MiFIR and MiFID II are familiar terms in investment circles. These are the statutes that regulate firms involved in the trading of financial instruments across the European Union.
The scope and aim of the MiFID II regime are perhaps most succinctly set out in the first sentence of Article 26 MiFIR, namely that “Investment firms which execute transactions in financial instruments shall report complete and accurate details of such transactions to the competent authority as quickly as possible, and no later than the close of the following working day.”
This requirement alone is significant for firms involved in trading across the European Union and in third countries, yet it hardly scratches the surface of the broad reporting requirements imposed by MiFIR. Whilst previous legislation was aimed at harmonising reporting rules across the Member States of the European Union, the new and updated rules brought in under MiFIR are intended to achieve the much loftier goal of promoting and maintaining the integrity of European investment markets.
In this article, we explain where MiFIR applies and summarise the transaction reporting requirements that it has introduced.
What is MiFIR?
To understand MiFIR reporting obligations, we need first to look at the Regulation’s EU Directive counterpart – the Markets in Financial Instruments Directive (MiFID). This law first became effective in 2007, with the intention of standardising the rules governing the sale and handling of financial instruments (which, in broad summary, are tradable assets such as equities, bonds and commodities).
In its first incarnation (known as MiFID I), the Directive introduced compliance monitoring processes and rules around how financial firms should handle client data. Firms were also made subject to reporting requirements for equities and bonds – enabling regulators to analyse the markets to identify any illegitimate trading that could amount to market manipulation.
The second incarnation of the Directive, MiFID II, came in response to issues that arose during the global financial crisis. Coming into effect on 3 January 2018, MiFID II remains in force today and brings a much wider range of trading activity into the regulatory fold.
To further clarify and codify the new trade reporting requirements that took effect during 2018, the European Parliament passed the Markets in Financial Instruments Regulation (MiFIR). Containing 55 articles, MiFIR greatly expanded on the reporting requirements originally set out in MiFID I, casting a wider net in terms of the financial instruments caught by the rules, and widening the scope of measures concerning corporate governance policies.
Who and what does MiFIR apply to?
MiFID I imposed reporting requirements on trades involving equities and bonds that were traded on a regulated market, in addition to over the counter (OTC) derivatives that are connected to the performance of those financial instruments.
The scope of this regulatory regime has seen a significant expansion under MiFID II (including MiFIR), and now covers financial a multitude of financial instruments that are linked to trading venues. Regulated trading venues include:
- The Regulated Market (RM);
- Multilateral Trading Facilities (MTFs); and
- Organised Trading Facilities (OTFs).
As a result of these expanded requirements, a wider range of asset classes are now subject to reporting requirements than had been the case under the previous legislation. These include:
- Equities
- Bonds
- Foreign Exchange (FX / FOREX)
- Indices and Baskets
- Interest Rates
- Commodities
It now falls to operators of trading venues to report transactions executed on their platform by firms that are not subject to the regulation. This means that transaction reporting obligations are incumbent on all investment firms and trading venue operators. UCITS (Undertakings for the Collective Investment in Transferable Securities) and AIF (Alternative Investment Fund) management companies are not necessarily subject to the rules, however they may have to meet the requirements if they carry out any portfolio management or investment advisory services.
It now falls to investment firms that execute transactions in the above financial instruments to report complete and accurate details of the transactions they act on to a National Competent Authority (NCA). The Financial Conduct Authority (FCA) is the NCA in the UK. As mentioned previously, complete and accurate reports should be filed without delay and by no later than the close of the following working day.
What has to be reported under MiFIR?
In the simplest terms, investment firms are required to report details pertaining to the execution of a transaction that falls under the scope of the MiFID II regime. A ‘transaction’ is defined by Article 26 of MiFIR as “the conclusion of an acquisition or disposal of a financial instrument”. This effectively means that any sale or purchase of a reportable financial instrument and the entering or closing of a derivative contract involving a financial instrument will now fall under the remit of MiFID II reporting requirements.
For those transactions that are subject to MiFIR reporting requirements, there are now 65 individual details that must be reported per transaction – substantially more than the 13 that were required in the past under MiFID I. These include the basic details of the trade and information that identifies the parties involved, through to the algorithms used in the execution, and even technical order transmission data.
It’s also important to note that MiFID II imposes a further requirement on firms to perform trade reporting functions in addition to the transaction reporting we’ve discussed in this article. This means that, amongst other things, investment firms are required to make certain trading information available to the public almost immediately – with the need to timestamp trades down to the microsecond.
How can firms comply with MiFIR reporting obligations?
As is clear from the above, MiFIR subjects investment firms and trading platform operators to extensive reporting requirements. To comply, they must provide details including those listed above to an NCA by no later than the close of the next working day after a transaction has been executed. Firms may choose to perform these reporting functions themselves, but they may also report through a trading venue or via an Approved Reporting Mechanism (ARM).
Given the extensive nature of transaction reporting requirements under MiFIR, it is perhaps unsurprising that some firms have struggled to meet the requirements incumbent upon them. In a July 2020 report published by the European Securities and Markets Authority (ESMA), it was revealed that NCAs imposed 371 sanctions in respect of reporting failures during 2019 – totalling €1,828,802.
MiFIR compliance made easy
The reporting requirements imposed under MiFID II (and specifically MiFIR) have created a significant administrative burden for investment firms and platform operators. With national authorities having made it clear that they are willing to issue punitive sanctions on firms that fail to comply, the importance of rising to this regulatory challenge could not be any clearer.
As the end of the Brexit transition period draws near, the possibility of dual reporting requirements for some transactions has arisen, making it all the more vital to find an effective reporting solution. By deploying eflow’s TZTR regulatory reporting software, firms can benefit from the effortless creation, management and filing of transaction reports whilst sticking to MiFIR’s tight deadlines.
For more information on how your firm can modernise its transaction reporting system, book a demo below or contact eflow today.
