EU legislators have agreed the proposed changes to MiFID II and MiFIR, bringing us a step closer to their implementation. The changes are expected to be published in the Official Journal in Q1 2024.
Focusing on Article 26, these amendments will require significant detail to be developed in RTS 22 over the following 9-18 months, meaning that it will not be possible to fully comply until the RTS is in place.
ESMA is expected to consult on the likely changes to the RTS in Q1 2024.
Earlier in the year we explained what we might expect to see in the revised Article. We can now confirm the changes that will impact firms reporting to EU NCAs under the new regulations in what will be the first “real legislative” divergence between EU and UK reporting rules.
Broadening the scope of firms caught by the obligation to report
MiFIR Article 52 now includes a requirement that the Commission will, in close cooperation with ESMA, assess the possibility of extending the requirements of Article 26 to Alternative Investment Fund Managers (AIFMs), and management companies which provide investment services and activities and which execute transactions in financial instruments. They have 12 months to do so from publication.
Strengthening the obligation on NCAs
ESMA has added three additional requirements on NCAs to distribute the reports to not only;
- the competent authority of the most relevant market in terms of liquidity for those financial instruments;
- the competent authorities responsible for the supervision of the transmitting investment firms
- the competent authorities responsible for the supervision of the branches which have been part of the transaction, and
- the competent authority responsible for the supervision of the trading venues used.
We can’t be 100% certain whether this obligation will mean any additional data will be required from firms in their reports or whether there is sufficient detail already to enable NCAs to comply with this.
Instruments in scope
The OTC derivatives transactions in scope has been amended. All OTC derivatives trades executed on venue will be in scope of transaction reporting – no change. Also in scope will be off-venue OTC trades which fall within the transparency requirements.
The amended transparency obligation has removed the link to the “traded on a trading venue”/TOTV concept and now covers OTC derivatives which are denominated in major currencies (Euro, Yen, US Dollar or Pound Sterling) and which are subject to the clearing obligation. Where these OTC derivatives are interest rate swaps, only the most liquid tenor combinations are included.
TvTIC in Level One
The TvTIC is now included in Level 1 legislation:
“Reports on a transaction made at the trading venue shall include a transaction identification code generated and disseminated by the trading venue to both buying and selling members of the trading venue.”
We are not convinced that bringing the requirement into Level 1 legislation will solve the implementation challenges associated with it.
Farewell to the short selling flag…
As expected, the obligation to report the short selling flag has finally been removed which aligns EU legislation with UK Supervisory priority.
No change to the substance but some of the text from RTS 22 covering third country firm branch reporting has been moved up into Level 1 text.
The obligation to report the “applicable waiver under which the trade has taken place” has also been removed. This also aligns EU legislation with current UK FCA Supervisory priority.
Of potential concern is the addition of the following requirement – the details of which won’t be fully realised until we see the amended RTS 22:
‘(j) the conditions for linking specific transactions and the means of the identification of aggregated orders resulting in the execution of a transaction;’ and
‘(k) the date by which transactions are to be reported.’
This could result in significant implementation challenges for firms when we fully understand which “specific transactions” they mean and how they are to be linked. With MTCH capacity not solving the problem of linking market-side to client-side fills, it may be that paragraph (j) is ESMA’s solution.
Paragraph (k) doesn’t seem to add much for regulators but firms will have to build complex logic to determine when exactly is T+1 – over weekends and ever shifting bank holidays.
Much of the content has been anticipated for a while and although some of these changes will reduce the reporting burden on firms, others are likely to prove more challenging to implement and report accurately.
The implementation timeline has not yet crystallised and the changes will also likely require a revision of the reporting guidelines. For the details we will have to wait for the consultation paper expected early in the New Year.