Wouldn’t you know it; you spend over three years planning and worrying about a hard Brexit, and in the end, right at the last moment, after all the sleepless nights, it doesn’t actually happen! Instead, we now have a nice 11-month transition period. While there may be no changes to the MiFIR, EMIR and, SFTR reporting regimes until 2021, now is a good time to think about what changes you would like to see in the UK reporting regimes at the end of the transition period. While it was assumed that there might be little change in an attempt to assure equivalence, the UK Chancellor’s assertion that he is seeking “outcomes based” equivalence rather than complete alignment appears to have left the door ajar for some sensible changes to the reporting regimes. Starting with MiFIR, here are my top ten suggestions for changes to the transaction reporting regime which we believe will make reporting more proportionate for firms without degrading regulator’s ability to use the data for the intended purposes:
“Country of Branch ” fields
Perhaps one of the forgotten drivers behind MiFIR transaction reporting is the monitoring of conduct of business. There are five MiFIR “country of branch” fields which the NCAs use to share data amongst each other to help ensure that they can monitor branch activities. At Kaizen, we have discovered that firms frequently have issues populating these fields correctly. Since there will be no systematic sharing of data between the UK and the EEA, there appears to be no regulatory requirement to persist these fields.
“ToTV Opinion Paper”
ESMA has used this paper to expand the reportable instrument set to include “OTC derivatives sharing the same reference data details as the derivatives traded on a trading venue” Understanding the reportable instrument set has caused firms enough problems without adding to the burden. This is a considerable addition involving the matching of attributes against the ANNA DSB to find potential ISINs and then comparing the attributes associated with these ISINs against FIRDS to see if the instruments are reportable. I do not believe this is proportionate and it can be argued that it is not consistent with the Level 1 regulation. It has to go.
- Basket and Index Derivatives
Firms executing transactions in OTC basket derivatives have to populate the underlying ISIN field with all the ISINs that are traded on an EEA trading venue. For example, if they trade a pharmaceutical basket comprising 421 stocks of which 352 are ToTV, they first need to discover which are ToTV and then populate all of them in the underlying ISIN field. If they make a mistake with any of those ISINs, it will be rejected by the regulator. This is very onerous for firms and can be of very little value to the regulators. There is no information on the weighting, so the information cannot possibly be used by the regulators on a systematic basis.
Additionally, any changes in the basket composition are not reportable. It is also questionable whether the reporting of an index is of any real value to the regulators as it is doubtful whether they hold the constituent and weighting data. Of course, it is possible to manipulate the index markets (see Flaming Ferraris) but this is likely to stand out like a sore thumb to the participants and should be reported through a STOR. It is very difficult for firms to know whether the OTC index derivatives are reportable as it only takes one of the index constituents to be ToTV and this information is difficult to source – it certainly isn’t on FIRDS.
Under MiFID, we used to say that everything that was knowable about an IPO was contained in the prospectus, so it would not be proportionate to require the resultant transactions to be reported. I’m not sure what’s changed to justify their inclusion for MiFIR. The task has been made more difficult as it is possible that some of the ‘counterparties’ don’t have LEIs as they are not necessarily normal market counterparties. Of course, trades cannot be reported if the counterparty doesn’t have an LEI. To make things worse, reporting firms have often discovered that the ISIN of the IPO is not on FIRDS at the time of the IPO. As some trading venues have not reported dates when an application for trading was made, some IPO trades have been continually rejected.
- Trading Capacity
In the UK, we understand ‘principal’ and ‘agency’; but we don’t always understand the distinction between the new MiFIR values of ‘dealing on own account’ and ‘matched principal’. However, many firms, particularly the buy-side, have discovered that brokers confirming transactions back to them as ‘matched principal’, causes immense difficulties. Additionally, you can describe the same back-to-back principal scenario to a number of firms and I believe 70% of them will report it as two ‘DEAL’ transactions and 30% will report it as a single “MTCH” transaction. If it doesn’t matter which method is observed, why have the element of grey in the first place? Let’s get back to trading capacity we understand (and that are used in other reporting regimes).
- Crazy Chains – transmission of order, INTC and individual funds
I love the Guidelines document, I really do. However, there are times when I’m reading sections 5.26 (Chains and Transmission) and 5.27 (Investment firm acting under a discretionary mandate for multiple clients) that I find it extremely difficult to carry on reading. There are a couple of inconsistencies within these Guidelines which suggests they may not work quite as the regulators envisage. It is just too convoluted and transaction reporting shouldn’t be this difficult. Again, I think it is the buy-side that may suffer most from this and maybe it is an area where the FCA may want to simplify the requirements. For example, are allocations to funds really required when the fund manager reports with the identifier of the individual decision maker within the fund management company? Does the transmission of order indicator actually add any value for the regulator?
- Repos & Securities financing indicator
Exactly what is the logic for requiring a securities financing transaction, such as a repo, to be reportable under MiFIR simply because it has been excluded under SFTR? How was that leap made? If RTS 22, Article 2 sets the precedent that SFTs aren’t reportable under MiFIR (because they cannot be deemed to be abusive) why was it felt necessary to add the proviso that they should be reported if the counterparty is a member of the European System of Central Banks. Simplify the regulation and remove SFTs from MiFIR transaction reporting completely.
Completing the technical standards and Guidelines was clearly a mammoth task for ESMA and it is inevitable that there would be time constraints. I believe this is particularly evident when it comes to the reporting of swaps. For example, it is questionable whether requiring the price of an equity swap to reflect the interest rate is sensible, as the price of the underlying reference security would appear far more valuable to the regulators in pursuing market abuse. In fact, why require the interest rate side at all – it is not required for CFDs or spread bets, which are essentially swaps anyway. As for the “swap-in” and “swap-out” indicator – does this really bring any value when rules for determining the ‘buyer’ and ‘seller’ are already set out in the regulatory text?
- Reference Data Requirements
Where a reported instrument is not ToTV and is only being reported because the underlying instrument is ToTV, up to 15 additional reference data fields need to be populated to describe the instrument to the regulator. This has proved to be particularly difficult for firms. A lot of these fields are essential for the regulator to detect market abuse – the underlying instrument ISIN is a prime example. However, it is questionable whether some of the others deliver any value. For example, does the ‘instrument full name’ add value when all the details are contained in other fields. Are some of the fields duplicated in the CFI code (e.g. ‘option type’). Does ‘notional currency’ have any relevance for non-FX derivatives?
- Short Sell indicator
This is very onerous for firms to populate correctly and maybe the cost benefit analysis of this field should be reviewed. If there is a permissible value for ‘information not available’ (for clients after acting on a ‘best efforts’ basis) then you have to assume that the overall quality of this information is questionable.
These are my ‘just for fun’ top ten as there may be perfectly valid reasons why the regulators need this information. To be honest, they’re my initial thoughts and I haven’t even mentioned other contenders such as ‘net amount’, ‘waiver indicator’ and ‘OTC post trade indicator’.
However, there is a serious element here. If there is an opportunity for the UK FCA to tweak its reporting regimes on the basis of ‘outcomes-based equivalence’ rather than alignment, the process needs to start immediately and firms need to feed into that process. Eleven months is not a long time.
Forthcoming blogs will detail our wish lists for the EMIR trade reporting and SFTR regimes.
For help with your transaction reporting accuracy or to discuss your own post-Brexit transaction reporting wish list with one of our regulatory specialists, please contact us.