European Union: MiFID II - Transaction Reporting

A transaction reporting regime has been in place at EU level for some time, albeit much was delegated to national implementation. Under MiFID II, the reporting regime will be overhauled and significantly extended in terms of scope and content. There are other reporting regimes, such as those under EMIR and REMIT, which create some overlapping requirements.

Introduction

This note discusses the transaction reporting requirements under the new Markets in Financial Instruments Directive ("MiFID II")1 and the Markets in Financial Instruments Regulation ("MiFIR").2 It is one in a series of client notes that will discuss the changes to the existing regime under the original MiFID I3 that will come into effect on 3 January 2017.

Obligation to Report Transactions in Financial Instruments

In 2007, MiFID I and the implementing Regulation4 introduced a harmonised regime of transaction reporting to ensure that regulators have enough trading information to be able to carry out day-to-day oversight of the markets. The general rule requires investment firms executing transactions in financial instruments to report details of their transactions to the national regulator as quickly as possible, and no later than the close of the following working day.

Which Financial Instruments?

The reporting regime of MiFID I only applies to financial instruments admitted to trading on a regulated market - that is, broadly, any security or derivative traded on EU exchanges. As of 3 January 2017, this will be broadened by MiFIR to certain additional categories of financial instruments:

  • those admitted to trading or traded on a trading venue5 (now including MTFs and OTFs) or for which a request for admission to trading has been made;
  • when the underlying is a financial instrument traded on a trading venue; and
  • when the underlying is an index or a basket composed of financial instruments traded on a trading venue.

Transactions should be reported even if they are not carried out on the trading venue. Generally, the investment firm executing the transaction is required to make the report. However, if the firm is not subject to MiFIR and executes a transaction on a trading venue, the reporting obligation is imposed on the operator of the trading venue.

Execution of a Transaction

In its Discussion Paper,6 ESMA proposes that, for the purposes of the reporting obligation:

  • "transaction" includes actual trades, as well as any change (not related to corporate actions or valuations) in an investment firm's and/or their client's position in a reportable instrument; and
  • "execution" means any action that results in a transaction and includes so-called "compressions" of derivatives where offsetting derivative transactions are wholly or partly terminated and replaced by fewer transactions with a reduced notional value.

The Discussion Paper sets out certain examples of actions which ESMA considers,7 or does not consider8 to be, an "execution of a transaction".

Reporting Obligation Where Order Transmitted to Broker

Under MiFIR, the reporting regime will generally capture investment firms that pass on details of orders received from their clients to other investment firms. It will also cover investment firms acting on a discretionary basis that place orders with other investment firms.

An investment firm that transmits an order to another investment firm may choose either:

  • to include in the transmission of that order all of the specified details; or
  • if the transmitted order is executed, to report it itself.

Where the transmitting firm elects to report the transaction itself, it must include a flag in the report indicating that the transaction relates to a transmitted order. Either one or the other of the transmitting firm or receiving firm will have to report the transaction. ESMA proposes that the transmitting firm should be relieved from the reporting obligation only if certain conditions are met, which broadly are that the information must have been sent to the receiving firm by the transmitting firm, where the receiving firm agrees to make the report pursuant to written agreement with the transmitting firm, and the transmitting firm has the systems and controls to ensure accurate and complete reports.

Transaction Reports - Content

MiFIR sets out specific fields which must be populated in a transaction report and requires ESMA to specify the details to be included in each field. To provide investment firms with an indication of the type of fields which may be reportable under MiFIR, the Discussion Paper includes a sample table and offers some guidance as to the population of particular fields. The intent is to harmonise the content of transaction reports across the EU.

The number of fields in a transaction report will be greater than at present. For example, MiFIR requires the inclusion of new flags such as a waiver flag,9 a commodity derivatives flag10 and a short selling flag. Flagging of short sales will differ from the disclosure obligations under the Short Selling Regulation11 as the latter relates only to disclosure of net short positions to the market or a national regulator. ESMA proposes that two fields should be included in a MiFIR transaction report: a short selling flag to indicate whether the transaction was a short sale within the meaning of the Short Selling Regulation and a separate flag to indicate whether the short sale was undertaken under an exemption from disclosure contained in the Short Selling Regulation.

Another significant change under MiFIR is that a transaction report must include 'details of the identity of the client' and 'a designation to identify the clients on whose behalf the investment firm has executed the transaction'. At present, the decision to collect client details is a matter for individual Member States, but MiFIR now makes client identification mandatory at the EU level. For short sales, there could be an element of duplicative reporting where a reportable net short position is created, which is in addition to disclosure of individual short sales falling under a reportable net short position threshold. Regulators will now be aware of short sales by underlying clients regardless of size or the overall net short position.

Transaction reports should identify the persons (Trader ID) and any computer algorithm (Algo ID) within the investment firm that is responsible for the investment decision and the execution of the transaction. National regulators will therefore have immediate visibility of any algorithms used without having to gather this information from investment firms on an ad hoc basis.

Reporting by Branches

Where a firm operates in another EEA member state through a branch, the branch will have to make transaction reports to the host state regulator. For services provided by branches outside the territory of the host Member State, reports will have to be made to the national regulator of the home Member State. All transaction reports received by a host state regulator will be forwarded to the relevant home state regulator if the latter requests them. Thus, home state regulators should have access to all information about transactions carried out by branches of entities under their supervision.

Currently, this split of responsibilities between home and host state regulators leads to situations where branches report their transactions to two authorities. Helpfully, there is guidance12 providing for the right of a branch to send all its transaction reports to the home state regulator only. In an attempt to simplify the requirements for firms operating through branches in other Member States, ESMA proposes that the head office of a branch reports the transactions to the home state regulator. Under this model of a "single connection point", no transaction report is submitted by the branch to the host state regulator. Instead, the home state regulator is expected to share the information with other national regulators where it is most appropriate to do so bearing in mind the following factors:

  • the most liquid market of the instrument;
  • the host Member State of the branch that holds/maintains the client relationship;
  • the host Member State of the branch of the executing trader; and
  • the host Member State of the branch that holds the membership of the trading venue, where the transaction was conducted.

For third-country firms carrying out business in a particular Member State through a branch, MiFID II clarifies13 that the reporting obligation applies to the relevant branch and that reports should be made to the national regulator of the Member State.

Submission Process and Responsibility

Under MiFIR, the transaction reports can be made either by the investment firm itself or through an Approved Reporting Mechanism ("ARM")14 reporting on the firm's behalf or by the trading venue where the transaction was executed. As a general rule, investment firms are responsible for the completeness, accuracy and timely submission of the transaction reports. ARMs must have systems that can effectively check transaction reports for completeness, and identify omissions and obvious errors caused by the investment firm. Both ARMs and trading venues will be required to have systems in place that enable them to detect errors or omissions caused by the ARM or trading venue itself. An investment firm that has outsourced reporting to ARMs or trading venues must nevertheless take reasonable steps to check whether the transaction reports are correct.

Overlaps with EMIR and REMIT Reporting

Due to the broadened scope of the reporting regime under MiFIR, there is a risk of conflict and duplication with other reporting regimes,15 in particular the requirements for reporting under the European Market Infrastructure Regulation ("EMIR") and the Regulation on Wholesale Energy Market Integrity and Transparency ("REMIT").16

The reporting obligation under EMIR came into effect on 12 February 2014 and requires counterparties to report derivative transactions of all types, whether over-the-counter or exchange-traded, to an ESMA-registered trade repository ("TR"). To avoid double reporting of the same information, investment firms will be deemed to be in compliance with the MIFIR reporting obligation where transactions are reported to a TR in accordance with EMIR and the TR transmits to the national regulator all the information required under MiFIR on time. MiFIR also provides that a TR registered or recognised under EMIR may seek authorisation as an ARM under MiFID II. ESMA has reaffirmed17 its commitment to work towards a consistent reporting mechanism and, consequently, TRs expect to be able to offer a single reporting service for both EMIR and MiFIR purposes, with the data sets required under EMIR and MiFIR ideally aligned.

There is also a risk that the reporting regime under MiFIR will create an overlap with REMIT. Under REMIT, market participants will be required to provide the Agency for the Cooperation of Energy Regulators ("ACER") with a record of wholesale energy market transactions, including orders to trade. On 8 July 2014, the European Commission's DG Energy published an updated draft of the implementing act on data reporting under REMIT.18 The reporting obligation under REMIT will apply with effect from 6 months19 after the date on which the implementing act has been adopted. To avoid double reporting relating to transactions covered by REMIT as well as MiFIR or EMIR, the draft implementing act provides that information in relation to wholesale energy products which has been reported in accordance with MiFIR or EMIR shall be provided to ACER by:

  • the relevant TRs under EMIR;
  • the relevant ARMs under MiFIR;
  • the competent authorities under MiFIR; or
  • ESMA.

The draft implementing act also clarifies that, where persons have reported details of transactions in accordance with MiFIR or EMIR, their obligation to report those details under REMIT will be considered as fulfilled.

Despite these efforts to coordinate the flows of data required under MiFIR, EMIR and REMIT, it remains to be seen how the alignment of the reporting regimes will work out in practice.

Obligation to Supply Financial Instrument Reference Data

For the purpose of monitoring the activities of investment firms, MiFIR requires trading venues and systematic internalisers to provide national regulators with relevant instrument reference data. As the data required under MiFIR is similar to the details to be notified under the Market Abuse Regulation20 and both regulations provide that the relevant data are published by ESMA on its website, ESMA considers it appropriate to maintain a single list of financial instruments for the purposes of both regulations. The fields to be reported as instrument reference data may vary with the categories of financial instruments. ESMA is considering suitable classification standards together with some guidance on how to populate the proposed fields for each category.

Obligation to Maintain Records

MiFIR imposes record-keeping obligations on both investment firms and operators of trading venues. There is an extensive and non-exhaustive list of information that trading venues will have to maintain. The relevant data must be transmitted to the national regulator upon request. Such data is meant to supplement the data available under the reporting obligation and should enhance market monitoring during any given period of time.

Footnotes

1 Directive 2014/65/EU.

2 Regulation (EU) No 600/2014.

3 Directive 2004/39/EC.

4 Commission Regulation (EC) No 1287/2006 of 10 August 2006 implementing Directive 2004/39/EC.

5 Under MiFIR, the term "trading venue" means a regulated market, a multilateral trading facility ("MTF") or an organised trading facility ("OTF").

6 Discussion Paper, MiFID II/MiFIR (22 May 2014, ESMA/2014/548).

7 E.g., purchases or sales of a reportable financial instrument; assignments, novations, terminations (totally or partially) of a reportable financial instrument, compressions or entering into a derivative contract in a reportable financial instrument; exercises of options, warrants or convertible bonds; when acting under a discretionary mandate on behalf of a portfolio or on behalf of a client, undertaking any of the aforementioned actions or instructing another party to do any of the aforementioned actions, pursuant to an investment decision by the investment firm.

8 E.g., issue of scrip dividends and the creation and redemption of exchange-traded funds; redemptions or expiration of securities; using financial instruments as collateral; give-ups for settlement/clearing; corporate events, including

9 According to the Discussion Paper, this field will identify the pre-trade transparency waiver used in accordance with Article 4 and 9 of MiFIR.

10 According to the Discussion Paper, where the relevant financial instrument is a commodity derivative, this field will contain an indication of whether the transaction reduces risk in an objectively measurable way in accordance with Article 57 of MiFID II.

11 Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps.

12 CESR Level 3 Guidelines on MiFID Transaction Reporting (Ref: CESR/07-301).

13 Article 41(2), MiFID II.

14 Under MiFID II, a person wishing to provide the service of reporting details of transactions to competent authorities or to ESMA on behalf of investment firms must seek prior authorisation as an ARM.

15 As to any duplicative reporting under the Short Selling Regulation please see above "Transaction Reports – Content".

16 Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency.

17 See also Consultation Paper, Draft Technical Standards for the Regulation on OTC Derivatives, CCPs and Trade Repositories (25 June 2012, ESMA/2012/379).

18 Draft Implementing Regulation: COMMISSION IMPLEMENTING REGULATION (EU) No .../.. of XXX on data reporting implementing Article 8(2) and Article 8(6) of Regulation (EU) No 1227/2011 of the European Parliament and of the Council on wholesale energy market integrity and transparency.

19 Some market participants anticipate an extension of this deadline.

20 Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions