As well as highlighting the legal entity identification challenges that the industry is likely to face as a result of the MiFID review, attendees to this week’s MiFID Transaction Reporting Group meeting also elaborated on the instrument identification challenges of the European Commission’s planned extension of the directive to cover the OTC and commodity derivatives. Ana Fernandes from the UK Financial Services Authority’s (FSA) Transaction Monitoring Unit (TMU), which is charged with scrutinising transaction reports to detect any instances of market abuse, noted that the extension of the scope is “intensive” and will now cover many more instruments, including those that do not currently have a standardised identification system in place.
Attendees and speakers alike raised concerns about the extension of the directive to commodities derivatives not just on regulated markets, but also in the OTC markets. The extension to OTC instruments in particular could require lengthy and expensive projects being kicked off (“years of work”) within firms and regulators in order to enable these parties to be able to store and report these (as yet undetermined) identifiers. One attendee referred to the challenges that have been faced during the much delayed introduction of the Alternative Instrument Identifier (AII) for transaction reporting as an example of what to expect, but on a much larger scale. Given the UK has 90% of all European Union OTC transactions, this should also be a particular challenge domestically.
Moreover, in order to be able to capture identifiers for instruments traded outside of the European region, trading venues will need to capture and provide this data to the regulators, rather than the firms directly. This data would then need to be stored by European firms and these trading venues in an accessible manner for a minimum period of five years.
The aim overall is to be able to align the transaction reporting regime for securities with the OTC world and the European Commission is therefore seeking a high degree of correlation between the two reporting regimes, said Fernandes. The underlying theme running through the MiFID review has been to allow for these reporting requirements to mirror those required under the new European Market Infrastructure Regulation (EMIR) and the Regulation on Energy Market Integrity and Transparency (REMIT), which is in the early stages of being drawn up for the commodities markets.
As well as this extension of the scope of MiFID reporting, firms will also face much greater scrutiny of the content of these transaction reports, with the European Commission providing much more detail on the data requirements. To this end, the Commission is proposing to compel firms to provide separate trader identifiers for individuals trading within particular firms in order to identify those engaging in market abuse directly.
Attendees to the meeting debated the challenge of introducing these new trader IDs, including the challenge of which identifier to use when several parties have touched a trade. One attendee, quite rightly, pointed out: “How do you identify an individual trader when we have enough difficulty identifying a legal entity?”
The new distinctions related to trading capacity, under which client facilitation is differentiated from proprietary trading by a new code, were also discussed. A few attendees noted that the majority, if not all, of trades would fall under client facilitation and such a distinction was therefore pointless and likely to result in yet more unwanted cost to add in a new field.
On a more positive note, an interesting suggestion from the floor was for the European Commission to align the codes used for trade reporting with those for transaction reporting. “This could result in operational efficiencies for firms and would reduce the need for duplicate data entry of the same or similar data,” he contended. Hence, by using the same code for both types of reporting, this data could be stored in one place within firms’ middle and back offices.