Article originally written by Lynn Strongin-Dodds and published by Best Execution.
What do you think are the biggest challenges with the implementation of MiFID’s trade and transactions reporting requirements?
GVL: The requirements are vast and clients will have different challenges depending on their businesses and existing technical capacity. However, MiFID II is quite fluid and while the regulator has provided information, including Q&As and guidelines throughout the year, there are still a number of unknowns which impacts everyone. For example, take reference data; the industry will rely on ESMA for reference data and transparency data to support their regulatory requirements. However, the industry is still waiting for ESMA to confirm which attributes and the format of the reference data and transparency data feed. ESMA has recently clarified, though, that relying on their T+1 Financial Instruments Reference Data System (FIRDS) is not sufficient to determine the eligibility of pre- and post-trade transparency reports which need to be made public in near-real time. Firms thus need to source reference data in a more timely fashion. The Trax MiFID List can provide such a source of information.
NM: Interestingly, firms are starting to think more proactively about the ongoing monitoring of transaction reports. So much attention has been placed on MiFID II implementation that the industry is starting to increase their focus on life after 3rd of January 2018. We’ve heard consistently from the regulators that they will be closely monitoring transaction reporting and the industry has taken note. In preparation for this, we have built a web-based monitoring and operational interface, which we call Trax Insight, which allows firms to not only submit reports but also monitor the lifecycle of a report, manage and resolve exceptions as well as view peer-benchmarking analytics.
The increased transparency will require additional identifiers and there has been a great debate about the use of International Securities Identification Numbers (ISINs). Has it been resolved?
GVL: We believe so, to a certain extent but MiFID II goes live in January and everyone needs to get on with the implementation. I think the time for debates has passed. The industry is now making progress on generating ISINs in real time via ANNA-DSB (Association of National Numbering agencies-Derivatives Service Bureau) and we expect this to be ready before go-live of MiFID II.
Given the sheer scale of work to meet these new requirements, do you think that buyside firms will be ready to meet the January 2018 MiFID II deadline?
GVL: I think most of our clients will be ready on time but one of the problems they face is that they have to make assumptions on reporting obligations without knowing the full impact of certain aspects of the regulation. With regulators clarifying the requirements by issuing Q&As, this makes it difficult for them, and will have an impact on the development. But the important thing for clients is to prioritise their projects in order of relevance so that they can be as ready as possible for the deadline.
What other regulations are having an impact?
NM: Although there is a lot of attention on MiFID II, there are other regulations that investors are preparing for such as the GDPR (The General Data Protection Regulation) and Securities Finance Transaction Regulation (SFTR), both of which come into effect next year. Amongst other requirements, SFTR increases the scope of reporting securities financing transactions while GDPR will require additional checks and balances for the management of personal data.
Thinking again about MiFID II, because of the natural person data that is now included in the transaction report, there is now an additional layer of complexity across a firm’s reporting systems in order to source and maintain this data – this has implications on trading desks, middle- and back-office office support systems and HR teams.
As a result of this there are also real issues around data storage locations because some firms are uncomfortable having this sensitive data held in certain jurisdictions – we have a solution that helps firms with this issue but it’s something that the industry is still grappling with. Along those lines, firms will also have to make sure that they are able to handle their existing personal data and have processes that can send that information in a consistent and secure form due to the additional fields required for MiFID II transaction reporting purposes.
Are there differences between the buy- and sellside?
NM: The buyside are particularly impacted by MiFID II because, in a lot of cases, they are now being required to report, where they previously did not have to under MiFID I. The sellside typically has more experience with transaction reporting and has therefore been able to transition to the MiFID II requirements more easily. From what we’ve seen so far, the buyside are looking to report to ARMs directly rather than relying on help from brokers where they may have previously under other regimes.
GVL: Another key component of the regulation is the requirement to have policies and procedures in place to demonstrate best execution. This is demanding more scrutiny on trading desks to ingest and interpret market data, analyse transaction cost analysis and support investment decision-making.
Both sell- and buyside firms also want much more flexible, future-proof solutions that can not only handle the requirements of existing regulations but also accommodate the new regulations coming on board such as SFTR. They want everything in one place and on one platform. This is certainly something we have seen firms look into during the review process when selecting their MiFID II solution providers.
Trax has been around a long time but what changes have been made to respond to the many different industry challenges?
GVL: Our aim is to lessen the regulatory burden and offer a complete, central point to help industry participants meet the different pre- and post-trade transparency obligations across the different asset classes. Our services range from publishing trades in near real-time, post-execution, to determining systematic internaliser status, assessing whether an instrument would be classified as liquid or illiquid based on a consolidated MiFID II eligible instrument list, and applying pre-trade transparency waivers and post-trade transparency deferrals. Trax can also analyse clients’ trading activity to assess the impact of the MiFID II transparency requirements. Our connection to Bats for equities trade reporting also gives clients flexibility to route reports to either the cross-asset class Trax APA or the Bats APA for equities. This is particularly valuable for assisted reporting whereby broker-dealers can aid their buyside customers to concentrate their equity trade prints.
Providing complete regulatory reporting services is a part of our core offering and we will continue to enhance its services as regulations evolve and as clients review their regulatory obligations.
NM: To accommodate client desire to be a ‘one-stop shop’, we have also completely re-built our system architecture, ultimately allowing us to support our full suite of operational solutions in our client-facing environment, Insight. The Insight platform is incredibly user-friendly and allows firms to easily reconcile both trade and transaction reports as well as view industry-level peer benchmarking reports. This will allow us to be nimble and easily develop new solutions as demands evolve.