MIFID II Part II, Transparency: A Paradigm Shift in the Future of Trade Reporting

Transaction reporting, referring to post-trade reporting has been a known devil for some time; this article intends to highlight i) where MIFID II proposes additions or changes to the current arrangements in place with financial institutions around the world, ii) the paradigm shifts prompted in a topic that is seemingly static and clear, and iii) the operational risks that present themselves as a result in the coming years. Morgan Stanley was fined ￡13.2 million for failure to submit 121,387 transaction reports between 2007 and 2014, and incorrectly reporting over 35 million transactions. These fines were not immediately after the financial crisis in 2008, but just two years ago in 2015; it's been clear than institutions are not entirely fine-tuned with reporting. Morgan Stanley are far from the only ones to be fined; the likes of Barclays, Credit Suisse, RBS and others have also had failures in this regard. “MIFID II” will be embodied or transposed at national level by individual country regulators, and whilst this applies for most of MIFID II’s provisions, transaction reporting will be a requirement at a supranational level for the entire EU, therefore transaction reporting will not be transposed into national laws, but will be required to be followed at EU overarching level with MIFIR (Markets in Financial Instruments Regulation). It is an area of MIFID II which is well-understood to have a clear impact on players outside of the EU including Asia and the US. Whilst transaction reporting has been in place with Dodd Frank, EMIR, SFTR, SDR as well as other locally implemented imperatives, not only does MiFIR propose to up the game for improvement in transparency and thereby market integrity, but aims to introduce a new paradigm introducing accountability; with which comes a host of challenges legally, conceptually, and operationally.

Entities & Products: A move towards all-pervasiveness

Transactions executed on MIFID II defined trading venues, will be subject to the reporting regime. This is to include OTC trades, equities, commodities, fixed income including bonds. Foreign branches of EU financial institutions will also need to report via their EU presence. There may also be EU trading venues abroad, after the equivalence determinations are complete where the trading of dual-listed stocks will result in a reporting obligation. The intent of MiFIR here is to catch all in terms of products and also who is involved in reporting; transaction reporting has commonly been delegated by the buy-side to the sell-side for instance. Depending on the role of the buy-side in a transaction, whilst they may be able to delegate reporting, a broader set of information regarding decision makers for trades will need to be made available to the reporting party T+1; this is new territory, and the integrity checks on such data fields is inherently difficult as depending on a firms processes, it may not be so easy to check back on who made a decision around a transaction as it may be to check notional amounts and product identifiers.  It is therefore debatable exactly how leveragable current reporting mechanisms will be for the MIFIR obligations. A new range of data sources including personal identification information ranging from names to National Insurance, or passport numbers will need to be submitted also. The increased accountability therefore will be operationalised through requiring personal, algorithm and entity level identification relating to transactions. This is another unprecedented area, and firms are deep in legal analysis over cross-border submission of personal data both from other countries into the EU, but also out of the EU into other countries as non-EU branches are also required to identify decision-makers. 

Governance: MIFIR marks a sign of things to come

The barrage of reporting requirements in the past half decade prompted questions around the bodies receiving reports, validation mechanisms to check integrity, accuracy and completeness of submissions and whose responsibility all of this is. With new areas being covered, inaccuracy or failure to report will need to be looked at. Regulators have become expert at requesting look-backs and therefore any identified gaps or anomalies in reporting will have a very low tolerance level going forward. MIFID I prompted the use of a UK-based Approved Reporting Mechanism (ARM), not to be mistaken for APA (Approved Publication Arrangement) for pre-trade price formation data publication. MIFIR now appoints a vast number of ARMs, for-profit-entities who will compete in the market providing reporting solutions. After all of this the question remains, what will the regulator do with the data? It can be inferred that as and when technology is aligned and efficiently used on both sides, the regulators will be able to navigate the data effectively, and it would not be a surprise that waivers, short sell flags, decision makers, and corporate access will be scrutinised quickly enough to locate unfavourable or unauthorised activity far more easily and accurately. Transaction reporting is building, and obtaining the first data sets for a future of transparency; the entry into the personal data space through MIFIR really marks this. The evolution of products in parallel with this will mark a move towards a future where the regulators are more tightly coupled with industry activity than ever before.