In order to comply with the latest regulations, firms must manage their transaction reporting obligations. A unified transaction reporting regime across the European Union (EU) was first introduced when MiFID I came into force in 2007 with the objective of detecting and investigating potential market abuses. With MiFID II implementation set for January 2018, transaction reporting will expand to include market integrity, which adds monitoring the fair and orderly functioning of markets into the transaction reporting definition.
Although the increased transparency through transaction reporting will have implications, such as additional costs and development of enhanced technology and market infrastructure for market participants, it is important for firms to comply in order to provide the necessary information to National Competent Authorities (NCA) so that they may monitor risks and market abuse.
The mechanics of transaction reporting
Investment firms who execute transactions must report to their NCA “as quickly as possible” and no later than the close of the following working day, i.e., T+1. These firms can choose either to file their reports directly – or through an Approved Reporting Mechanism (ARM) – to the European Securities and Markets Authority (ESMA), as shown in the graphic below. After this process, ESMA puts the reports through the Transaction Reporting Exchange Mechanism (TREM), which allows NCAs from other EU Member States to look at the information.
ARMs are one new category of Data Reporting Services Providers (DRSPs) that did not exist under MiFID I. An ARM is defined as an entity authorised to provide services to an investment firm for it to meet its reporting obligations under the provisions established under MiFID II/R. This service includes reporting details of transactions to domestic competent authorities or ESMA. Firms choosing to report their transactions via an ARM will also be provided with detailed validation services before submission of the reports to regulatory bodies
ARMs were first introduced in the UK through the Financial Services and Markets Act of 2000, but the concept has now been extended to the rest of the EU. With MiFID II imposing these transaction reporting requirements for financial entities, we anticipate that ARMs will become much more widely used within the trading landscape in upcoming years.
Reporting under MiFID II via ARMs
ARMs must have adequate policies and arrangements in place to report the information required under MiFID II. Furthermore, MiFID II specifies several regulatory obligations that ARMs must comply with, which include operating and maintaining effective administrative arrangements designed to prevent conflicts of interest with its clients. However, the ultimate responsibility for trade reporting remains with the investment firms. For ARMs that are also either market operators or investment firms, all information collected must be treated in a non-discriminatory way and they have to operate and maintain appropriate arrangements to separate different business functions.
Update on transaction reporting in France
The current market practice for transaction reporting under MiFID I is to report directly but, under MiFID II it is clear that firms will have the option to report though ARMs. The Financial Markets Authority of France (AMF) is working on a reporting platform to allow ‘connectors’ to receive transaction reports from ARMs and has said that it will accept any reports from ARMs that are authorised by a NCA. Currently, there are no ARMs based in France but discussions have been taking place with some market participants who may want to take on the role.
What should firms be doing to comply by 2018?
It is expected that regulators will not show lenience for a lack of implementation of the appropriate systems and processes for transaction reporting, so it is of great importance that firms do their absolute best to ensure compliance within the next year. Obviously, certain obligations will be specific to each firm, but some important steps to work towards compliance include:
- Analyse transactions to work out what must be reported and if circumstances exist in which you may be exempt
- Look at possible ARM arrangements
- Discuss with IT how to manipulate the required data and allocate budgets for any necessary upgrading of systems
- Consider the implementation impacts across the firm.
With the MiFID II application date just over a year away, firms should be looking at the best ways to conform with the new regulations and we expect that, within this coming year, ARMs will become increasingly significant for firms’ compliance in transaction reporting.
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