So – it’s been some time since I last posted, for which I must apologise. This is not an indication that all has been quiet in the reporting space – in fact quite the opposite. Compliance officers across the EU have been reeling with a succession of consultation papers and announcements hitting them from all sides. Here is a summary of the news most relevant to this audience.
Despite it being almost eight-years old, the original MiFID legislation still has the power to slap you when you least expect it. Even the largest firms aren’t immune from getting it wrong (as evidenced by the recent £4.7m fine for Deutsche Bank). Retail derivatives brokers can be caught out when they stray from FX and energy contracts into more esoteric fare, such as CFDs based on single stocks or bond futures, where they may find themselves with an unexpected requirement to report these transactions under the MiFID rules. Make sure to build consideration of reporting requirements into your approval process for new businesses and products.
After almost a year of coaxing firms into compliant EMIR reporting via the Q&A route, ESMA has lost patience and started to take a firmer line. This started with a requirement for Trade Repositories to reject any reports which broke the rules on where blanks and NA values were permissible. This level 1 validation went live at the beginning of December. A further, tougher, level 2 validation is in the pipeline that will stipulate the exact range of values permitted in those fields, which are populated.
In order to be able to enforce the Q&A guidance more effectively, many of the answers published to-date will be incorporated into a revised set of technical standards, whose adoption will be mandatory according to a consultation paper published in December 2014. ESMA will also take the opportunity to expand the number of reporting fields by around 25%, meaning no one will be immune from making system changes, however compliant their current reporting solution. Best estimate for the introduction of level 2 validation is the third quarter of 2015 and for the consultation paper changes, the first quarter of 2016 (though nothing official has been announced).
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The reporting of transactions in the wholesale energy markets might not appear to have immediate relevance to retail derivatives brokers. However, if you offer CFDs in electricity or gas to your clients and then hedge your exposures via certain organised market places you might incur a reporting requirement. Trades already reported for EMIR purposes are exempt, but REMIT also requires the reporting of order information, which are not reportable for EMIR. The simplest solution in these cases might be to ask your OMP to report on your behalf, but it is not yet clear which exchanges and brokers will offer this service (or how much they might charge). REMIT reporting starts in October 2015.
MiFID 2 (the Directive) covers a large number of topics, including the requirements applying to approved reporting mechanisms and other authorised bodies supporting the legislation. MIFIR (the Regulation) covers, among other things, the detailed reporting obligations of individual firms. Even before all of the standards have been finalised and approved, it is clear that the reporting burden on regulated firms from MIFIR will be greater than for MiFID and EMIR put together.
This is due to the aggregated scope of reportable products (including FX derivatives, cash securities trades, swaps), additional transaction types (financing transactions, primary issues, results of option exercise) and the greatly expanded scope of information required (national identification of retail clients, identity of the person or algorithm executing the trade). The overlap between the fields envisaged for MIFIR and those already reported for EMIR purposes is not so great as we might have hoped, and the two requirements will continue in parallel (MIFIR will not replace the EMIR requirement).
What are financial firms to do about this imminent wave of regulation if they are not to turn over their entire IT department to satisfying the reporting requirements? The only approach which appears viable for small-to-medium-sized firms is to outsource the management of all of your transaction data and rely on a third-party to assess reportability under the various regimes, to format and route your data as appropriate and to report back to you with confirmation of what has been reported on your behalf. This last step is critical in order to support your internal assurance processes (as unfortunately you will retain ultimately responsibility under most of the regimes).
If you have an alternative vision for how these future requirements might be addressed, or any other comments on the above, I would be very interested to hear your thoughts.