Claire Savage, Chief Operating Officer, AQMetrics
Following years of planning and implementation for MiFIR, it is time to pause and consider the lessons learned from the compliance process and the ongoing considerations in this evolving regulatory environment.
The reality of being in implementation mode for MiFID II for the last two years, preceded by almost ten years of regulatory reform, is that the reporting solutions put in place have been tactical, and found lacking in certain areas. While the target goal for transaction reporting by 3 January 2018 was met by most firms, the challenge of meeting accuracy, completeness and reconciliation obligations is slowly evolving.
The National Competent Authorities (NCA) too have experienced a period of adjustment and are entering a phase of optimisation. The Central Bank of Ireland’s recently published strategic plan 2019-2021 refers to a three period of consolidation following the implementation of international and European regulatory reforms. This relative lull in the introduction of new regulations represents an opportunity for firms to shift their focus towards optimising solutions around MiFID II and MiFIR.
Transaction reporting in an opaque environment
MiFID firms have undertaken transaction reporting with a commonality of data challenges. The collection and verification of expanded data sets, including legal entity identifiers, personal entity identifiers, and underlying instrument classifications, is compounded with the ongoing development and enhancement of external data sources, including the ESMA Financial Instruments Reference Data System (FIRDS) and the ANNA Derivatives Service Bureau (DSB).
Tactical solutions involving manual workarounds have been largely deployed to help counteract these challenges. However, the risk with such tactical solutions results is that transparency is compromised, change management is challenging, and it results in a fragile system, that is operationally burdensome on the compliance team.
Shining a light for the future
There is no doubt that the regulatory themed inspections will increase in 2019, with a focus on completeness, accuracy and reconciliation for transaction reporting.
For completeness, while firms cannot solely rely on FIRDS as the golden source of data, the process for identifying reportable and non-reportable instruments can be achieved by combining FIRDS reference data with supervisory controls for listing, determination and exclusion.
For accuracy, data management can be addressed in partnership with the ARM, through the provision of rule-based data management that may be absent from the firms’ legacy systems. Data can be collected, validated and consolidated with third-party data in the transaction reporting solution.
For reconciliation, transparency is key. Reporting statistics and flexible search functionality can be combined with peer group analysis to provide additional data insights to the firm.
Now is the time for firms to ask the following questions both internally and to their ARM:
- How resilient is the MiFID II transaction reporting solution?
- How can I consolidate this reporting with other areas of regulation?
- How can I improve the processes and the controls within my firm to manage these regulations so that I am managing them with a common supervisory control portal?
The changing light
In parallel, this phase of optimisation is likely to be interwoven with shifting priorities in the european regulatory authorities.
In its strategic plan, the Central Bank of Ireland stated that ‘for MiFID firms, the landscape is changing’ and that the focus for regulators would be on ‘third party outsourcing, critical business operations, financial and technology information and, of course, Brexit’.
The UK has published a draft regulation draft UK regulation to ensure the MiFID II and MiFIR regime works after Brexit. This will impact the transaction reporting requirements for both UK firms and European Economic Area firms with UK branches themselves and UK branches of European Economic Area firms. UK branches of EEA firms will potentially be subject to a double reporting requirement in some cases, and will need to adapt their reporting solution to facilitate transaction reporting to both the FCA and their home state NCA.
What is assured though, is that the EU will continue to take all steps necessary to protect its market. With MiFID III on the horizon, there is no doubt that there are shades of grey ahead. Now is the time to pause, reflect and optimise. The tactical implementations may have served their purpose in 2018, but for 2019 onwards, a more strategic approach is required.