Q: Which ‘reporting crocodile’ will be nearest the canoe in 2017?

A: MiFID II, and it’s only 358 days away…

In our last blog we looked back on the reporting events and challenges that shaped 2016 through the hits of Bowie; but as we begin 2017 we find ourselves asking, ‘where are we now?’ (last Bowie reference…promise!). In short, there are many reporting regimes that are contenders to win the accolade of the ‘reporting crocodile’ nearest the canoe for UK firms in 2017. However, the characteristics and specific demands that MiFID II requires of firms, establishes it as the most demanding and challenging regulatory reporting ask of 2017. The clock is ticking and as at the time of writing, we have 358 days until go-live!

The other crocodiles circling the canoe

For those of you who came back into the office to deal with the aftermath of your firm’s Bank of Israel Reporting go live, 3 January 2018 may seem a long way off. Equally if you are responding to the CFTC review of your DFA reporting through the NFA and their 4s letters or an official examination by them, again MiFID II seems a distant problem to contend with. Worse still, your firm may be facing regulatory censure on longstanding commitments such as MiFID I or, as we are seeing increasingly, fines from the CFTC in relation to accuracy of reports under the DFA regime. Then there is pressure from ESMA and competent authorities to improve the quality of EMIR reports. In addition to the EMIR Review and MiFID II, European firms need to contend with consultations on SFTR.  For those who have US and HK obligations there are the new SEC and HKMA obligations due throughout the first three quarters of the year.

These ‘crocodiles’ are not just circling but hitting the canoe at the same time and of course, you cannot pick and choose which ones to deal with; all need to be grappled with. But what makes MiFID II stand out as the crocodile you need to deal with most?

What are the characteristics of MiFID II that require special attention?

In a nutshell – in many respects, MiFID II confers materially different obligations on firms and runs a much greater risk of regulatory censure following go-live compared to other G20 reporting obligations. There are three characteristics which mark out MiFID II for special attention:

First, the sheer number of fields, many different from what has been asked of before. E.g. Trader ID, algo ID, short-selling field, pre-trade waivers, and precise execution time to the millisecond and beyond!

Second, MiFID II builds upon an existing regime where competent authorities, most notably the FCA, have developed expertise in detecting data quality issues and have a regime in place to issue sanctions. Ana Fernandes of the FCA made it clear at the recent FCA TMU Transaction Reporting Forum, that expectations will remain high and the ability of the TMU to detect errors will be improved come 3 January 2018.

Third, the sheer complexity of the MiFIR requirements dwarfs that of competing regimes. Whether it is determining what transactions need to be reported, what business events need to be excluded, notwithstanding ‘no LEI no trade’, the short-selling calculation, or how to put in place the mandated regulatory controls, the level of complexity is materially different than what has been expected before.

Next, we explore some of these complexities and discuss what firms need to be doing now to ensure successful delivery this time next year.

Your MiFID II to do list

It’s the New Year and what better time to draft your ‘MiFID II Transaction Reporting to do list’?  Better still, we’ve done it for you…

1. Reporting Solution – Build or Buy?

Key to meeting the complex obligations of MiFID II is putting in place the appropriate reporting solution.  There is no fixed answer on whether to buy or build as it depends completely on your firm’s size, previous investment in meeting reporting obligations, and expected reporting volumes.

At one end of the spectrum there are the large tier 1 banks who have been investing heavily in their reporting solutions over the last six years. In this case, it is most likely that there will be an extension of recent builds to cater for MiFID II requirements. A word of warning, IT architects and IT leads that expect a similar build to EMIR should think again, see below for examples of why.

At the other end of the spectrum, are firms who have previously had little or no reporting obligations who are only now looking to make the decision on whether to build or buy. On balance, due to the complexity involved and time remaining, buying a solution and adapting it to your needs is probably the least risky option and you should choose a provider with a track record of providing reporting solutions that are ready to roll off the production line.

2. Determine what trades are reportable, based upon instrument being traded

At first glance it appears straightforward how to determine what instruments needs to be reported. Firms will be able to rely, to a certain degree, on the list that ESMA is mandated to provide under RTS 23. But even here there are significant implementation and operational issues with this list. For example, if it is not produced or there are issues with it then firms still have the obligation to report correctly, irrespective of the provision of the list.

It become more complicated when you have to identify instruments which reference those traded or admitted to trading on trading venues.  How will firms identify and report the below examples?

  • Third country futures that reference instruments admitted or requested for trading on trading venue (RM, MTF or OTF)
  • OTC derivatives and 3rd country ETDs that reference instruments admitted or requested for trading on trading venue (RM, MTF or OTF)
  • How to identify, at the time of trade, the index constituents.

Due to these inherent problems; determining which instruments are reportable becomes a materially more complex proposition compared to MiFID I, EMIR and DFA. Firms need to be working now with their counterparts, vendors and participate in discussions with their Trade Associations to put in place workable solutions.

3. Establish what activity requires reporting

Having figured out what instruments need reporting firms need to turn their attention to determining what activity is reportable. In short, take a look at RTS 22, Article 2 and the 14 different sets of activities that need to be excluded. The fact that many of these business activity exclusions have not been seen in EMIR, demonstrates again the material difference in the type of reporting solution required for MiFID II compared to previous reporting regimes. Firms will have to look at their trade data and ensure their reporting solutions are able to identify activity that should be excluded, as MiFIR does not allow for over-reporting.

4. No LEI – No Trade

Both the FCA and ESMA in recent public meetings have reiterated the point that firms must not trade with entities that do not have a LEI. This has been reiterated in the first MiFID II Q&A published by ESMA. There is considerable work for client onboarding teams and relationship managers to reach out to clients without LEIs and ensure compliance by 3 January 2018. Good luck!

5. Short-sell calculation

We will not discuss here the merits or otherwise of the short-selling requirement for transaction reporting (ok well, a little passing reference…suffice to say the value of this field is a best questionable.) Transactions in cash equities and government securities will require a calculation to identify transactions that take the firm short at any given point. Making an accurate calculation that takes into account late trade bookings and busts will be problematic and firms should not underestimate the time and cost that will be needed to ensure compliance.

6. Under RTS 22, Article 15, ESMA high priests did say upon to firms, ‘thou shall test and reconcile one’s transaction reports….’

Ok, maybe not as dramatically as that but ESMA now makes the obligation to test and reconcile mandatory under MiFIR. The important point to note is that controls are often the first casualty of delivery, as go-live approaches. For MiFID II this is not an option; firms need to ensure effective testing and reconciliations are in place at go-live. Failure to do so will be a breach. Looking to third party providers who have mutualised the costs of testing and reconciliations may make sense to ensure comprehensive and effective controls are in place prior to go live in 358 days time.

There are many more items to add to the MiFID II Transaction Reporting to-do list.  Of course in the current environment there is no choice between which regimes you implement. That said, the complexity and the introduction of new demands on firms by MiFID II means it should be treated as the largest crocodile nearest the canoe when firms are planning their 2017 regulatory reporting delivery.