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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
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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.