Clarifying MiFID II : How do the new post-trade reporting requirements affect the buy-side ?
By Jason Waight , Head of Regulatory Affairs & Business Management , MarketAxess Europe and Trax
he delay to MIFID II could well provide the industry with the
Tbreathing space needed to avoid some of the issues encountered with EMIR , where a last minute rush to put in place suitable reporting arrangements caused real challenges for many industry participants . Learning from that experience , a key question is to what extent buy-side firms will seek to rely on their brokers to meet the trade and transaction reporting obligations they will incur under MIFIR . Under MiFIR it will no longer be possible for buy-side firms to benefit from an exemption from the obligation to report 1 altogether . EMIR has taught us that the buy-side ’ s reliance on the sell-side will only be achievable through a more formal outsourcing arrangement together with the attendant compliance requirements associated with the outsourcing of a regulatory obligation . We consider below the implications for both trade reporting ( real time publication of price and quantity ) and transaction reporting ( market surveillance reporting to Regulators on a T + 1 basis ) on buy-side firms .
Trade Reporting / Post-trade transparency
Not to be confused with the T + 1 transaction reporting obligation to national regulators ( discussed below ), this is the post trade real time trade reporting / publication requirement . It is well understood that MIFID II expands the scope of this obligation beyond the existing MIFID
1 Strictly speaking it is not an exemption but an opportunity to rely on a third party report requirements currently applicable to equities to include fixed income , derivatives and commodities . Perhaps less well understood are the implications upon who has the obligation to report and whether or not it may be avoided , delegated or outsourced .
Today under MiFID I ( for equities only ), buy-side firms typically agree that the responsibility for satisfying the post-trade publication requirements shall be assumed by their broker . Effectively , this removes the obligation from the buy-side to take any further action . This is possible because currently MIFID I expressly allows the parties to a transaction to agree upon whom the responsibility should fall and thus all the obligations that flow with that responsibility are avoided .
MiFID II is subtly different . There will no longer be any express permission for firms to agree between themselves who will be responsible for satisfying the publication obligation . Instead , the rules state that the seller is responsible for making the report , unless the buyer is a Systematic Internaliser (“ SI ”) for that class of instruments . So , when selling to a broker who is not an SI , or to a broker who is not a MIFIR firm ( for example , a Swiss or US dealer ) or an unauthorised firm , the buy-side firm will incur the obligation to report which must still be satisfied in some way . The parties are of course always free to delegate the performance of this activity by way of an outsourcing agreement , but any such agreement does not exempt the buy-side entity from either the obligation to report in the first place , or the liability for failures . This means that the buy-side may need to have more systems and controls around the arrangements including a written agreement and systems to verify and monitor the act of reporting 2 . Outsourcing agreements of this nature are likely to have a different commercial structure to the current informal arrangements under MIFID I , and it would be prudent for buy-side firms who are provided such services without charges , or on a soft-dollar basis to get comfortable with such arrangements from a compliance perspective , having regard to the increased stringency of rules around incentives and transparency .
Furthermore , trade reporting can only be satisfied through an authorised Approved Publication Arrangement ( APA ), regardless if the selling firm is a buy- or sell-side entity . Trax is planning on registering as an APA and also working in close collaboration with the industry to develop unique tools for SI determination . The below diagram explains the trade reporting obligation for buy-side firms .
Transaction Reporting The obligation to report full transaction details to the regulator within T + 1 ( not a publication requirement ) shall also increase in scope pursuant to MIFID II . Currently , under MIFID I , many buy-side firms rely on an express exemption from the obligation to transaction report ( known as the “ portfolio manager ’ s exemption ”), which principally applies to portfolio managers operating a discretionary fund . 3 The mechanics of the portfolio manager ’ s exemption are not well understood . In particular , the exemption operates to relieve the investment firm of the obligation to make a transaction report , but it does not mean that the broker has made a report on their behalf . Critically , the broker does not make two separate transaction
2 The rules relating to outsourcing by FCA regulated firms are covered in the FCA Handbook under SYSC 8
3 [ Consolidation of orders from various funds across multiple jurisdictions in a central dealing desk which includes execution only authorisation , may arguably invalidate the ability to rely on this exemption ].
36 | THE TRADE MiFID II HANDBOOK www . thetradenews . com