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MiFID II: A Little Too Much Transparency?

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Has transparency gone too far under planned revisions to the reporting requirements of the 2007 Markets in Financial Instruments Directive (MiFID)? Market participants say that it will expose sensitive market activity, while creating a massive operational headache.

While traders assume they will just have to deal with this pain they are in limbo until the timeframe and details have been confirmed. The publication deadline for draft technical standards and delegated acts, which would finalise the MiFID II details, has passed with nothing published. A widely expected postponement of the date at which MiFID II would come into force from January 2017 to January 2018 is as yet unconfirmed.

“We are all waiting to get clarity on the delegated acts; it was thought it would be January,” says Adrian Fitzpatrick, head of Central Dealing at buy-side firm Kames Capital. “The EC still hasn’t confirmed for sure that MiFID has been delayed. Without that being officially confirmed everyone should be working on the assumption the deadline is January 2017 not January 2018. My expectation is it will be delayed, but there are examples from the past where the working assumption was that the regulators would change dates and they did not.”

The new MiFID II reporting rules have raised concern among market participants, even if they are implemented correctly. Firstly, they place considerable demands on the time and resources needed to engage in reporting. Trade reports – those made in real time to support price formation – must be reported via approved publication arrangement (APA) – platforms that are authorised to publish trade reports on behalf of investment firms. Transaction reports, published on a T+1 basis, have to be made via an approved reporting mechanism (ARM) and are detailed reports intended to allow to national competent authorities (NCAs) to monitor market activity.

Andrew Bowley, head of Regulatory Response & Market Structure Strategy at broker Nomura, says, “There are three different parts of the MiFID II that require banks to capture quotes; a bank has quote obligations where it is a systematic internaliser; it has best execution oversight where it owes a fiduciary duty to clients; and it has quarterly best execution reporting. Each of those three parts requires the sell-side to capture quotes and workflows must change to reflect that over the next two years.”

The number of fields that are required or transaction reporting has risen to 65 from 23 with 13 of those fields already in use requiring change in content. Much of the detailed information is highly sensitive – for example the investment decision making process and personal data of traders who execute the trades. Secondly, reporting is now required for all asset classes thereby expanding the models of trading that have to be captured. Thirdly, the buy-side must now report where it had previously been exempt. And finally, firm quotes must be reported on a pre-trade in addition to trades/transactions, by market operators and by investment firms that are categorised as systematic internalisers (SIs).

“There are obvious and as yet unresolved difficulties with reporting unexecuted quotes where a negotiation takes place over the phone, not least which bid/offer quote to report as well as how practically to capture this information,” says Elizabeth Callaghan, head of Fixed Income E- Trading Market Structure Strategy & MiFID II Regulatory Response at trade body the International Capital Market Association (ICMA).

Clean report

From an operational standpoint, decisions need to be made as to how the information is captured, stored and transmitted to the local NCA either directly or via an ARM or APA. There are challenges at each stage in the collection dissemination and transmission of the data, including which reporting regime a firm is subject to.

James Baugh, head of sales for London Stock Exchange Equities and Turquoise, says, “We are engaging with a number of global banks around the SI determination and the pre-trade quoting obligations particularly for non-equity products. Firms will be challenged in understanding whether they should be registered as an SI in those products, and in understanding what their trade reporting obligations are.”

Bowley explains that there is a range of options within firms as to how they capture the data and having additional time to allocate budget and planning to this process can be advantageous.

“There is a spectrum of approaches a firm could take from very simple – give everyone some sort of graphical user interface (GUI) to catch manual quotes – through to full-blown order management system,” he says. “With a few technical options to take, I think an extended timeframe is quite helpful for people to think about the right way to approach that in terms of cost efficiencies, fit with existing infrastructure and obviously workflow efficiency.”

However setting up arrangements for the process once data leaves its originating firm would be assisted by greater certainty says Fitzpatrick.

“Until everyone knows exactly what is wanted by the regulators going forward, everyone is a bit wary of how to proceed with reporting,” he reports. “Some of the providers like Bloomberg and Traiana are saying they offer support, but they will not all become APAs. We have to figure out separately as institutions how we are going to report, and whether it is cost effective to give it to someone else where they have got all of the data encryption to protect this information.”

It is not only the market participants who face a struggle. Across all 28 member states authorities’ systems may not be ready by the start date, says Anthony Kirby, executive director for Regulatory Reform and Risk Management at consultancy Ernst & Young.

“I think it is a huge ask, trying to get all these different systems ready to receive two and a half times as many fields as was needed under MiFID I,” he warns.

Assuming a deadline is fixed, and a path to reporting becomes clear within a feasible timeframe, MiFID II be creating a fundamentally more transparent market which will carry unintended consequences, for example in the publishing unexecuted quotes.

Callaghan says, “One [consequence] is the possibility of quant desks with advanced algorithms – buy or sell-side – cross-referencing buy-side holding data with unexecuted quote data, leading to a competitive advantage for the quant desks.”

Baugh says there are still some questions that need to be worked through on non-equity pre-trade quotes, including whether they need to be anonymous or public.

“[We] are working with both the market and the regulator to understand the potential differences between pre-trade quoting for equities versus non-equities in the context of MiFID II, and the opportunities this may present for firms wanting to provide quotes to their clients,” he says.

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