Why every Trading Participants need to be familiar with Regulatory Reporting!

Why every Trading Participants need to be familiar with Regulatory Reporting!

The evolving requirements of ESMA and Market Abuse Regulation (MAR) persuade Reporting Entities to strategize the reporting structure of a trade. Since MiFID II implementation, it is aiming at increasing investor protection by creating a more efficient, risk-aware and transparent market for investment services and activities.

This regulatory initiative has been described as the “biggest overhaul of financial markets regulation in the EU for a decade” and provides a significant extension of the previous MiFID regulation with a broader regulatory scope and more stringent rules for investment firms — such as banks and other providers of investment services — as well as for regulated markets and data reporting services providers.

To comply with the evolving regulatory processes, every financial firm needs to stay familiar with the MiFID II’s reporting processes. This article will provide you an overview of ESMA’s MiFID II reporting structure and its flow.

Why every Trading Participants need to be familiar with Regulatory Reporting!

MiFID II Reporting to the Regulatory Bodies:

What is a Financial Regulatory Body & what is the major role played!

A financial regulatory body, regulates the financial firms which provides services to consumers and maintains the integrity of the financial markets. As a supervisory authority, every regulatory bodies aim at the fair and orderly operation and the transparency of the financial markets by ensuring that listed companies provide correct and complete information. It enables the establishment of financial services by verifying that financial institutions comply with rules of conduct.

The below diagram emphasizes the reporting scenarios that market participants will need to adhere in order to implement the standardized regulatory compliance.

Reporting by Trading Venues:

Why every Trading Participants need to be familiar with Regulatory Reporting!

Reporting by Investment Firms:

Why every Trading Participants need to be familiar with Regulatory Reporting!

Transaction Reporting

The Transaction Reporting adheres under the RTS 22, which requires the investment firms & trading venues to report complete and accurate details of transactions in financial instruments no later than the close of the following working day as per Markets in Financial Instruments Regulation (MiFIR).

The technology enablement should integrate 65 required transaction reporting fields however it should also ensure the data security. Also there is a need to certify connectivity to the new and existing ARMs, and help the clients for submitting initial and amended transaction reports.

Transparency Reporting

The MIFID II / MiFIR transparency reporting consist of 2 core transparency obligations.

  • Pre-trade transparency - Designed to provide market participants with near real time publication of basic trade data.
  • Post-trade Transparency - Designed to provide market participants with near real time publication of executed trades

Once the participants submit their reports, Approved Publication Arrangements (APAs), and Consolidated Tape Providers (CTPs) might further report this to NCA. The transparency could help the authorities to monitor the complete risk and the market exploitation.

As per RTS 1 - Transparency requirements for Trading Venues and Investment firms for Shares / depository receipts / Exchange traded funds / certificates will be handled and this transaction has to be reported within 0 to 15 minutes.

RTS 2 - Transparency requirements for Trading Venues and Investment firms for Bonds / Structured Finance products / Emission allowances & derivatives will be handled and this transaction has to be reported within end of the transaction day.

Best Execution Reporting

As per PwC, Best execution is achieving the best possible result for customers when executing their orders via execution venues or OTC. MiFID II looks for transparency over financial institution order execution and the Regulatory Authority, which requires the investment firms to evaluate whether the execution quality achieved corresponds to the quality promised in their best execution policies.

As per RTS 27 (For Trading Venues), This Regulation lays down obligations on execution venues to publish data relating to the quality of execution of transactions. It shall apply to trading venues, systematic internalizes, market makers, or other liquidity providers.

As per RTS 28 (For Investment Firms), This Regulation lays down rules on the content and the format of information to be published by investment firms on an annual basis in relation to client orders executed on trading venues, systematic internalizer, market makers or other liquidity providers or entities that perform a similar function to those performed by any of the foregoing in a third country.

Position Reporting

According to the ESMA, investment firms should provide a complete breakdown of positions held on own account and on behalf of clients as the investment firm can end up holding a position.

As per RTS 21, Trading Participants must report on a daily basis a complete breakdown of their positions in commodity derivatives, emission allowances and derivatives of emission allowances, client & Clients of those clients & so on to the end client. On weekly basis the aggregate positions held will be published. The limitation per file for reporting is restricted as 50,000 records per file and if the count exceeds, then it will be submitted as multiple reports.

ESMA highlighted that it is trade participants’ responsibility to assess the transaction results.

Algorithmic Trading Reporting

Under MiFID II, EU regulators began enforcing rigorous requirements on firms using algorithmic trading strategies and systems, which has been explained in Regulatory Technical Standard 6 (RTS 6). Also, firms need to carry out an annual self-assessment and validation of their algorithmic trading activity against the regulatory requirements. Moreover, these assessments result can also be requested by regulators at adhoc basis.

As per RTS 6, As part of its overall governance and decision making framework, an investment firm shall establish and monitor its trading systems and trading algorithms through a clear and formalized governance arrangement, having regard to the nature, scale and complexity of its business.

MiFID II needs the firms to ensure that outsourced arrangements should comply with RTS 6.

Financial Instruments Reference Data Reporting

As per ESMA’s Reporting Instructions, trading venues firms need to submit identifying reference data for the relevant financial instruments to their competent authorities who are required to transmit it to ESMA for subsequent publication on its website. This is in particular required to support the scope of transaction reporting under MiFIR, as well as market abuse surveillance activities under MAR.

As per RTS 23, The Markets in Financial Instruments Regulation (MiFIR) requires trading venues to provide competent authorities with identifying reference data for the purposes of transaction reporting. For the purpose of effective market monitoring by competent authorities, reference data for financial instruments should be reported in a consistent format and according to specified standards.

Double Volume Cap Reporting

This reporting limits the trading in the Dark Pools by involving a CAP on the use of 2 transparency waivers.

As per London Stock Exchange, there are 2 systems;

  • Reference Price Waiver (RPW)
    Systems matching orders based on the midpoint within the current bid and offer process of the trading venue where that financial instrument was first admitted to trading or the most relevant market in terms of liquidity.
  • Negotiated Trade Waiver (NTW)
    Systems that formalize negotiated transactions.

As per RTS 3, This Regulation sets out, the details of the data requests to be sent by competent authorities and the details of the reply to those requests to be sent by trading venues, approved publication arrangements (APAs) and consolidated tape providers (CTPs), for the purposes of calculating and adjusting the pre-trade and post-trade transparency and the trading obligation for derivatives as well as to determine whether an investment firm is a systematic internalizer. Total volumes of trading reported separately for each trading venue.

The looming MiFID II regulatory challenges can only be addressed by partnering with the right RegTech solution provider, who can alleviate the challenges ahead. With the technology enablement, the firms can transform the regulatory challenges by automating end-to-end regulatory data collection, validation and submission. It also validates the risk and manages the exception along with the end-to-end automated regulatory processes without any manual intervention and convert it into acceptable MiFID II/MiFIR regulatory requirement format with one-time configuration. Read here to transform your Regulatory Challenges into business opportunities.

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Why every Trading Participants need to be familiar with Regulatory Reporting!
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Insights Industry
Insights Solutions
  • 24 Apr, 2019
  • 4 Mins Read

The evolving requirements of ESMA and Market Abuse Regulation (MAR) persuade Reporting Entities to strategize the reporting structure of a trade. Since MiFID II implementation, it is aiming at increasing investor protection by creating a more efficient, risk-aware and transparent market for investment services and activities.

This regulatory initiative has been described as the “biggest overhaul of financial markets regulation in the EU for a decade” and provides a significant extension of the previous MiFID regulation with a broader regulatory scope and more stringent rules for investment firms — such as banks and other providers of investment services — as well as for regulated markets and data reporting services providers.

To comply with the evolving regulatory processes, every financial firm needs to stay familiar with the MiFID II’s reporting processes. This article will provide you an overview of ESMA’s MiFID II reporting structure and its flow.

Why every Trading Participants need to be familiar with Regulatory Reporting!

MiFID II Reporting to the Regulatory Bodies:

What is a Financial Regulatory Body & what is the major role played!

A financial regulatory body, regulates the financial firms which provides services to consumers and maintains the integrity of the financial markets. As a supervisory authority, every regulatory bodies aim at the fair and orderly operation and the transparency of the financial markets by ensuring that listed companies provide correct and complete information. It enables the establishment of financial services by verifying that financial institutions comply with rules of conduct.

The below diagram emphasizes the reporting scenarios that market participants will need to adhere in order to implement the standardized regulatory compliance.

Reporting by Trading Venues:

Why every Trading Participants need to be familiar with Regulatory Reporting!

Reporting by Investment Firms:

Why every Trading Participants need to be familiar with Regulatory Reporting!

Transaction Reporting

The Transaction Reporting adheres under the RTS 22, which requires the investment firms & trading venues to report complete and accurate details of transactions in financial instruments no later than the close of the following working day as per Markets in Financial Instruments Regulation (MiFIR).

The technology enablement should integrate 65 required transaction reporting fields however it should also ensure the data security. Also there is a need to certify connectivity to the new and existing ARMs, and help the clients for submitting initial and amended transaction reports.

Transparency Reporting

The MIFID II / MiFIR transparency reporting consist of 2 core transparency obligations.

  • Pre-trade transparency - Designed to provide market participants with near real time publication of basic trade data.
  • Post-trade Transparency - Designed to provide market participants with near real time publication of executed trades

Once the participants submit their reports, Approved Publication Arrangements (APAs), and Consolidated Tape Providers (CTPs) might further report this to NCA. The transparency could help the authorities to monitor the complete risk and the market exploitation.

As per RTS 1 - Transparency requirements for Trading Venues and Investment firms for Shares / depository receipts / Exchange traded funds / certificates will be handled and this transaction has to be reported within 0 to 15 minutes.

RTS 2 - Transparency requirements for Trading Venues and Investment firms for Bonds / Structured Finance products / Emission allowances & derivatives will be handled and this transaction has to be reported within end of the transaction day.

Best Execution Reporting

As per PwC, Best execution is achieving the best possible result for customers when executing their orders via execution venues or OTC. MiFID II looks for transparency over financial institution order execution and the Regulatory Authority, which requires the investment firms to evaluate whether the execution quality achieved corresponds to the quality promised in their best execution policies.

As per RTS 27 (For Trading Venues), This Regulation lays down obligations on execution venues to publish data relating to the quality of execution of transactions. It shall apply to trading venues, systematic internalizes, market makers, or other liquidity providers.

As per RTS 28 (For Investment Firms), This Regulation lays down rules on the content and the format of information to be published by investment firms on an annual basis in relation to client orders executed on trading venues, systematic internalizer, market makers or other liquidity providers or entities that perform a similar function to those performed by any of the foregoing in a third country.

Position Reporting

According to the ESMA, investment firms should provide a complete breakdown of positions held on own account and on behalf of clients as the investment firm can end up holding a position.

As per RTS 21, Trading Participants must report on a daily basis a complete breakdown of their positions in commodity derivatives, emission allowances and derivatives of emission allowances, client & Clients of those clients & so on to the end client. On weekly basis the aggregate positions held will be published. The limitation per file for reporting is restricted as 50,000 records per file and if the count exceeds, then it will be submitted as multiple reports.

ESMA highlighted that it is trade participants’ responsibility to assess the transaction results.

Algorithmic Trading Reporting

Under MiFID II, EU regulators began enforcing rigorous requirements on firms using algorithmic trading strategies and systems, which has been explained in Regulatory Technical Standard 6 (RTS 6). Also, firms need to carry out an annual self-assessment and validation of their algorithmic trading activity against the regulatory requirements. Moreover, these assessments result can also be requested by regulators at adhoc basis.

As per RTS 6, As part of its overall governance and decision making framework, an investment firm shall establish and monitor its trading systems and trading algorithms through a clear and formalized governance arrangement, having regard to the nature, scale and complexity of its business.

MiFID II needs the firms to ensure that outsourced arrangements should comply with RTS 6.

Financial Instruments Reference Data Reporting

As per ESMA’s Reporting Instructions, trading venues firms need to submit identifying reference data for the relevant financial instruments to their competent authorities who are required to transmit it to ESMA for subsequent publication on its website. This is in particular required to support the scope of transaction reporting under MiFIR, as well as market abuse surveillance activities under MAR.

As per RTS 23, The Markets in Financial Instruments Regulation (MiFIR) requires trading venues to provide competent authorities with identifying reference data for the purposes of transaction reporting. For the purpose of effective market monitoring by competent authorities, reference data for financial instruments should be reported in a consistent format and according to specified standards.

Double Volume Cap Reporting

This reporting limits the trading in the Dark Pools by involving a CAP on the use of 2 transparency waivers.

As per London Stock Exchange, there are 2 systems;

  • Reference Price Waiver (RPW)
    Systems matching orders based on the midpoint within the current bid and offer process of the trading venue where that financial instrument was first admitted to trading or the most relevant market in terms of liquidity.
  • Negotiated Trade Waiver (NTW)
    Systems that formalize negotiated transactions.

As per RTS 3, This Regulation sets out, the details of the data requests to be sent by competent authorities and the details of the reply to those requests to be sent by trading venues, approved publication arrangements (APAs) and consolidated tape providers (CTPs), for the purposes of calculating and adjusting the pre-trade and post-trade transparency and the trading obligation for derivatives as well as to determine whether an investment firm is a systematic internalizer. Total volumes of trading reported separately for each trading venue.

The looming MiFID II regulatory challenges can only be addressed by partnering with the right RegTech solution provider, who can alleviate the challenges ahead. With the technology enablement, the firms can transform the regulatory challenges by automating end-to-end regulatory data collection, validation and submission. It also validates the risk and manages the exception along with the end-to-end automated regulatory processes without any manual intervention and convert it into acceptable MiFID II/MiFIR regulatory requirement format with one-time configuration. Read here to transform your Regulatory Challenges into business opportunities.

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