Published on 09.12.2020

MiFID II & MiFIR – Trade Reporting vs Transaction Reporting

An Introduction to MiFID and Reporting

The Markets in Financial Instruments Directive II (MiFID II) is a piece of legislation enacted by the EU in 2018. Its main goal was to address shortcomings with the original MiFID, which was implemented in January 2007. MiFID II works in conjunction with the Markets in Financial Instruments Regulation (MiFIR), but they are unique in some areas.

In this article, we will consider the main differences between MiFID II and MiFIR as it pertains to trade reporting and transaction reporting.

What is MiFID II?

MiFID II is a directive that applies to all firms providing financial services established in the UK or EU. The goal of MiFID II is to bring greater transparency and investor protection to the financial markets. It provides an enhanced regulatory framework for relevant firms operating in financial markets within the EU and UK.

MiFID II introduced tighter rules surrounding the following:

Business Conduct – MiFID II states that firms and individuals who provide financial services within EU or UK markets must have a good understanding of the requirements of MiFID II, work in the best interests of their clients and adhere to certain business conduct rules including honesty and fairness, fair disclosure and product governance.
Investor Protection – MiFID II has enhanced protection for the end user by increasing the standards to which firms and individuals should be held. Enhanced provisions include the removal of fees and commissions except where these are passed to the client, and the provision of Key Information Documents (KID) for investors.
Supervisory Power – The European Securities and Markets Authorities (ESMA) and the Financial Conduct Authority (FCA) have the power to cease the sale or marketing of financial products when investor or stability risks are heightened in their relative EU and UK markets.
Pre and Post-Trade Reporting Transparency – Firms must now disclose and report both pre-trade quotes and post-trade transparency to increase transparency and fairness for equity and non-equity instruments.

Trade Reporting vs Transaction Reporting

Key Differences

Trade reporting – The main aim of trade reporting is to increase transparency across financial markets for the public. By making key information such as prices and volumes available, investors, advisors and firms working within the markets can better understand market conditions while making informed decisions before executing trades or giving advice.

Trade reporting occurs in near real-time and there are restrictions on the timescale for reporting a trade. Reports on equity and equity-like product trading must be filed within 1 minute of execution, and non-equity trading reports, such as bonds and derivatives, should be filed within 5 minutes. There are several deferrals available for certain adjustments to the base deadline of 5 minutes, and in certain circumstances, firms could have up to 4 weeks to report the trade.

Post-trade reports are filed to Approved Publishing Arrangements (APAs). These organisations are authorised to publish trade information in reports on behalf of investment firms. They will also ensure that reporting obligations are met under articles 20 and 21 in the Markets in Financial Instruments Regulation (MiFIR). Pre-trade transparency is published by the Systematic Internaliser (SI).

Trade reports provide less information than transaction reports. Key post-trade report details include:

Time and date of the trade
Price of the trade
Currency of the price
Quantity/volume of units traded

Trades that are considered to be large in scale are subject to different reporting requirements aimed at protecting investors trading on a larger scale from revealing their trading strategies or adverse market movements. Depending on the size of the trade, MiFIR allows pre-trade transparency requirements to be waived under certain conditions. The publication of post-trade information can also be deferred allowing large transactions more time before they’re made public.

Transaction Reporting – Transaction reporting is designed to support market regulators by providing essential information on each transaction for all asset classes to an Approved Reporting Mechanism (ARM) The ARM will then pass the reporting details of the transaction onto the relevant authorities – the FCA for UK markets and ESMA for EU markets, alongside other National Competent Authorities (NCAs) where necessary within the EU.

This process allows for the streamlined monitoring of market integrity and enables the detection of abusive or illegal trading activities.

Transaction reports provide market regulators with a considerable amount of information (up to 65 fields). These fields also include non-trade details such as information about the investment decision-maker, execution algorithms, and client details. These must be reported by the end of the next working day (T+1) after execution. Regulators retain these reports and they are not made public.

Who Is Responsible for Reporting Under MiFID II?

Trade Reporting Responsibility

Investment Firms
If one party is an investment firm, it is their responsibility to report the transaction. In the event that both parties involved are investment firms, the Systematic Internaliser (SI) is responsible for reporting. An SI is a firm that deals outside a regulated market regularly by executing client orders. If both firms are SIs, then the seller is responsible for reporting the trade.

Systematic Internalisers (SIs)
Investment firms must study their last six months of data every quarter to determine if they classify as an SI. SIs are subject to pre and post-trade transparency requirements, such as publishing pre-trade quotes using an APA or on their website.

Trading Venue
If the trade is conducted on a trading venue, then the venue is responsible for submitting the report.

Transaction Reporting Responsibility

Investment firms executing transactions in financial instruments are responsible for filing transaction reports to an ARM within the T+1 time limit.

MiFIR Reporting – Information Included in Trade and Transaction Reports
Trade Reports Include:

Date & time of trade
Financial Instruments Identification code
Quantity
Price & price currency
Venue of execution
Transaction identification code

Transaction Reports Include:

Date and time of trade
Details about the buyer and seller
Economic details of the transaction
Which financial instrument was traded
Who performed the trade

The Role of APAs and ARMs

APAs: Once trade report data has been submitted, the APA will take responsibility for publishing the post-trade information. This process promotes transparency between market participants.

ARMs: When firms submit their transaction reporting data to the ARM, the ARM verifies the integrity of the data and alerts the firm if there are any errors or missing information in the report by sending a rejection if fields are missing or if the information is wrong.

The ARM is required to store and maintain the data while keeping it secure from unauthorised access. The transaction reporting data stored by ARMs needs to be available to ESMA, the FCA, and other regulators with information-sharing agreements. This data can be used to prevent market abuse and ensure that trades are executed in the best interests of the client.

Impact and Common Challenges of MiFID II on Firms

One of the struggles many firms face with MiFID II requirements is the timeliness of their reporting. Without the right technology, the tight reporting windows could prove to be logistically demanding and exceptionally costly.

One of the main goals of MiFID II is to improve market transparency through increased trade and transaction reporting. This means that firms not currently optimising through the utilisation of the most up-to-date technology might find it harder to ensure compliance with their reporting.

Failure to adhere to the reporting requirements can incur substantial fines, but there are ways to protect yourself and your firm from such exposure.

Avoid transaction reporting mistakes with Novatus En:ACT

At Novatus Global, our team of transaction reporting experts provide tailored support across the entire reporting process to ensure your transaction reporting is conducted effectively for all reporting regimes.

Novatus Global’s market-leading En:ACT platform is the technological solution that will: