Why U.S. firms should care about MiFIR Transaction Reporting
There is currently a plethora of similar sounding reporting regimes being implemented by regulators across the globe. MiFIR transaction reporting is yet another reporting obligation and although it is primarily aimed entities within the European Union, it could have significant impact on US entities.
Transaction Reporting versus trade reporting
Trade reporting is a term that’s used for the current ‘T’ plus 3 minute transparency reporting and the EMIR/Dodd Frank derivative reporting to a trade repository. Transaction reporting is different. Transaction reporting is an essential tool that enables EEA regulators to meet their important regulatory objectives in monitoring for market abuse and maintaining orderly markets. It captures both cash instruments and derivatives and requires a detailed set of information extending right down to the names and dates of birth of the traders and individual beneficiaries.
What is the US dimension?
“Investment Firms” are obliged to transaction report under MiFIR. This captures US investment firms operating within the EEA when they make a transaction in a reportable financial instrument. It also captures branches of EEA investment firms located in the US when they make a transaction in a reportable instrument.
What are the risks of non-compliance?
The EEA regulatory authorities taken a strong enforcement stance against transaction reporting failures, as demonstrated by the string of sanctions imposed by the FCA culminating with the recent £13.28m fine against a tier one US investment firm. In announcing this fine, the FCA made a very clear statement that:
"Accurate and timely reporting of transactions is crucial for us to perform effective surveillance for insider trading and market manipulation in support of our objective to ensure that markets work well and with integrity."
European regulators clearly attach a great deal of importance on complete and accurate transaction reporting. Failure to meet these requirements is not an option if firms want avoid possible sanctions.
What’s the big deal in moving from MiFID transaction reporting to MiFIR transaction reporting?
The current transaction reporting regime in the EEA has been around since 2007. However, the new MiFIR transaction reporting regime greatly increases its scope and complexity with a significant impact on the number of reportable instruments, the definition of a transaction, the fields included in a report and the entities that need to report.
Reportable Products - MiFIR extends the scope of reportable products to all financial instruments admitted to trading or traded on a Regulated Market, Multilateral Trading Facility (MTF) or an Organised Trading Facility (OTF). This represents a very significant increase in the number of financial instruments that will become reportable. Not least, it will add all the FX, commodity and interest rate derivatives that were excluded from current MiFID reporting. There is also a large number of North American and Asian instruments traded on MTFs, which will now become reportable, irrespective of which venue they actually trade.
Reportable Fields - MiFID required up to 24 fields to be populated in a transaction report. MiFIR has now significantly increased this to over 60 fields. Some of these additional fields relate to completely new requirements such as flags to indicate whether the transaction was part of a short sale or was made under a waiver. Many of the new fields provide additional detail about the parties to a transaction; for example the investment decision maker, the trader responsible for the execution and details of any algorithms involved. This will result in considerable data protection concerns as the reports will need to contain personal data relating to individuals, including names, dates of birth and passport numbers.
What should firms be doing now?
Clearly the significantly expanded reporting obligation under MiFIR will have impact on US firms who either do business in EEA or are US located branches of EEA entities. US firms must carefully consider impact of upcoming MiFIR regulation and start preparing for the January 2017 reporting start date. If you will have a reporting obligation under MiFIR, here are some of the steps you should be taking now:
- Legal Entity Identifiers (LEIs) – Reporting firms will need to identify themselves with an LEI. Fund managers will need to ensure that all the entities they deal on behalf of also have an LEI. However, it is not just your own entities you need to worry about; you must also identify all your counterparties with an LEI (unless they are an individual).
- Personal data - MiFIR asks for the first name, surname and date of birth of individuals involved in the trade. This doesn’t just apply to the beneficiaries – it applies to the traders at the executing firms too, both the executing traders and the decision makers. And this doesn’t apply to European individuals – if your beneficiary is American or if your trader is American, then it is their personal details, including passport numbers, that need to be included in a report to European regulators. You should ensure you have all this data and have the required data protection controls in place.
- Instrument reference data. You need to know what instruments are caught – it will be a breach if you don’t report transactions in reportable instruments and the authorities require controls to ensure you don’t report anything that isn’t reportable! You will also need to include reference data associated with these instruments in the reports you submit.
- Determine how you will submit the reports to the regulatory authority. Probably the easiest and safest way to report is via an Approved Reporting Mechanism (ARM). US firms with reporting obligation can now centralise their reporting onto one ARM to cover all of the EEA as MiFIR assures uniform standards and Europe wide ARMs regime.
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