MiFID II reporting five years on: what does the future hold?

MiFIR transaction reporting is five years old this month. In the second of a three-part blog series on MiFIR, our reporting director Simon Appleton looks ahead at some of the upcoming changes expected in Europe and the UK.

Status check

Five years after MiFID II’s implementation and nearly three years after Brexit, the EU and UK transaction reporting regimes are under review.  Both regimes are generally working well hence, in the UK for example; other parts of MiFID appear to be being assessed with a greater sense of urgency, such as Post-Trade Transparency.

Transaction reporting data quality has improved steadily over the last five years, albeit accuracy levels vary greatly across firms, asset classes and data fields. Firms conducting deep, regular testing have seen reporting standards improve significantly and those with robust control frameworks have seen the greatest progress.

However, the fact that only a third of the investment firms reporting under UK MiFIR have requested data via the FCA’s Markets Data Processor, confirms that two-thirds (over 850 UK MiFID investment firms), are at risk of being in breach of their reporting obligations.

Pre-MiFID an independent review established that there is no viable alternative to transaction reporting that would allow regulators to monitor investment firms and markets effectively. Regulators are increasingly describing themselves as being data-led and so clearly the receipt of accurate, complete and timely reports has never been so crucial.

MiFID transaction reporting in the UK

Given that the rules were implemented five years ago, the FCA is reviewing its policy options to ensure that the reporting regime is not only effective but also efficient for firms and that the requirements are not disproportionate when compared to the benefits. They will be aware of the impact of divergence from EU MiFIR but will also want what works well for UK firms and the FCA.

The FCA will be very considered in its approach to reviewing the transaction reporting requirements. This will allow it to determine which parts of the regime need to be updated, taking into account feedback from industry, as well as experience gained since 2018. 

Which aspects of the technical standards, guidelines and Q&A require amendment or additional clarity and guidance for firms? Areas such as corporate actions and the reporting of swaps are ripe for review.

In addition, before considering when to engage with industry, the FCA needs to absorb the UK Treasury’s:

• Future Regulatory Framework (FRF) Review;
• Edinburgh Reforms; and
• Establish the resultant role of the FCA.

The Treasury’s policy statement for “Building a smarter financial framework for the UK” and Edinburgh Reform plans were both only published last month, so the publication of the FCA’s transaction reporting discussion paper (DP) may be some way off.

Areas of likely change in the UK

• Removal of the Securities Financing Indicator: the requirement to report securities financing transactions (SFTs) under UK MiFIR ceased with effect from 31 March 2022 and so this field is effectively redundant
• Changes to the OTC Post-trade indicator: Given the UK Treasury’s Wholesale Markets Review it is highly likely that there will be changes to the applicable values for this field
• Removal of the Short Selling Indicator: Given previous communication from the FCA, it would be highly surprising if they did not follow ESMA’s lead and remove the Short-Selling Indicator
• OTC derivatives and crypto: The reporting scope for OTC derivatives is to be considered, as will the development of Unique Product Identifiers (UPIs), which could help resolve issues with the use of ISINs. Crypto-related instruments could form part of the discussion given the expected greater scrutiny on these
• Cross-regime alignment: The UK Treasury is keen to understand where overlaps lie between MiFID II and EMIR reporting and where different reporting formats are used. Given the significant differences between the two regimes as to what constitutes a reportable event or valuable information, it’s anticipated that the use of consistent and international data standards, reportable values, formats and methodologies is where further efficiencies can be made. MAR and Benchmark Regulation are both likely to form part of the cross-regime analysis
• ESMA’s proposals: The FCA will consider which proposals from the EU’s review (below) will form part of the forthcoming discussion paper.

EU review of MiFID transaction reporting

ESMA’s proposals for changes to transaction reporting under EU MiFIR were published back in March 2021 and so the EU’s review is much further advanced than the UK’s. As a reminder, the headline changes include:

• AIFMs and UCITS management companies providing one or more MiFID services to third parties will be required to transaction report for the first time
• Replacement of the “Traded on a Trading Venue” (ToTV) commonalities concept with a simplified “SI approach” for determining whether an OTC derivative is reportable
• A new field, a Buy-back Programme flag, to identify trades in buy-back programs conducted on behalf of an issuer
• Introduction of a MiFID client categorisation flag, to identify whether the transaction was for a professional, opted-up professional or retail client.
• Replace ‘INTC’ with a unique code to the reporting firm when aggregating orders across more than one client
• Removal of the Short Selling Indicator.

In December 2022, the EU Council announced that it had voted in favour of final compromise amendments to the commission’s MIFID II and MiFIR proposals in the EU MIFID Review. The texts will represent the council’s negotiating position for trilogues, which are expected to commence around Q2 2023 (as the European Parliament is still working towards its final compromise position in Q1).  

The MiFIR Article 26 level 1 text, dated 16 December 2022, was published on 21 December 2022 and includes reference to other additional information, for example, the due date for the transaction report, which could prove challenging for firms in certain scenarios. The short-selling flag has indeed been removed and a new designation for aggregated orders has been included.  For the detail though, we will have to wait for the revised RTS 22.

Estimated timelines for implementation are contained within a recent Kaizen blog.

Focus on data quality

Regulators, both in the EU and the UK have frequently stated the importance of accurate reporting to support them maintain clean and orderly markets. They remain unlikely to look kindly on a firm when either mis-reporting has hampered a market abuse investigation, or where they fail to act upon observations made by regulators, either through general communications (e.g. Market Watch newsletters) or through those made directly to firms. 

It’s now nearly 30 years since the Investment Services Directive and 2023 looks likely to be a busy year as ESMA’s MiFIR review leads to its legislative conclusion and the UK FCA digests the impact of the government’s reforms.

Read the first part of this blog series MiFID II reporting five years on: a retrospective.

• We at Kaizen will stay on top of any developments and continue to work with new and existing clients to detect and remediate their reporting issues. 
• For conversation with Simon about anything raised in the commentary above, please contact us.