David Farmery, COO at Message Automation offers a brief overview on the possible business and operational challenges firms face as they prepare their trade reporting processes to comply with new MiFID II requirements. Comments from January podcast
MiFID II is complex. The guidance, discussion papers and draft regulatory technical standards (RTS’s) are over 1,500 pages long. As in the European Market Infrastructure Regulation (EMIR), there will be a certain amount of functional uncertainty over exactly what these regulations mean and clarity will come in staggered stages starting with this year and lasting until January 2017. The uncertainty is a project manager’s nightmare but probably a consultant’s dream with several moving parts and multiple requirements. Flexibility in a firms’ adopted solution will be key.
There will be several business challenges, most notably regarding the scope of the products and activities that are relevant to me and whether they are covered by my existing reporting solution? For example, if I’m a European Union (EU) domiciled entity then there is a strong chance that all the products I have had to report for EMIR are also going to be in scope for MiFID, or MiFID requirements will be a subset of those. If, on the other hand, I’m a London branch of an American bank, it’s possible that I have no EMIR reporting to do whatsoever, but if I am also a European Economic Area (EEA) registered investment firm, all of my investment activity within the London branch could become reportable under MiFID. So there is a chance that some source systems that have never been mapped to EMIR or maybe to Dodd Frank, will need to be brought into scope for MiFID.
The second key business challenge concerns firms that have adopted a delegated reporting model for EMIR. While this is perfectly valid, I would suggest that they analyse whether it will be appropriate under MiFID II. Lastly but certainly not least are the issues around systematic internalisers (SIs), which are essentially market makers that fulfil orders from clients using their own capital. If you belong to this group or want to become one in the new landscape, you will have a number of new challenges including real-time pre and post-trade transparency reporting for products classified as liquid. You can be classified as an SI for a sub set of the products you trade.
Moving on to operational challenges, the key one is data. Although there are some data fields which are common to EMIR and indeed the original MiFID I, there are some significant additions. These include identification of the traders responsible for the investment and execution decisions or if it was a committee, which committee was responsible for the investment decision. Even algorithms responsible for investment and execution decisions need to be identified. This will require new transactional related static to be captured at the time the deal is executed. In addition reportable events are a subset of those under EMIR. MiFID is only concerned with those events that could highlight market abuse, which obviously includes new trades or changes in nominal but will not include clearing, novation or compression.
A second operational challenge is that the transactions that need to be reported in MiFID II are a sub set of those in EMIR. Essentially you should only report those transactions that are, or could be, traded on a “venue” – even if they actually weren’t. For listed cash equities, that’s easy – there are published lists to compare against. However what if I’ve executed an interest rate swap but I have done the trade bilaterally and not on a venue. I will need to work out for that particular taxonomy or flavor of swap, whether it is being traded anywhere else in the EEA on a venue, because if it is, I need to report it. That leads on to the ability to handle detailed product taxonomies. As always, the devil is in the detail.
Other operational challenges include where do I report to? For instance, if I’m currently reporting to one or more trade repositories (TRs) for Dodd Frank and EMIR will those TRs actually support MiFID II? The indication is that, yes the main ones will but firms will still need to plan for some heavy regression testing on what has already been reported under the US and European regulations if they are amending their core processes to cope with MiFID II.
Finally, under MiFID, firms are meant to ensure the completeness and accuracy of their reporting and there is as much a risk from over reporting as under reporting. As in EMIR and Dodd Frank, firms will need to have robust, auditable reconciliation processes.