Commentary: A look at transaction reporting obligations of MiFID II

The Markets in Financial Instruments Directive II is part of the European Union's objective to create a fair/transparent EU market for securities. MiFID II, along with the original Markets in Financial Instruments Regulation, lays out obligations on financial firms across key operating aspects of the businesses to improve transparency, create comprehensive audit trails, prevent market abuses and improve market integrity longer term for the region's financial markets and also create governance for non-EU managers and traders to access EU investors.

The obligations are fairly onerous and will require managers to capture, record and analyze much more data than ever before and across all the business' core processes (operations, accounting, trading, investor relations, risk and compliance) as all are affected directly or indirectly.

This article focuses specifically on the most onerous obligation: pre- and post-trade reporting. Under MiFID II, that reporting now extends to all over-the-counter trades in the EU with a dynamic set of obligations (that can and will change over time) on what is required to be reported real time (within 15 minutes) or on a T+1 basis. The regulators clearly are focused on lighting up the dark pools and move liquidity to regulated markets like multilateral trading facilities and organized trading facilities to create market transparency.

There are some exclusions to this obligation — for example, stock loan trades and repos, post-trade assignments as well as portfolio compression trades — but everything else is covered.

We have been working closely with many clients on MiFID II readiness, and have come to recognize several challenges they are encountering as they get up to speed on the new requirements.

First, we focused on the daily reporting obligations and found there is a sensitivity around the timing for reporting, with equity transactions needing to be reported with three minutes of execution and other trades within 15 minutes, which is only possible via automation.

In addition, there are workflow challenges, as listed transactions need to be reported within three minutes of the execution, which can be done only through automation.

We then focused on the challenges of reference-data consistency. Since MiFID II fields include sensitive personally identifiable information of traders, there needs to be a comprehensive encryption of regulatory identifiers. Cross referencing for reporting obligation and validation requires the need to manage counterparty legal entity identifiers and their systematic internalizer status. LEIs form the backbone of recognizing any entity under MiFID II. An investment firm cannot operate in the EU if it doesn't have a valid LEI. SIs have an additional burden of reporting on behalf of hedge funds for trade reporting.

Rules and change management posed the challenge of waiver and deferral rules needing to be configurable, exempt transactions management.

In addition, we focused on the challenge of operational workflow. This requires seamless integration and efficient post-trade workflow across all systems, with a need for an additional level of operational controls for approvals, especially for T+1 reporting.

With this comes the need for a consolidated data that aggregates quotes and pricing from all respective venues.

Lastly comes the challenge of data quality and exception management, since there is a need to have requisite validations before reporting to regulators. This calls for complete transparency around responses from regulators.

We have come up with a four-step methodology to help clients navigate their transaction reporting challenges. This approach is agnostic of the final technology platform you choose, but these are questions you will need to answer clearly to start your journey for MiFID II compliance:

1. Regulatory construct: What are the reporting obligations and jurisdictions for you? How many asset classes are you dealing in?

2. Transaction data management and governance: Do you have the security, counterparty and PII data in place? If data is available, is it properly encrypted?

3. Technology platform overhaul: What is the volume growth you are looking at? Fill-level reporting will increase the reporting manifold. Is there a seamless integration between your firm and the regulator or the market? Have you given some thought around exception capture?

4. Operational capability and controls: Do you have economies of scale and economies of scope to handle near real-time and daily MiFID II reporting? What is the level of automation you have achieved?

With the introduction and implementation of MiFID II quickly approaching, it is expected asset managers will continue to face a variety of challenges ensuring they are compliant with the newest regulatory requirements. Firms will need to leverage not only the necessary knowledge but also the tools and technology to ultimately tackle their reporting needs.

Gurvinder Singh is CEO of Indus Valley Partners, New York.​ This article represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.