Economic Area (EEA) can trace its history back to 1993. Since then, the obligation on firms has steadily increased with MiFID I introduced in November 2007 and MiFID II/MiFIR in January 2018.

How was MiFIR different to previous reporting obligations?

The obligation to report and the details to be reported were incorporated into a regulation not a directive, limiting the ability of member states to implement different rules.  Some interpretation differences arise although these are subtler than historically.   

• The data to be reported increased from 24 fields to a maximum 65 fields
• The scope of reportable instruments was broadened to include ‘over the counter’ derivatives and certain derivatives over FX, commodity and interest rates.
• Data quality checking and reconciliations became legally mandated in RTS 22, Article 15. 
• ESMA produced guidelines and Q&As to assist firms with implementation of the regulation.

What’s changed since January 2018?

ESMA Q&A on MiFIR data reporting

The document predates MiFIR go-live with the first question answered April 3 2017.  A further 13 questions have been answered with the latest in September 2020.

ESMA validation rules – valid but wrong

The validation rules are designed to improve the quality of the data received.  There have been five versions with incremental changes made over the course of the five years.  All until version 1.5 were applicable to both UK and EU regulated firms.  Versions 1.6 and 1.7 have been optional for UK regulated firms and UK ARMs alike. 

However, validation rules can only go so far in improving data quality.  The validation rules capture approximately 400 data quality issues. Regulators have stressed that passing validation is not the only way a firm should validate its data quality.  Our comprehensive quality testing demonstrates that there are many more ways of reporting valid but incorrect data.

“Firms should not assume that a report was accurate because it was accepted by the Market Data Processor, as business validation rules are not intended to identify all errors and omissions.” – FCA Market Watch 59 (April 2019)

“The CSSF continuously monitors the quality of the transaction reporting data. During the last year, the CSSF not only carried out the standardised quality tests developed together with the other competent authorities and ESMA, but also conducted a series of data completeness and quality enhancement campaigns.” CSSF, February 2022

Data Reporting Services Providers (DRSP) regime 

Immediately post MiFIR go-live, Approved Reporting Mechanisms (ARMs) were supervised by their National Competent Authority (NCA).  On 1 January 2022, ESMA took on its new mandate as direct supervisor and now supervises firms that represent almost 99% of the transactions reported by an ARM.

This is unlikely to have an immediate effect on firms – although there have been some concerns raised about the additional costs of this supervision. But in time this should further harmonise the implementation of the regime across member states in the EU.  UK ARMs are still supervised by FCA. 

Brexit – limited impact so far 

So far, the impact of Brexit on reporting firms has been limited. For example, UK nationals must now be identified using their passport numbers when a report is made to an EU competent authority – yet should still be identified using the National Insurance number when a report is made to the FCA. Other alterations have had to be made as the status of UK venues has changed, when reporting to the EU and that has impacted the way in which certain fields should be populated, TVTIC, Pre-Trade Waiver and Country of Branch Membership.  A more significant change has been to the ‘in-scope instruments’ with the introduction of UK FIRDS, and the most recent change that came into effect on 30 December 2022 are the changes to the exempt securities under the UK short selling regulation. 

Supervisory priority

The only significant supervisory change was made by the FCA on 13 January 2022 when the regulator announced it was in the early stages of considering policy options for the UK reporting regime which included the future of the short selling indicator.  

“Until the future of the short selling indicator field…has been determined, we will not take action against firms who do not meet these requirements. We do not expect firms to notify us about issues affecting the short selling indicator field through an errors and omissions notification form. We will keep this position under review.” – FCA, January 2022

Validation rule – January 2023

This month’s five year anniversary is marked by the awakening of validation rule – 269 which states the trade date cannot be earlier than five years before the submission date. Where this is the case, reports will not be accepted by the NCA and the firm will receive a CON-281 rejection.  Hence, firms will no longer be able to correct some mistakes of the past.

What hasn’t changed at all?

ESMA’s table thumping Guidelines – Transaction reporting, order record keeping and clock synchronisation under MiFID – has been the go-to place for firms seeking guidance for their implementations. It is somewhat surprising that there hasn’t been a single revision to any one of its 291 pages since it was last corrected on 7 August 2017.   

Some final thoughts

Fields like TVTIC and the short sell indicator have been difficult to implement, and we expect some of these issues to be addressed in the next iteration of the regulation.

In our second blog in the series Simon Appleton will look ahead at the changes to MiFIR reporting we are expecting to see this year and beyond.