The new transaction reporting requirements under MiFID II/MiFIR build on the existing MiFID I requirements and reporting infrastructure, but they cover more instruments and products and more types of transactions.
The new transaction reporting requirements under MiFID II/MiFIR build on the existing MiFID I requirements and reporting infrastructure, but they cover more instruments and products and more types of transactions. Interest rates, commodity and FX derivatives will no longer be exempt from reporting, and all instruments traded on MTFs and OTFs will become reportable.
Also, the number of fields to be reported for each transaction will increase from 28 to over 80. For example, a trader or algo identifier will be needed, and a short selling indicator. Standard indicators such as the LEI will replace the existing BIC/FRN.
The requirements will be challenging for all industry stakeholders, including national regulators, automated reporting mechanisms, trading venues and all market participants. For example, asset managers will no longer be able to rely on brokers to report transactions but will themselves have to report trades for which they are the 'seller'.
The rules will not be finalised until later this year, but the direction of travel is clear and there are unlikely to be widespread changes to the draft issued by the European Markets & Securities Authority (ESMA) on 19 December.
All areas of firms will be affected – front and back offices, operations and IT, compliance and even HR.
Firms will have to build new systems (in some cases from scratch), enrich existing systems or re-engineer their technological infrastructure. Not all the required data may currently be available within the firm. For example, many of the feeds from the listed derivatives lists will probably not cover all the information that is required, and firms may not currently have all the necessary client reference data.
The biggest challenge will be managing costs. There will be significant (re)build and on-going IT costs, but also firms will need to up-skill resources with enough knowledge of OTC derivatives, cash equities and electronic trading to spot issues and errors.
Projects need to start now. Many firms are still coming to terms with EMIR and the collateral evaluations, and there are many other things on their radar, so new reporting requirements from January 2017 may not seem a priority. However, the MiFIR requirements are so significant that firms run the risk of falling behind on implementation if they do not start the gap analysis now. Transaction reporting is one of the key priorities for national regulators and some are already warning that there will be no leeway for non-compliance.
Until ESMA has finalised all the details, firms cannot start doing field-by-field analysis or detailed programming, but they should analyse their risk areas and identify where they need to do more work, including from where and how to capture the necessary data.
Firms need to consider whether they can plug the much wider requirements into their current systems or whether they need to re-engineer them or build new ones from scratch.
Firms’ views still count and could make a difference to the detail of the final rules. They should respond directly to the ESMA CP (not just through industry groups), and they should also communicate their concerns to their national regulators.
Regulatory Transaction Reporting is an area that has been and will continue to be heavily impacted by a barrage of other regulations, such as EMIR, AIFMD, REMIT, the Dodd Frank Act and Commodities position reporting. It is therefore important not to consider the MiFID II/MiFIR rules in isolation but to take a more holistic view to analysis of the requirements and to systems developments.
KPMG member firms have extensive expertise in this field and of the MiFID II/MiFIR requirements in particular. We are represented on ESMA’s Working Group and are closely connected to the regulators’ thinking. We can assist client with their TR projects, including gap analysis, governance and control, remediation and data assurance.