MiFID II reporting five years on: The future of post-trade transparency reporting

MiFIR trade & transaction reporting was five years old in January. In the third of our blog series on MiFIR, Chris Machin reviews what’s ahead for MiFIR post-trade transparency reporting in Europe and the UK.

As mentioned by Simon Appleton in part two of this blog series, there has been significant focus on post-trade transparency (PTT) reporting in the last year by both the FCA and ESMA.

Since the foundations of MiFID II were put in place in 2018, the main area of consternation has been RTS 2 non-equities (rather than the vanilla RTS 1 equities). Leading up to go-live, the industry had been clear that bracketing all non-equities into one RTS wouldn’t work. If we could start again, segregating out OTC derivatives from bonds and the other asset classes would be essential. Five years on, this debate still painfully rumbles on.

What we are now seeing post-Brexit, is an interesting mix of divergence and convergence from the UK and EU regulators, with a common debate around liquidity vs transparency.

ESMA issues positive opinion on amended RTS 1 and 2

ESMA loves to share an update just before a holiday season and so it did just before Christmas 2022, confirming its support for the European Commission’s proposed amendments to the regulatory technical standards on RTS 1 and RTS 2. The amendments are an attempt to establish increased transparency, strengthen data integrity and availability, and create a level playing field. However, it should be noted that this was the same mandate and message used more than five years ago when MiFID II went live in January 2018.

So, is anything actually changing? And is ESMA’s approach in line with the potential changes announced by the FCA in its post-Brexit consultation paper earlier last year?

Liquidity vs transparency

Liquidity vs transparency, as mentioned earlier, is still the burning argument. By increasing transparency, will this improve liquidity?  A consolidated tape has been proposed since 2014 as consolidated tape providers (CTPs) were listed amongst approved publication arrangements (APAs) and approved reporting mechanisms (ARMs) as data reporting service providers (DRSPs), but none have materialised to date. It’s complex. The industry sees shares and bonds in scope for consolidation, but the complexity of OTC derivatives is still a derided topic, with trade associations like ISDA at the forefront of lobbying what members are saying. Is a derivatives tape needed? There’s also the terminology of MiFIR Article 13 and ‘reasonable commercial basis’. How do the exchanges and APAs feel about this when data sales are a big revenue driver for them?

Dark pools/trading

Limitations on dark trading and moving to a single volume cap have been discussed and in practice for a while. But ESMA’s latest update demonstrates how it is diverging from the UK.  ESMA is trying to increase transparency with the aim of encouraging trading on lit markets, by keeping the cap in place, whereas the UK is trying to increase liquidity by reducing these restrictions and pulling back the liquidity that was lost when the UK exited the EU.

Clarity on transparency fields

Clarity on transparency fields is welcomed although the somewhat ambiguous ‘price’, ‘quantity’ and ‘notional amount’ are not always relevant, depending on the asset class being traded. More clarity is required on defining non-price forming transactions and deferrals aside, however it will be interesting to see how 2023 plays out.

FCA’s update on MiFIR transparency

ESMA’s opinion still needs to be negotiated through the European Parliament and it is likely the new ‘Manual’ described in the guidance, will replace or co-exist with the transparency Q&A, whereas in the UK, HM Treasury has given the FCA the power to change the rules accordingly.  

With the FCA, we know the share & derivatives trading obligations (STO & DTO) have to change as the statements from the respective articles 23 and 28 in the regulation no longer apply now the UK has segregated. Traded on a Trading Venue (ToTV ) is questionable but the biggest draw may be the delineation of the systematic internaliser (SI) regime from the reporting responsibility.  It seems that this responsibility will be at entity level which still brings uncertainty around communication of status between SI and the Non-SIs and buy-side.  A central evergreen source is needed, something like Smartstream RDU’s SI register which was made available in preparation for 2018.  This was crucial to market participants and APAs alike on the identification of who has the publication obligation, given RTS 1 and 2 post-trade transparency reporting is single-sided.

Though trying to achieve extra transparency, the regulators need to keep one eye on creating undue risk in the market to those that are providing the much needed liquidity. On the UK side, there is mention of change in deferral flags, providing more precise information and less ambiguity, but caution should persist. RTS 1 and 2’s goals were OTC price transparency, level playing fields, and encouraging investor confidence, whilst reducing investor risk and allowing informed investment decisions for all. If the FCA and ESMA keep this in mind as 2023 progresses, taking on the feedback from the industry, the battle of liquidity vs transparency could harmonise into achieving both, a match made in heaven!

• For a conversation with Chris about the upcoming changes to RTS 1 and 2 requirements or a free healthcheck of your MiFIR post-trade transparency reporting, please contact us.