Simon Maisey, managing director and head of Tradeweb’s global business development
When you’re preparing to comply with a multi-faceted, far-reaching piece of legislation, uncertainty can be your biggest challenge. Despite a 12-month delay from its original implementation deadline, many aspects of MiFID II’s requirements are yet to be finalised. With barely six months before the directive and its accompanying regulation come into force, asset managers and other buy-side firms are trying to remove as many ambiguities over their new obligations as possible.
One key area of focus is MiFID II’s extended post-trade transparency regime, which aims to bring more information into the public domain to support price formation. These new post-trade transparency reporting requirements are highly complex – subject to multiple caveats and carve-outs, in terms of identifying responsibility – but also incomplete and could change. Further, they stand alongside many other new obligations related to trading, including pre-trade transparency rules, transaction reporting, best execution policies and trade surveillance procedures, meaning there are a lot of new processes to be put in place.
Unlike some existing reporting rules, MiFID II places ultimate responsibility for meeting certain post-trade transparency obligations with the buy-side. Nevertheless, asset managers were taken by surprise at the turn of the year, counter to prior expectations that they could rely on major banks to shoulder the bulk of the burden, with the delay of the systematic internaliser (SI) regime. But despite continuing speculation over the future role of sell-side counterparts, help is at hand in terms of handling complexity and minimising uncertainty. New innovative solutions – such as Tradeweb’s assisted reporting capabilities – offer buy-side firms a comprehensive and rigorous, but user-friendly approach to compliance.
While trades executed ‘on exchange’ are the responsibility of the trading venue, from a post-trade transparency perspective, obligations are less obvious across the OTC universe. For trades executed off venue, MiFID II requires one counterparty to report the time, price and size of any trade in scope in near real time, via an approved publication arrangement (APA). This may not sound overly onerous, but in the absence of clarity, it may be challenging.
First, the scope of instruments has not been finalised. The European Securities and Markets Authority (ESMA) has said post-trade transparency reporting applies to all instruments that are admitted for trading on a trading venue (TOTV). But TOTV is a fluid concept. The list of instruments regarded as TOTV will be based on data collected by ESMA via national competent authorities (NCAs) from all EU trading venues the previous trading day and as such evolves incrementally.
Second, the question of which counterparty reports has several layers of complexity. It had been expected that most major banks would be categorised under MiFID II as SIs and would be responsible for meeting post-trade transparency requirements for any trade to which they were a party. MiFID II defines SIs as firms that trade specific instruments on frequent, systematic and substantial basis, but last December ESMA decided to delay the introduction of the SI regime until September 2018, to ensure accuracy of designation. Banks can opt in before that date, triggering reporting responsibilities, but today it is not certain how many banks, if any, will take this leap. This means any seller of an in-scope instrument between January and September 2018 to an EU-registered counterparty will have to report for post-trade transparency purposes (as will any EU-registered participant in any transaction with a non-EU firm). Even once the SI regime comes into being, there are no plans for a central reference source listing SIs for each instrument, meaning buy-side firms may need to check counterparty status on a trade-by-trade basis.
The third known unknown is timing. MIFID II allows for a standard delay in the reporting of certain large or illiquid trades to avoid adverse market impact, but Europe’s 28 NCAs have the discretion to lengthen or adapt that deferral based on local market characteristics. As with the SI list, there are no plans for this deferrals information to be listed in a single format or location for digestion by market participants.
Historically, asset managers have relied on sell-side counterparts to fulfil the majority of their regulatory reporting requirements, for example, using delegated reporting services under the European Market Infrastructure Regulation (EMIR). But the reconciliation problems arising from EMIR reporting requirements mean that such arrangements will not be available under MIFID II.
Some larger firms may choose to report directly to APAs or work with their OMS providers to deliver the information required, however this may not cover all post-trade transparency reporting requirements, given current variables and future uncertainties. Plus, it is a significant technology undertaking for what may turn out to be an infrequent or exception based requirements.
However, it is possible for APAs to work with their sell-side clients to provide ‘assisted reporting’ capabilities to the buy-side, effectively extending the formers’ connectivity ‘pipes’ from the APA to their buy-side client, using a FIX-based API. As part of the assisted reporting service, the APA can provide a GUI to the buy-side firm to allow them to ensure the trades reported on its behalf are compliant, amending and reconciling as necessary. The buy-side firm’s trades can be flagged as assisted trades and identified by its legal entity identifier code. The benefit is that the buy-side firm achieves compliance with its post-trade transparency reporting obligations without having to set up direct connectivity, thus saving time, money and effort – and eliminating uncertainty over how to deal with different trades.
Of course, such arrangements are really only of value if they can take account of the vast majority a firm’s OTC trading activity. Tradeweb’s APA for example, covers all instruments from the most standard of cash equities to the full range of OTC derivatives. Moreover, the Tradeweb APA already has commitments to participate from a significant number of sell-side firms representing an estimated more than 60% of OTC non-equity trading volumes, meaning that the majority of most buy-side firms’ regular counterparties will be in a position to offer assisted reporting via the Tradeweb APA. There will of course always be outliers, not least because firms regulated under MiFID II will continue to trade with firms located in jurisdictions outside the EU. As such, the Tradeweb APA enables buy-side use of assisted reporting capabilities to also send trades to be reported directly.
By contracting with an APA as soon as possible, buy-side firms will remove one significant area of uncertainty, enabling them to focus on their core business and other key areas of compliance. With ESMA suggesting there will be no period of grace for meeting post-trade transparency requirements – unlike under EMIR – firms should not leave their reporting arrangements to the last minute.