Following the publication of the Committee of European Securities Regulators’ (CESR) consultation papers on MiFID earlier this year, industry groups have submitted their responses to the proposals, including providing feedback on the potential data costs and system requirements to cope with the changes. To this end, the British Bankers’ Association (BBA) and Xtrakter Transaction Reporting Working Group is one such group that has raised the issue of the “large start up costs and ongoing maintenance costs” of collecting client identifiers.
CESR asked for feedback to its recommendations to ascertain just how much of a challenge the data requirements of MiFID mark two will prove for market participants in order to feed this information back to the European Commission. Firms had until 4 June to submit their responses to the 44 questions contained within the non-equity markets transparency consultation paper, which detailed a whole host of new derivatives data requirements.
As previously noted by Reference Data Review, the data supply chain will certainly be altered by these new requirements and some degree of investment will be necessary in order to consolidate and report this data publicly. Accordingly, the Xtrakter working group response identifies a number of logistical problems that need to be addressed by CESR before any work can begin, including who pays for the identifier itself.
“A central utility would need to be set up to issue and maintain client IDs. Not only will there be costs in establishing and maintaining the register, there will also be a question as to who should pay for the establishment of an ID for a particular client. Decisions would have to be taken to decide whether the client directly paid for the establishment of his unique ID or whether the first investment firm who applied (on behalf) of the client for an ID would pay. Should a decision be taken for the latter option, it would mean that other investment firms who subsequently use that client ID bear no direct cost for establishing or using the ID,” states the response.
This is quite clearly an argument that has resulted from the current charging practices used by some data vendors with regards to end user licenses (a serious bone of contention within the industry at the moment). The group, which represents the interests of the BBA, the Association for Financial Markets in Europe (AFME) and the Futures and Options Association (FOA), therefore seems keen to ensure that the regulatory community is apprised of the issue before it rears its ugly head within the MiFID reporting sphere for unique independent client identifiers.
In general, the group is in favour of such identifiers but is also asking for clarity from the regulatory community that they are fully using the existing identifiers out there on the market. After all, if you don’t have to reinvent the wheel, why go to all that effort?
There is also need for a degree of clarity on what exactly is meant by the “ultimate client”, according to the Xtrakter group. “In the case of an investment management client, will the reporting requirement remain at the portfolio manager fund manager level? We are of the view that the sell side firm’s client reporting obligation should remain at the portfolio manager level, as the portfolio manager is both the investment decision maker and also typically the EEA regulated entity,” it suggests. This will have a significant impact on the level of data granularity required to be stored and maintained by the firm, and thus the complexity of the overall data management structure.
The Xtrakter group notes the usual data protection issues that crop up when customer data is shared by regulators across jurisdictions, which must also be taken into consideration. It also highlights the important quality and service level considerations of the maintenance of this data with regards to scope of use and granularity.
Given the number of other related regulations floating about in the regulatory ether at the moment, the group also asks for a more tied up approach to identifiers for reporting purposes. “It would greatly assist both investment firms and regulators if the client ID for transaction reporting purposes could also be used for other regulatory reporting purposes such as ‘single customer view’ purposes and ‘large exposures’ reporting purposes,” it states.
The checklist for an identifier, according to the group, should comprise: widespread coverage; fair access and reasonable costs; sufficient granularity and a hierarchical structure for the required data items to be included; that it is available on a centralised register (like the US Office of Financial Research or a European equivalent, perhaps); and supported by clear service level agreements (SLAs). It agrees that the CESR suggestion of the Swift Bank Identifier Code (BIC) as the most appropriate identifier based on its ubiquity has some validity, but cautions that a lot of issues still remain with the identifier before it can be used as such. In the meantime, it suggests the use of proprietary identifiers may be more practical.
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