It’s no secret that the European financial market has experienced serious turmoil and reform in the last five years. With numerous scandals, questionable business practices, and a general lack of reporting transactions within the post-trade industry, the need for reform was clear.
As a result, the European Securities and Markets Authority (ESMA) stepped in as an intermediary to help draft and enforce laws to help increase transparency and efficiency of all companies and enterprises, central counterparties (CCPs), and other organisations operating within the European financial markets.
However, the transition to submitting reports and formatting those reports according to new requirements, adopting the right technology and processes to ensure accurate reporting have just been a few of the challenges faced by many organisations.
In this article, we will discuss what MiFID II is, why everyone is talking about it, and what you need to know.
What is MiFID II?
Before we dive into the specifics of MiFIR / MiFID II, let’s look at the background and history. The Markets in Financial Instruments Directive (MiFID) has been in force in Europe since November 2007. The purpose of MiFID is to regulate Europe’s financial markets. MiFID provides a level of protection for investors who purchase or invest in investment services and activities as well as other financial products.
The overarching goal of MiFID is to ensure a high degree of protection for investors in financial instruments and to avoid market abuse altogether.
In short, MiFID helps to ensure the following:
- The proper conduct, processes, and activities of businesses, organisations, and investment firms
- Regulatory reporting
- Increased transparency among trade-related transactions and shares
- Requirements surrounding financial instruments in trading
- Requirements for regulated markets
Even though MiFID has been in force since 2007, why are organisations and enterprises still talking about it today? In October 2011, the European Commission proposed a revised version of MiFID, which involved a revised Directive and a new Regulation.
Approximately two years later, the European Union adopted the new MiFID, which became known as MiFID II and MiFIR.
What Were the MiFID Improvements?
The goal of the new and improved MiFID II and MiFIR is to ensure fairer, safer, and more efficient financial markets in Europe by increasing transparency for all entities and parties who participate.
MiFID II and MiFIR do this by mandating new reporting requirements to increase the amount of available as well as shed some light on the activities occurring within OTC trading. These reporting requirements will ensure a strict level of organisational practices and processes for governing transactions.
Who Does MiFID II Affect?
In short, the MiFID II reporting requirements and regulations apply to all investment firms that execute client orders in Europe as well as international venues and exchanges. All firms must submit reports showing quantitative data related to the following:
– Client orders
– Post-trade transactions (and the firms these transactions were executed from)
– The number of orders executed on each venue
– Each class of financial instrument
The following types of firms are required to submit reports under MiFIR I:
- Trading Venues:
- Regulated Market (RM) – A multilateral system ran and/ or managed by a market operator subject to enhanced government requirements, which gathers or facilitates the gathering of multiple third-party buying and selling in financial instruments.
- Multilateral Trading Facility (MTF) – An MTF is a multilateral system operated by an investment firms or a market operator, which gathers multiple third-party buying and selling in financial instruments.
- Organised Trading Facility (OTF) – An OTF is a multilateral system that facilitates multiple third-party buying and selling interests in bonds, structured finance products, emission allowances, and derivatives. Unlike an RM and MTF, an OTF has the discretion on how orders are executed.
- Systematic Internaliser (SI) – An investment firm that deals on its own account by executing client orders outside a Trading Venue (TF).
- Market Makers
- Other Liquidity Providers
- Financial counterparties
- Non-financial counterparties exceeding the clearing threshold as defined under EMIR 10(1)(b)
- Investment managers providing advice and portfolio management on a client-to-client basis
- Credit Institutions
- Market operators/ Trading Venue
- Central Counterparties
- Third- country firms providing investment services or activities within the EU
What Information is Published?
The MiFID II mandates that investment firms and organisations submit both qualitative and quantitative data. In short, quantitative data measure values and are often expressed in numeric form (i.e. how many, how often, and how much).
In regards to quantitative data, we refer to the classes of financial instruments, which include the following:
- Equities
- Debt instruments
- Interest rates
- Credit
- Currency
- CFDs
- Emission Allowances
- Securities
On the other hand, qualitative data are measures of ‘types’ and may be represented by a name, symbol, or a number code. Therefore, in regards to measuring and capturing qualitative data with respect to financial instruments, we have provided the following chart:
All About Reporting: Reportable vs. Non-Reportable Transactions
One of the biggest questions to arise from the launch and enforcement of MiFID II is what exactly are companies, enterprises, firms, and service providers required to report? What exactly are considered reportable and non-reportable transactions?
Reportable Transactions
Here are examples of reportable transactions:
- Financial instrument transfers between funds or portfolios are reportable as they constitute an acquisition and disposal when transferred from one fund or portfolio to the other.
- A transfer from an account held by one client to a joint account where the client is one of the joint holders
- Any and all activities related to IPOs, secondary public offerings or debt insurance—particularly those without allotment rights
- The acquisition of shares
- The acquisition and/or disposal of financial instruments
- Exercising a financial instrument or convertible bond
Non-Reportable Transactions
- Custodian/nominee moves financial instruments from one depository bank to another depository institution
- A client transfers financial instruments to a custodian/nominee to hold in its custodial/ nominee account as it is solely connected to custodial activity
- The creation and redemption of a fund by the fund administrator
- Exercising a financial instrument such as an option, a covered warrant, a convertible or exchangeable bond, an allotment right or a subscription right by the owner of the financial instrument
- The delivery of financial instruments to investment firm
- The acquisition or disposal in connection with mergers, takeovers, insolvency proceedings, stock splits or reverse stock splits
- The creation, expiration or redemption of a financial instrument as a result of pre-determined contractual terms, or as a result of mandatory events
- The issuance of script dividends
- Acquisitions under dividend reinvestment plans
- An exchange or tender offer on a bond or other form of securitised debt where the terms and conditions of the offer are pre-determined
- Securities Financing Transactions (SFTs)
What Are Organisations Saying About MiFID II?
As we mentioned above, MiFID II /MiFIR has put a great deal of pressure on companies, firms, enterprises, and service providers to change and adopt new processes, technology, and difficult-to-find resources to capture data, generate reports, and submit them to trade repositories.
In fact, an article published by The Financial Times claims that MiFID II preparation could cost firms $2.1 billion. As a result, banks and clients debate what to charge and what to pay for research and financial analysts. Some money managers claim to receive quotes of between $50,000 to $75,000 from some financial institutions for the most basic research and analyst packages.
Furthermore, many firms are unaware of just how much MiFID II will impact organisations inside and outside of Europe. Although European regulators obviously don’t have a direct impact on firms outside Europe, many firms claim that in order to remain MiFID II compliant, they will require changes in the way firms outside of Europe operate—from reporting to executing trades to archiving communications.
For example, U.S.-based brokers and firms that execute trades on behalf of Europe-based asset managers will likely be required to follow the same processes and protocol mandated by the primary firm in Europe to ensure all locations and subsidiary firms are MiFID II compliant. Therefore, U.S.-based firms will see an indirect impact from MiFID II.
Many firms in Europe have considered relocating operations in fear of increasing costs due to the enforcement of MiFID II. For example, the primary costs for activities for outside countries will be assessed in terms of what is and what will not be permitted in Europe.
As a result, many firms have had to, and may have to change the financial products and/or services they offer in the future. MiFID II may also mean putting restrictions on how much firms can charge for certain products and services, specifically investment services and other financial products. As a result, firms are at risk of incurring costs associated with operational changes and product development.
Transaction Reporting Final Checklist
So, what can firms do to ensure they are preparing and submitting accurate trade/transaction reports to their respective assigned trade repositories?
Here is a final checklist for firms to refer to before submitting reports:
- Make sure you have a LEI. All reporting firms should identify themselves with a LEI. All reporting firms should identify themselves with a LEI. This means that a firm should make sure that it has acquired a LEI for itself and validate that its counterparties also identify themselves with a LEI.
- Ensure you have the required protection controls in place. MiFIR requires that firms provide some personal data (first name and last name, date of birth, national identification number) for the buyer, seller, and the decision-makers for both sides irrespective of their nationality.Firms should make sure that they have the required protection controls and legal documents in place for the distribution of these data.
- Check your Data Collection Capability for the 65 fields. Different information required for reporting should be gathered from different sources. Make sure you know from which source each information should be extracted.
- Familiarise yourself with the MiFID II glossary. (Refer to the MiFID II glossary here.)
All in all, taking the time to familiarise yourself with the MiFID II and MiFIR reporting requirements and regulations can help position you and your firm for success. However, there are also other options available for outsourcing transaction reporting and partnering with other firms for help.
In fact, working with a third-party firm that specialises in MiFID II and MiFIR regulations and reporting requirements just might be a cost-effective solution for your firm.
How Can Point Nine Help?
Many organisations, enterprises, providers, and firms have been struggling with keeping up with MiFID II and MiFIR reporting requirements. Many have been forced to adopt technology, resources, and processes to ensure they are submitting timely and accurate data and information.
In addition to adopting new processes and resources, many organisations are struggling with finding knowledgeable, experienced resources in this particular field. This is where the team at Point Nine can help.
Point Nine can help provide automated reporting solutions:
✓ Real-time connectivity to all market participants- our automated solution is adjustable to our clients’ internal and external data sources
✓ Collecting of raw data
✓ Masking for personal data in case the customer wants the personal data to be encrypted
✓ Eligibility of reportable data
✓ Heavy enrichment of raw data
✓ Calculation of positions
✓ Validations and matching of data before submission of the report
✓ Transaction and trade reporting automated solution
✓ Connectivity to National Competent Authorities, APAs, and ARMs
✓ Acks / Nacks processing and exception management
✓ End of day reports
✓ Full audit trail
The team at Point Nine has served hundreds of organisations, enterprises, providers, and firms over the years, and has helped them with their reporting needs. To learn more about how we can help you, contact our team today.
