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CESR’s Advice on Transaction Reporting Accepts High Cost of the Introduction of New Entity Identifiers, the BIC Will Have to Do…

As part of its overall technical advice to the European Commission on the subject of MiFID, the Committee of European Securities Regulators (CESR) has indicated that although the introduction of a “meaningful” and unique pan-European legal entity identifier for transaction reporting purposes is desirable, it isn’t practical in the short term. In its package of recommendations to the Commission (paper three of four), the regulator indicates that it is keen to mandate the collection of client identifiers across Europe and notes that although its favoured identifier, the Swift provided Bank Identifier Code (BIC), does not cover the whole market at the moment, it’ll have to do.

During the consultation period, a number of concerns about the mandatory collection of client identifiers were raised by the British Bankers’ Association (BBA) and Xtrakter Transaction Reporting Working Group. In particular, the group highlighted the potentially high cost of the establishment and running of a central utility to maintain these identifiers and it therefore asked CESR to clarify who would be liable to pay for these costs.

At the moment, only 19 out of the 29 member states even require firms to provide client information as part of their transaction reporting obligations, and the identifiers used by these national regulators vary from country to country. However, the most popular is the BIC, closely followed by a unique internal client identifier, which can be free format (not the easiest option to standardise across Europe by far). CESR also notes that although the BIC is likely to be the most suitable form of identifier for these purposes, these codes are not currently available for all entities.

However, CESR’s response has been to judge that the anticipated advantages of collecting these identifiers outweigh the potential disadvantages: improvements in efficiency and precision being the most obvious benefits. It also contends that regular collection of these (as yet undetermined) identifiers would bring down costs for firms, as ad hoc reporting of this data would not be as challenging or frequent, and they could be used for other purposes such as identifiers to be used for the large exposures regime or liquidity risk requirements.

CESR does acknowledge the potential cost implications of the introduction of the systematic collection of identifiers in the 10 countries that do not currently engage in this activity, but it does not allude to the maintenance costs of a utility to maintain this data at a pan-European level. “These new costs could be passed on to investment firms’ clients, typically with a relevant share of retail investors in those member states that at present time are not collecting client IDs,” it notes of the costs for these 10 member states, thus sidestepping some of the concerns raised during the consultation period.

In its advice to the Commission, CESR concludes: “The provision of client identifiers and meaningful counterparty identifiers could lead to greater efficiencies in market surveillance and the detection of market abuse… There is a consensus among CESR members to request the European Commission to amend MiFID and its Implementing Regulation in order to make the collection of client ID and (thus) meaningful identifiers for all counterparties by competent authorities mandatory within the framework of the upcoming review of MiFID.”

The ball is therefore back in the court of the European Commission to deal with any of these remaining concerns and to determine the most suitable identifier for collection, although CESR has provided a list of options and a highly recommended option.

The checklist for an identifier, according to the BBA and Xtrakter group’s feedback, 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 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.

CESR has seemingly taken this feedback into account: it notes that a “universal code” would be preferable to firm specific client codes, but acknowledges this is a considerable challenge and would incur potentially significant costs. “CESR considered that it was not in a position to propose the use of a unique, European-wide code for a client/customer identification by every investment firm reporting a transaction, considering, first, the technical and cost-related aspects of building from scratch such a pan-European identification code and, second, the political sensitivity of this issue,” it states.

The regulator therefore breaks the options down into different levels for identification and discusses the pros and cons of each approach (which is available to download below, from page 91 of the CESR document). This includes the use of a unique identifier at the pan-European, national, investment firm and securities account level.

Its conclusion is therefore that the BIC is the most appropriate format at a pan-European level but at the national level, it should be up to each member state to decide. “CESR is of the opinion that each member state should be free to decide which codes should be used for these purposes, taking into account national regulations and practices, as long as they fulfil the aforementioned requirements. Nonetheless, for the purpose of exchanging transaction reports between CESR Members, CESR relies on the use of BIC codes for counterparties and clients (whenever such codes exist) and strongly encourages their use at national level,” it states.

The BIC remains at the top of the list – good news for Swift, but what does the market think?

For those that wish for an opportunity to provide yet more feedback to the regulatory community on the subject, the European Commission (DG Internal Market and Services) is organising a public hearing on the review of MiFID on 20-21 September 2010 in Brussels. Visit the Europa site here for more information.

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