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[ M I F I D I I | F X ] es for firms to ensure they report appropriately. Reporting concerns FX market participants had been concerned over whether the reporting obligations would extend to products transacted bilaterally without using an execution venue, but the European Securities and Markets Authority (ESMA) issued an important opinion in May 2017 that concluded only OTC deriva- tives sharing the same reference data details as derivatives traded on a trading venue should be sub- ject to transparency and transac- tion reporting requirements. “ESMA’s equivalence definition was far narrower than anyone had expected, which means if a bilater- ally traded FX forward doesn’t ex- actly match the terms of a trading venue instrument, it doesn’t have to be reported,” says Mark Kelly, director of professional services at NEX Regulatory Reporting. “Many firms have not yet adjusted their thinking to take this clarification into account, but it should signifi- “It is up to individual firms to ascertain which transactions with which counterparties are exempt from reporting.” THOMAS KENNEDY, GLOBAL HEAD OF ANALYTICS, THOMSON REUTERS cantly relieve the reporting burden for FX products.” In reality, while buy-side firms need to have the right systems and processes in place to meet their 66 TheTrade Winter 2017 best execution and investor protection requirements, Kelly believes that when it comes to transaction re- porting and pre-trade transparency, buy-side firms ac- tive in FX and interest rates will be affected the least. “With the majority of FX and interest rate deriva- tive transactions being traded off-exchange and not directly referencing a security admitted to an ESMA recognised venue, such activity will therefore fall outside of reporting scope,” he explains. Meanwhile buy-side firms also need to get to grips with the new classification of trading venues under MiFID II, including systematic internalisers (SIs) that deal on their own account when executing client orders, multilateral trading facilities and organised trading facilities. Orders executed on trading venues such as EBS, Thomson Reuters Matching or FXall should be report- ed by the venue itself, while orders executed bilater- ally with SIs should be reported by the SI operator. This theoretically relieves investment firms of certain reporting obligations, but they need to be sure their counterparties are registered as SIs. “There is no published list of approved SIs and this has been a source of confusion for the buy side, because if there is no transaction or trade reporting but the counterparty is not actually an SI, the buy-side firm would fall foul of the regulation,” says Thomas Kennedy, global head of analytics at Thomson Reu- ters. “In the UK, SIs are registered by the Financial Conduct Authority at the asset class level, so it is up to individual firms to ascertain which transactions with which counterparties are exempt from reporting.” With just a few months to go until MiFID II comes into force, market participants now face the choice be- tween simply doing the minimum required to comply with the regulation, or using this as an opportunity to improve execution quality, efficiency and transpar- ency. Those that choose the latter option may face steeper costs in the near term but better rewards in the long term. “Firms that see MiFID II as a commercial imperative to provide optimal execution, review best practices, work on their algos and invest in technology to pro- vide enhanced analytics and visualisation will be much more likely to win institutional flow in the future,” adds Kennedy.