MiFID II significantly broadens the to do list for compliance teams and legal counsels– introducing extended reporting obligations on market participants, compared to the existing requirements under MiFID I. Where MiFID I required reporting to local regulators of transactions in cash equities, MiFID II expands the scope to several non-equity asset classes and significantly increases the amount of data that needs to be reported. This expansion of the scope and the associated extra responsibilities was given some extra urgency by the ESMA briefing issued at the end of last year which mentioned that it has already started gathering the associated data.
What does it mean for firms?
In short it asks for greater reporting across more traded instruments. While investment firms will still have to report details of their transactions in instruments to their national competent authorities, they will now have to report transactions (a) where admission to trading has been requested, and (b) where the underlying is a financial instrument (or an index or basket of financial instruments) traded on a trading venue.
To provide a sense of what that means transaction reports under MiFID II include 65 fields that will need to be populated with information including the identity of the client (using legal entity identifiers where appropriate) and the person or algorithm responsible for the investment decision and execution. It is easy to see how many firms might feel overwhelmed and there is a need to adapt the internal system to catch the additional client and execution information to populate in these fields.
So how can firms cope?
Fortunately, to make this all possible, there are a number of Data Reporting Service Providers that the new regulation is introducing to help meet these requirements. Broadly these can be divided into Approved Reporting Mechanisms (ARM), Approved Publication Arrangements (APAs), and Consolidated Tape Provider (CTP) which are the new categories of Data Reporting Services Providers (DRSPs) that do not exist under MiFID I. All of them will essentially enable the reporting of details of transactions to domestic competent authorities or ESMA on behalf of investment firms as well as publish information to the market.
What developments are we seeing?
If we take Nasdaq as an example we can anticipate that suitable trading venues and investment firms will apply for ARM status as soon as the National Competent Authority application period opens and are already making extensive preparations. Organisations that qualify will be in the process of developing systems in order to be fully MiFID II compliant, which will enable them to provide a transaction reporting service covering all Asset Classes and all market participants. As MiFID II widens the group of companies who are obligated to report, firms taking on ARM status will offer direct support for these parties into the transaction reporting world.
Firms that are looking to qualify as ARM will probably already have a Regulatory Reporting platform with respect to MiFID I reporting, EMIR TR and Remit Reporting, and will now be expanding to also include MiFID II transaction reporting. Because firms looking to comply with MIFID II will be able to leverage expert third parties with years of reporting experience with the ever-changing regulatory landscape, market participants the difficulties meeting their regulatory MiFID II transaction reporting obligations could be mitigated. For example clients using their trading venue as their ARM can expect a lot of the data necessary for the reporting is already available, and when all is said and done can expect to provide only limited additional data for each trade. This should suit the smaller firms on markets. It is also expected that ARM services can be customized to the needs of each client: Full Service, Middleware or a Report Routing Service.
What are the differences with the new categories – APAs and CTPs?
APA is an Approved Publication Arrangement who is authorized to provide the service of publishing trade reports for transparency purpose on behalf of investment firms for transactions done outside of the market, OTC. The purpose is that APAs shall improve the quality of trade transparency information published in the OTC space and ensure that such data is published in a way that facilitates its consolidation with data published by trading venues.
CTP is a Consolidated Tape Provider and is a person authorized to provide the service of collecting trade reports for financial instruments from regulated markets, MTFs, OTFs and APAs and consolidating them into a continuous consolidated tape providing price and volume data per financial instrument. The information shall be made available free of charge 15 minutes after CTP has published it. Between these three all relevant instruments will be covered, i.e. both transaction executed on venue and OTC in instruments covered by MiFID II.
From our perspective as a trading venue, we are positive about initiatives like APA and CTP which will lead to more and higher-quality transparency in the market. Our efforts in the implementation of these requirements is to work towards reduce uncertainty and improve our services. With the requirements in MiFID II on reporting and publication of information our goal is to have services which can harmonize and improve the quality of the data and facilitate the consolidation of data which is also readily available to the market.
We see a lot of interest from the industry for APA and ARM services. These initiatives respond to the underlying demand from markets participants to facilitate the need to comply with the requirements in MIFID II. For the CTP service the business case is not that obvious. The business case for providing a consolidated tape for the non-equity is not that strong because this category of instruments contains many different and heterogeneous asset classes. Time will tell.
What is clear is that, while MIFID II will doubtless feel intimidating for many with the responsibility for ensuring that their firms comply, the introduction of DRSP and the caliber of the organizations that are stepping into these roles makes the associated tasks much more doable. Help is at hand, MIFID II need not feel overwhelming.