REGULATORY CONSULTING

MiFID2 / MiFIR Reporting

The Markets in Financial Instruments Directive (MiFID) was passed into UK law in 2007.  It introduced a number of measures designed to increase transparency and competition between trading venues offering financial instruments.

Following the 2008 financial crisis, the European Commission reviewed the scope of MiFID and determined that additional scope and measures were required, in order to;

  • strengthen investor protection
  • reduce the risks of a disorderly market
  • reduce systemic risks, and
  • increase the efficiency of financial markets and reduce unnecessary costs for participants

The output from this exercise has been a recast of the MiFID rules (commonly referred to as MiFID2) which will be implemented in each member state.  In addition, a new regulation – Markets in Financial Instruments Regulation (MiFIR) was introduced, which is binding across all EU member states.

The effect of MiFID2 will vary from firm to firm, depending upon your activities in the markets, who you are trading with, whether you are hedging or speculating, whether you are trading bilaterally or through Regulated Markets (RMs), Multilateral Trading Facilities (MTFs) or Organised Trading Facilities (OTFs).

Firms that are considered to be Investment Firms (IFs) are required to report their transaction data either directly to the National Competent Authority (NCA) or to an Approved Reporting Mechanism (ARM) – who will in turn be responsible for transmitting such data to the NCA.

In markets this complex, there are many areas that are under consultation – a process which is likely to continue even after go-live as the market grapples to understand how to implement MiFID2 effectively in what was quite a short timescale for a complex piece of far-reaching legislation.

Some Challenges for Commodity Trading Firms

MiFID2 is perhaps the highest impact regulation to affect commodities firms in recent times.  Depending upon how a firm operates, where they trade, why they trade and who they trade with – there are various activities that may be required of them.

A selection of operational challenges for trading firms are highlighted below:

  • Understanding the new threshold rules and gathering sufficient data around market size in order to support an exemption request/categorisation.
  • Performing a Trade Portfolio analysis to determine what is reportable under MiFID2 and how this co-exists alongside what is reportable under EMIR (where applicable).
  • Responsibility of Investment Firms to report trades on behalf of non-investment firm clients.
  • Privacy and protection of personal data (the regulation requires personal data regarding individual traders, such as their Passport number or national identifiers).
  • Holding additional ‘non-commercial’ data in order to support the reporting requirements (e.g. decision makers).
  • How to handle the testing and certification of algorithmic and high frequency trading models.
  • How to handle ‘off-system’ trades and ensure these are reported to an ARM.
  • How to handle ‘approximately booked’ trades – these typically exist in order to hold a representation of a deal in a system, but technical constraints mean that the record is often a simplified representation of the true deal that was struck.
  • Managing the effectiveness of delegated reporting, where this may be carried out by many different exchanges or brokers – each using a separate ARM service.
  • How to fit MiFID2 T+1 transaction reporting processes into an existing operational control framework.
  • How to ensure that sufficient operational oversight is in place in order to fulfil the obligation to ensure that submissions to the ARM or the NCA are correct, timely and complete.
A ramp along a curved wall in the Kiasma Museu, Helsinki, Finland

Timeline

The recast Markets in Financial Instruments Directive (MiFID) was approved by the European Commission in 2014, and went live on January 3rd 2018.

As the UK withdrew from the EU in 2020, responsibility for oversight of a UK specific implementation of MiFID2 was transferred to the Financial Conduct Authority.

Summary

MiFID2 provides a number of business challenges for UK and EU firms who are actively trading financial products.

The changes to the threshold measures may result in some firms being reclassified, and subsequently requiring them to incorporate additional responsibilities under the EMIR legislation.

Given the links between EMIR, REMIT, MiFID2 and MAR – firms are strongly advised to consider regulatory change in its entirety – rather than piece-meal.

This will prove to provide greater efficiencies of scale, greater reuse of processes and technology and consistent repeatable controls across the business functions.