ESMA proposes changes to ‘burdensome’ MiFID II best execution reporting requirements

The markets regulator has set out proposed changes to streamline current MiFID II reporting requirements under RTS 27 and RTS 28.

ESMA has invited market participants to comment on its consultation paper setting out proposed changes to current reporting requirements under MiFID II, which the regulator labelled as “burdensome”.

The alterations suggested by the European markets regulator focus on the potential streamlining of the range of information required to be reported under MiFID II’s RTS 27 and RTS 28, which require execution venues and investment firms to publish periodic data on the quality of execution respectively.

“The objectives behind the best execution reporting obligations by firms and execution venues continue to be justified. However, the existing regime has proven burdensome and not entirely able to achieve the intended objectives,” said ESMA in its paper.

“ESMA proposes to work in the direction to develop a streamlined, less detailed and more user-friendly RTS 27 reporting framework which aims to ensure that venues publish meaningful information on their achieved execution quality, which assist the public and market participants in choosing the best execution venue for their order executions.”

Among the proposed changes to reporting for venues is the reduction of best execution indicators down to seven key areas.

These include the total monetary value of all transactions per type of financial instrument executed by a venue, median monetary transaction value per type of financial instrument, fees applied to users for a median transaction, bid-offer spread related to a median transaction, access to further information on costs, speed of execution, and the total number of market makers designation to a venue per instrument.

Also, in a bid to create a more streamlined approach to the current RTS 27 regime that could allow for reduced reporting efforts for venues, the regulator has suggested altering the necessary granularity of information required to instead focus on reporting per type of financial instrument over a quarterly period. ESMA has also suggested aggregating RTS 27 reports within asset classes including whether individual instruments are determined to have a liquid market.

This marks a considerably simpler version of the current regime which requires venues to report data that determines execution quality by individual instrument executed at four reference times per day for each market segment.

ESMA said the reporting on these key features would give market participants a more “focused” and “swift” overview of execution quality achieved on venues. In basing it on specific data symbols it would also allow for a standardisation and improved comparability of information outlining execution.

The consultation paper also proposes changes to the scope of RTS 27 in terms of which execution venues fall under it, excluding market-makers from having to adhere to the new reporting regime to create a closer alignment with the transparency requirements under MiFID II.

According to ESMA, information published by market makers on execution quality of transactions under RTS 27 has become “less relevant” as many of them have turned into systematic internalisers when executing orders over the counter (OTC).

For this reason, the regulator has suggested that the new RTS 27 should only focus on transactions executed on trading venues and those on OTC transactions where an SI or another liquidity provider is party to the transaction.

Alongside its proposed changes to how venues should report information, the regulator has also set out plans to amend the way that investment firms report execution quality. Falling under RTS 28, current requirements oblige firms to publish an annual report on quality achieved in execution of client orders on venues, SIs and other liquidity providers.

Some firms, however, do not execute client orders themselves but instead transmit them to third parties for execution. According to the MiFID II Delegated Regulation these companies must produce a yearly list of the top five investment firms they used to transmit or place client orders for execution in terms of trading volumes for each financial instrument class.

“This requirement shares the same objectives as RTS 28, but it is generic and has not allowed a comparable approach by firms,” said ESMA.

To create synergy between the two regulations, ESMA has suggested changes that would see RTS 28 cover the reporting obligations of both categories of investment firms.

Elsewhere, ESMA has suggested amendments to which requirements should be included as part of reporting under RTS 28 to make the information more “meaningful”. These include removing the need to include the percentage of orders which were passive and aggressive when drafting lists of top five performers and adding the need to explain why firms have not been able to provide data on required parameters, as well as, adding information on received payments for order flow in execution quality summaries.

“The proposals in this paper aim at standardising and making reporting obligations, to the extent possible, less burdensome. Therefore, the proposed more focused requirements for RTS 27 and 28 reports should enable venues and firms to provide them at lower costs than under the current reporting framework,” said ESMA.

Comments on the consultation paper will be accepted by the regulator until 23 December later this year.