The second Markets in Financial Instruments Directive (MiFID II) and the associated Regulation (MiFIR) came into effect across the EU on January 3, 2018 (replacing MiFID from 2007). When it was introduced, MiFID II was one of the broadest pieces of financial regulation since the 2008 financial crisis, covering most of the financial services industry.
Its overall objective is to strengthen investor protection through increased transparency and reporting, enhanced governance rules and heightened regulation of markets. The regulatory text itself consists of both a Directive and Regulation, as well as myriad Regulatory Technical Standards (RTS), Implementing Technical Standards and Delegated Acts.
While transaction reporting requirements existed under MiFID I, the scope and overall intention of the transaction reporting framework was greatly increased when MiFID II was introduced. The obligation to report transactions under MiFIR requires investment firms that execute transactions in financial instruments to report “complete and accurate details of such transactions to a NCA - the FCA in the UK - as quickly as possible, and no later than the close of the following working day. Transaction reporting data is then used by the FCA and other regulators to detect and investigate suspected market abuse, as well as conduct supervision and to support the work of other regulatory authorities (such as the Bank of England).
Note – transaction reporting is separate to trade reporting, a MiFID requirement for firms to report basic trade data to the market on a near real-time basis.
Instruments covered – all security derivatives and cash equities are now in scope of reporting.
Type of transaction – no longer covering only market-side trades, the definition of ‘transaction’ now covers any purchase or sale of a reportable financial instrument, entering or closing a derivative contract in a financial instrument, and any change in notional amount of that contract. There are also some specific exclusions that do not require reporting, which only increases the overhead in reporting correctly.
Reporting responsibility – depending on a firm’s counterparty, the responsibility for reporting a transaction will fall on one or both parties, requiring sharing of trade information between firms.
Data reported – 65 pieces of data are required to be reported per transaction (only 13 of which were used in MiFID I), and range from basic economic information, to detailed data on the instrument itself, the trader or even the algorithm involved in the execution.
Timelines and mechanisms – reports must be made via an Approved Reporting Mechanism (ARM) and by no later than the end of day the following day (T+1).
SteelEye’s award winning MiFID II Transaction Reporting Solution seamlessly captures, normalises and enriches all of a firm's required data, before automatically compiling the daily transaction reports, ready to be sent to an ARM at the click of a button.
Under MiFID II, firms are expected to take ‘all sufficient steps’ to achieve the best possible results for their clients. When executing a client order, firms are expected to consider “price, costs, speed, likelihood of execution and settlement, size, nature or any other relevant consideration”.
As well as the required policies and procedures a firm must have in place to ensure these outcomes are reached, MiFID II requires firms to disclose far more information to demonstrate the quality of, and compliance with, its best execution responsibilities. Best Execution reports include:
To ensure that financial firms can demonstrate compliance with the MiFID II rules, there are requirements for them store extensive and detailed records of their transaction, documents and communications. The scope of the records that needs to be kept significantly increased when MiFID II was introduced and include:
Importantly, the scope of MiFID II's record keeping requirements extend to telephone conversations, emails, instant messages and meeting notes which relate to transactions or client orders.
All of these records must be kept in a ‘readily accessible’ medium, in a Write-Once-Read-Many (WORM) format, for a minimum of 5 years.
This is all so the relevant NCA can access and review records as and when requested.
In practice, a firm may be asked at any point to provide all the records that relate to a particular trade or client order. The firm would then be expected to ‘reconstruct’ the trade, bringing together all the transaction/order details, conversations, emails, meeting minutes and more.
Given the typical deadline for completing a reconstruction is 72 hours after a request is made, the ability to access, identify and connect different records across different data formats is a significant challenge for most firms.
SteelEye’s Core Package consolidates, normalises and indexes all trade, order, communication, market and reference data on a single platform. With all data in one place, record keeping is effortless, trade reconstruction is instant and firms gain new insight into their performance.