Transaction Reporting under MiFID II: Challenges ahead (FAQ)

Transaction Reporting under MiFID II: Challenges ahead (FAQ) - Κεντρική Εικόνα
29 Nov 2017
Managing Director

Starting on January 3rd 2018, Investment Firms will need to report to their Competent Authority (CA) an extensive set of information relevant to their investment transactions. Among the biggest challenges is the reporting on T+1 to an Approved Reporting Mechanism or ARM. Here are a number of high level Frequently Asked Questions that we hear from our customers:

What is the main aim of this reporting for the Competent Authority, on top of so many other reporting types?
The reporting aims at providing a representation of the transaction that informs the competent authority about all relevant circumstances under which the transaction took place. What is of interest here is the change in position resulting from reportable transactions, not the Investment Firm’s or its client’s actual position.
In this context, an Investment Firm’s transaction reports should include not only the information about the market side of the transaction but also information about any associated allocation to the client, where relevant.

What are the main differences from MiFID I?
The scope of reported instruments has been extended to practically all instruments traded in European markets, including OTC derivatives which where previously out of scope under MiFID I. In addition, the reported information will be substantially heavier as the number of data fields required on transaction reports has increased from 24 to 65. Also, many financial institutions outside of Europe will now fall under the radar, in particular branches of EU firms.

Under MiFID I many buy side firms were relieved of their obligation to report, assuming that their transactions would be reported by their broker. Does this exemption also apply under MiFID II?
Unfortunately no. Under MiFID I, buy side firms are indeed relieved of their obligation to report if they have ‘reasonable grounds’ to be satisfied that their broker will make a transaction report to the regulator. However, in this case the broker only satisfies his own obligations in respect of himself, he does not make two separate transaction reports. In contrast, MiFID II requires buy side forms to make a separate report. Although such responsibility can be delegated to another party, many brokers may not have the capacity or may charge to file separate reports on behalf of their clients. In addition, buy side firms will have to supply sensitive information about their customer, an issue that requires thorough consideration.  

What type of systems should be used for this reporting?
Many financial institutions opt to use dedicated systems for regulatory reporting, which makes sense in today’s complex regulatory landscape. Others, particularly the medium and smaller sized institutions prefer to leverage their existing systems. Among these, given that this reporting is post-trade and also given the diversity of information that needs to be provided, this is clearly a task for  back/ middle office systems rather than front office/ order routing systems, to centralize and report all relevant information.

Why is it challenging for Back Office systems to provide such information?
Reported information comes from a variety of sources including Front office systems, risk management, counterparty, trading venues, various centralized databases (LEI, ISIN and others). As a result, a relatively heavy interfacing exercise needs to be launched in order to extract all reportable information from various sub-systems and feed it into a back office system on a consistent and error-free basis. Also, part of the new information required over and above MiFID 1 may not be readily captured by any sub-system within the firm, leading to extensions in various entry forms and/ or definition of default values.

Irrespective of your situation, don’t leave the setup of this very important subject for the last moment. January 3rd is already too close!

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