MiFIR: Bigger and tougher than MiFID
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There will be a massive explosion in reporting obligations under the new Markets in Financial Instruments Regulation (MiFIR) regime. Buy side firms and venues – who have not reported transactions under the 2007 MiFID regime – will now need to get granular information on the trading process, transactions, instruments and entities which were previously ignored. Firms that have been reporting face a tremendous expansion of asset classes and instruments to be reported.
Regulators, the European Commission and the European Securities Markets Authority, want to close any loopholes that existed under the original set of rules, while expanding these rules to capture a wider set of activity and instruments. This means increasing the quality and quantity of data available to regulators, helping them to prevent market abuse and to maintain orderly markets.
The scope of assets covered by MiFIR is far broader than before. Under MiFIR’s Article 26 transactions for instruments traded on any ‘trading venue’ – rather than just securities-related instruments on European Economic Area (EEA) regulated markets – and derivatives with an underlying instrument traded on any trading venue will need to be reported; this captures swathes of over-the-counter (OTC) trading as well as commodities, interest rate and FX derivatives.
To put that increased scope in perspective, a firm trading on a derivatives exchange outside the EEA may still be caught by MiFIR reporting obligations if the underlying instrument is traded on a market in Europe.
The vagaries of national market structure will also broaden the range of assets affected. For example, all the US and Asian equities listed on the unregulated segments of German exchanges will become reportable irrespective of where they are traded – i.e. much more trading on non-EEA exchanges will become reportable under MiFIR simply because many of these stocks are also traded on these MTFs.
Capturing the lot
Fields that have to be completed for a transaction have more than tripled in number, currently up to 81 from MiFID’s 24. As even Tier 1 firms have been fined for transaction reporting failures under MiFID, it is likely that the failure rate will increase considerably as reports become more complex.
The information required is challenging to acquire and in some cases legally challenging to provide. For example, reports must identify the individuals and entities involved; that includes the trader, the client and any algorithm responsible for the investment decision and trade execution.
While the development of Legal Entity Identifiers (LEIs) is simplifying the identification of firms considerably, for individuals identification is tricky. British individuals who are clients or traders will need to be identified by their national insurance numbers and other nationalities will have their own identifiers. The pain doesn’t end with the identifiers as firms may also need to provide the name, date of birth and post code of the individual in addition to the national identifier.
Storing all of that information, even for an Approved Reporting Mechanism (ARM), brings massive data protection issues. It also brings the threat of legal action – countries including South Korea, Luxembourg and Switzerland have laws against disclosing investor identity. Additionally, countries in EU will have issues sending personal information to non-EU EEA countries.
Transactions that take place under a waiver, and transactions for equities and government bonds that are part of a short sale, will need to be flagged up so that regulators can assess their eligibility.
The reporting obligation applies to all investment firms ‘which execute transactions’, and reports must be made on a T+1 basis to the home-state national competent authority (NCA). Buy-side firms placing orders either on their own behalf or for an end investor will therefore need to get this information together and include it within the orders they place, or report them to an ARM or the venue they trade on.
Given the scale of information required and the T+1 timeframe, it seems unlikely that buy-side traders will be able to delegate their reporting to brokers, as they do under the European Market Infrastructure Regulation (EMIR), should they wish to. It may also prove unpalatable given the sensitivity of much of the information.
A shift from the host-state regime to the home-state regime will also mean that many firms will need to report to a different competent authority, for example Deutsche Bank London would no longer report to the UK’s Financial Conduct Authority, but to Germany’s regulator BaFin. If anything the shift in NCA should be the smallest concern since MiFIR harmonises the reporting regime and firms can continue to use the UnaVista ARM to report to any NCA.
The greatest challenge lies in the process of capturing data, populating reports and submitting them. Even the largest firms sometimes fail to fulfil reporting under the simpler MiFID rules; if that is indicative, MiFIR will be a massive challenge.