Rather than opting for an all in one directive to herald the second coming of MiFID, the European Commission has split the update into two parts: a regulation and a directive. The Markets in Financial Instruments Regulation (MiFIR) should be of particular interest to the data management community due to its focus on all aspects of data transparency, from trade data through to transaction reporting.
According to the draft of MiFIR, which is available to download at the bottom of the blog, the regulation: “sets out requirements in relation to the disclosure of trade transparency data to the public and transaction data to competent authorities, the authorisation and ongoing obligations applicable to providers of data services, the mandatory trading of derivatives on organised venues, and specific supervisory actions regarding financial instruments and positions in derivatives.” The data transparency requirements have therefore been neatly tied together under one regulatory banner, leaving the directive to deal with aspects such as the provision of investment services and conduct of business requirements for investment firms.
The draft regulation is the culmination of the work of the European Securities and Markets Authority (ESMA) and its predecessor over the last couple of years to gather industry feedback on the implementation of the first version of MiFID and to fill in any gaps, as well as to extend the regulation beyond the equities market. The draft paper notes that the European Commission has focused on assessing the impact of these new requirements including cost effectiveness and transparency; hence it is adopting a defensive stance ahead of any possible industry backlash on the subject.
Much like its predecessor, MiFIR is focused on improving cross border transparency and ensuring a level playing field with regards to data reporting requirements and access. Although the regulation contains a number of important pre-trade data transparency requirements such as equal access to data about trading opportunities, the most important aspects for data managers will likely reside in the post-trade section of MiFIR.
The extension of transparency requirements to OTC derivatives and fixed income instruments and the multilateral trading facility (MTF) and organised trading facility (OTF) contingents in the market is one such development. These markets, however, will not face the same level of transparency requirements as the equity markets, although “equity like” instruments such as depository receipts and exchange traded funds will see the MiFID requirements extended to cover them directly. All trading venues and their related trades will therefore now be subject to the same level of transparency requirements, but these will be tailored to the individual instrument types in question (the level of transparency will be determined by instrument type rather than venue).
On transaction reporting (the area of most relevance with regards to reference data standards), MiFIR aims to improve the quality of the data underlying these reports (a common theme across a lot of recent regulation – see commentary on which here) by being much more prescriptive in the standards that must be used. The idea is for firms to provide “full access to records at all stages in the order execution process” and for trading venues, beyond just traditional exchanges to encompass MTFs and OTFs, to store relevant data for a period of five years. This data includes legal entity identification data that the regulation indicates must be reported via approved mechanisms and formatted in a certain manner that will make it accessible for regulatory oversight purposes cross border.
The exact nature of the legal entity identification (LEI) and instrument identification standards that are to be used by firms in their transaction reports is likely to be impacted by the ongoing work at a global level as part of the systemic risk monitoring effort (see more here). At the moment, a range of identifiers is acceptable, but the regulatory community has been pushing towards the Bank Identifier Code (BIC) for some time (see more on which here), but this may change before MiFIR comes into force.
Another important section of MiFIR is the one devoted to the “increased and more efficient data consolidation” for market data, which necessarily entails a reduction in the cost of this data. A City of London paper published earlier this year addressed this issue directly, noting that the majority of the European firms participating in the study believe poor data quality, high costs of pricing data and a reliance on vendors are the main barriers to post-trade transparency (see more here), and MiFIR appears to be aiming to directly address those issues.
The argument for some form of consolidated tape or tapes is an integral part of that endeavour (see recent industry commentary on this issue here) and MiFIR indicates that the aim is for data to be “reliable, timely and available at a reasonable cost.” On that last point, the regulation also includes a provision that all trading venues must make post-trade information available free of charge 15 minutes after execution, thus enabling data vendors to stay in business but increasing transparency overall (or so the logic goes). Moreover, the regulator is keen for a number of consolidated tape providers to offer market data services and improve access to a comparison of prices and trades across venues, rather than a single utility version.
In order to tackle the issue of a lack of data quality for trade reporting, all firms will also be required to publish their trade reports through approved publication arrangements (APAs), thus ensuring certain standards are adhered to.