12th April 2016

Calibrating the MiFIR transaction reporting framework

Written by Robert Driver, Policy Director, Capital Markets

In 2007 MiFID I introduced a harmonised reporting regime across the EU. The key objective was (and still is) to ensure that regulators have sufficient trading information to oversee day-to-day market activity. The purpose of a comprehensive transaction reporting framework is to enable the monitoring and identification of market abuse.

The main instruments currently reported under MiFID I are shares, bonds, futures, options, swaps and certificates of deposit. However, following on from data reporting gaps exposed by the financial crisis, MiFIR will significantly increase the range of financial instruments to be reported.

FX, commodities, interest rate and OTC derivatives will be in scope, as well as stocks on US exchanges with secondary listings on EEA trading venues. It is estimated the number of financial instruments to be reported will increase approximately ten-fold, from around 1.5 million to 15 million.

Firms will also need to provide regulators with substantially more information than under MiFID I. For example trading capacity (matched principal or own account dealing), trader details (principal or agent), interaction with other elements of MiFID (e.g. waivers under the transparency framework), and a wide range of other granular data.

Developing new reporting requirements invariably requires a great deal of analysis and refinement. The BBA responded to ESMA’s recent consultation on transaction responding, a detailed document which is essentially an initial guide on “how to do” transaction reporting.

It was an admirable effort from the supervisory authority to provide the industry with clarity on a detailed and technically challenging subject. Inevitably, there are still important issues that need to be addressed before the transaction reporting guidelines are finalised.

For example, firms will need to flag when a transaction is a short sell. In theory this sounds like a reasonable request but in practice collecting the data and perhaps more challengingly validating the information (how do you know for sure whether a client is actually going short or not?) is very difficult. Even if a client does go short, this doesn’t necessarily mean they are manipulating the market, so the value of any submitted data is limited.

Other overarching issues that will need to be addressed include receiving and transmitting orders, the overlap between MiFIR and the Securities Financing Transactions Regulation, reference data issues, and the transition period from MiFID I to MiFIR. There are numerous granular issues that will need to be clarified when getting “into the weeds” of the detail.

In addition, implementation will require a significant upgrade in data systems for firms, competent authorities, and ESMA itself. The technological challenge cannot be underestimated, and is a key factor in the delay of the MiFID II/R go live date.

Transaction reporting provides critical market data to supervisors, and the BBA fully supports ESMA’s approach to calibrating the framework. We urge the industry to work together and efficiently use what time we have left to deliver an effective and workable transaction reporting regime that benefits both regulators and firms alike.

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