MiFIR Transaction Reporting
As financial markets become increasingly complex, the regulatory measures imposed by the Markets in Financial Instruments Regulation (MiFIR) are critical to ensuring transparency and compliance. MiFIR in conjunction with the Markets in Financial Instruments Directive (MiFID) has a particular focus on improving and enforcing transaction reporting requirements.
Introduction and Purpose of MiFIR Transaction Reporting
The transaction reporting process of MiFIR is an important tool in the regulatory oversight of UK and EU markets.
Transaction reports are post-trade reports that provide up to 65 fields of data related to the trade and those involved in the trade. The specific requirement for 65 fields comes from Article 26 of MiFIR and relates to the obligations of firms to report transactions. Transaction reports should not be confused with trade reports. The specifics of trade reports are covered in our other article transaction vs trade reports.
Under MiFIR, investment firms providing services in financial instruments must submit transaction reporting, and firms need to ensure compliance with the regulation. For this reason, it’s important to develop a good understanding of the process. In this article, we’ll take a detailed look at the transaction reporting requirements that firms face under MiFIR. We will explore the benefits that this directive was designed to produce for markets and consider any detrimental adverse effects it might have had so far.
MiFIR Transaction Reporting Process and Standards
Transaction Reporting as designated by MiFIR involves a detailed process that must be adhered to. Both parties involved in the transaction have certain responsibilities under this regulation. Here are the key requirements:
- Reporting Process
- Timescale
- Data Reporting Standards
- Entity Identification
Reporting Process
After executing a transaction, firms typically send the transaction report to an Approved Reporting Mechanism (ARM). If the transaction was conducted on a trading venue, both the trading venue and the executing entity are obliged to submit a transaction report. The executing entity may choose to delegate its own reporting to the trading venue.
Timescale
Firms must submit a transaction report to an ARM before the end of the next business day, otherwise known as T+1 (transaction + one day). Failure to meet the timely transaction reporting requirements can result in substantial penalties. The importance of timely transaction reporting cannot be overstated.
Data Reporting Standards
With 65 required fields, the complexity of reporting for MiFID II has increased from the requirements of MiFID which was 23 fields.
- The necessary fields contain information on
- Price & volume
- Buyer & seller information
- Date & time of the transaction
- Information on the financial instrument
- Legal Entity Identification (LEI) codes
The Regulatory Technical Standards (RTS), specifically RTS 22 which covers the “Data Standards and Formats for Transaction Reporting”, outline the necessary steps for compliance in these areas.
Entity Identification
Legal Entity Identification (LEI) codes are unique identification codes that are used across markets and jurisdictions to identify entities involved in financial transactions. Those involved in the transaction and the submitting firm must provide valid LEI codes.
Key Requirements and Differences Post-Brexit
Post-Brexit, the UK has assimilated the core principles of MiFIR and MiFID II into domestic law, and the FCA now has the authority to adapt and amend these rules for the UK market.
One key difference is that instead of using the European Securities and Market Authority’s (ESMA’s) Financial Instruments Reference Data System (FIRDS), the UK now uses the FCA’s FIRDS. The FCA highlighted that the FIRDS master data will differ from the ESMA’s since their master data is from EU venues. The location of the party reporting the transaction determines which FIRDS should be used. An EU party executing on a UK venue is reportable under both systems – the EU party reports to ESMA while the UK party reports to FCA.
Types of Financial Instruments Covered
As defined in Section C of Annex 1 of MiFID II, firms are required to report transactions in reportable financial instruments across all asset classes, specifically those that fall under the definitions outlined in RTS 1 and 2. RTS 1 refers to shares, exchange-traded funds, depository receipts and certificates. RTS 2 covers transparency for bonds, structured financial products, emission allowances and derivatives.
The financial instruments covered by MiFID II must be:
- Instruments listed or traded on regulated trading venues which are Regulated Markets (RMs), Multilateral Trading Facilities (MTFs) or Organised Trading Facilities (OTFs)
- Instruments traded over the counter (OTC) but where the underlying is listed or traded on a regulated trading venue (RM, MTF or OTF)
Challenges, Accuracy Testing, and Reconciliation Requirements
Challenges and Common Issues Faced by Firms
Transaction reporting can vary in complexity depending on the types of transactions being reported as well as the volume of trading. The mapping of certain fields will only be done once, so for firms who regularly engage in similar trades, this exercise can be quite straightforward. Firms that deal in multiple asset classes or regularly execute trades of high complexity could find that the transaction reporting process is lengthy and therefore costly.
Once the data has been collected, it must be verified for accuracy, which can also be a time-consuming process if processed manually.
Investment firms must stay up to date with any updated regulatory guidance, validation rules or notices from ESMA or the FCA to ensure they remain compliant at all times. Firms advising or executing trades in UK and EU financial markets may have dual reporting requirements to the FCA and ESMA, depending on whether they are executing through a branch located in these regions.
Using transaction reporting software can help firms substantially improve the accuracy and timeliness of their reports, especially if they are executing complex and varied trades.
Accuracy Testing and Reconciliation Requirements (RTS 22),
MiFIR Article 26 requires investment firms and reporting providers such as ARMs and trading venues to ensure the completeness, accuracy and timely submission of their reports. Investment firms remain responsible for taking reasonable steps to verify the data submitted on their behalf is complete, accurate and timely. RTS 22 outlines the reporting standards and the formats in which data must be submitted to trade repositories or NCAs.
Accuracy testing validates transactional reporting data, while reconciliations check reported data against internal records. By testing regularly, firms ensure that the transaction reports they provide are error-free, meet regulatory requirements and guidance, and adhere to industry best practices.
Role of Approved Reporting Mechanisms (ARMs)
ARMs operate in the centre of the transaction reporting process. Firms will submit data to the ARM where it is checked for accuracy before being forwarded to the relevant NCA. If any information is found to be inaccurate or missing, the ARM will inform the firm and this can be resolved before sending to the NCA. This process helps to ensure MiFID II transaction reporting standards are met.
Firms can also report directly to the NCA (typically with the regulator’s transaction reporting system) rather than through an ARM. Regardless of the process, the firm is ultimately responsible for the accuracy of the data.
Compliance with MiFID II and Potential Penalties
Firms that do not comply with the transaction reporting requirements of MiFIR and MiFID II could face significant regulatory fines and penalties. To avoid this, firms can implement systems that enable the accuracy and timeliness of their transactions and repeatedly test the accuracy of the reports they produce.
How Can Novatus Global Help With Transaction Reporting?
If your firm requires assistance with streamlining and verifying its transaction reporting processes, Novatus Global has the experts to ensure reporting compliance across the board.
Novatus En:ACT is the fully scalable technology platform trusted by major global firms to reconcile both source systems and submission files for all G20 transaction reporting regimes.
Get in touch with one of our experts today to begin streamlining your transaction reporting and ensure compliance.
