The introduction of multiple reporting requirements under different regulations and on different timelines should prompt banks and investment firms to think strategically when implementing regulatory changes and when improving existing reporting processes. In particular, they should consider the potential overlaps and synergies across these reporting requirements, assess the capabilities of their current practices and IT infrastructure, and work out how they can capitalise on the use of reporting data for their own purposes.
Overview of transaction reporting requirements
Below we highlight some key developments that will affect firms' current reporting processes:
- The revised Markets in Financial Instruments Directive (MiFID II/MiFIR), which will apply from 3 January 2018, extends the existing transaction reporting regime significantly by increasing both the scope of reportable instruments and the number of data fields from 23 to 65.
- The Securities Financing Transactions Regulation (SFTR) will require firms to report their securities and commodities lending, repo and margin lending transactions from Q1 2018.
- Reporting under the European Market Infrastructure Regulation (EMIR) – although in place since February 2014 – is likely to be subject to amendments following the EMIR Review expected to be consulted on by the end of 2016. Further, the European Securities and Markets Authority (ESMA) announced in its Supervisory Convergence programme for 2016 that it intends to scrutinise the quality of data reported to trade repositories. The on-going changes in relation to EMIR trade reporting means firms will need to revisit their existing reporting arrangements.
- Under the Market Abuse Regulation (MAR), firms will have to comply with more stringent suspicious transaction and order reporting rules, which will come into effect in July 2016.
- Under the Regulation on wholesale energy market integrity and transparency (REMIT), firms have to report their transactions in wholesale energy contacts (including the supply and transportation of natural gas and electricity) and on derivatives in relation to these contracts. Although these obligations have been in place since October 2015, there are still issues around data quality.
How can firms take a smart approach to reporting?
Think strategically: assess interlinkages among the regulations
Assessing the potential interlinkages among the different reporting rules could allow for a more holistic design of an integrated reporting process that leverages from common requirements. For example:
- For transactions reported under both EMIR and MiFIR, firms should identify the extent of common data requirements, ensuring appropriate golden sources are used. However, firms should be conscious that there is no complete alignment between the two reporting regimes. In its recent consultation on changes to the reporting RTS under EMIR, ESMA concluded that full alignment of data fields between EMIR and MiFIR would not be pursued at present. The importance of ensuring the completeness and accuracy of data is arguably one of the critical success factors for sound reporting, and as the complexity of reporting increases – so the challenges around data. With this in mind some firms may consider the benefits of a harmonised data framework that facilitates all reporting. The design should avoid any unnecessary burdens around data maintenance and allow for future change. Further, firms should consider the data capabilities required in order to have a more top down approach to reporting as a way of avoiding tactical solutions downstream.
- Firms which have reporting obligations under both SFTR and MiFIR regimes should ensure that their reporting processes are designed to identify easily those SFTR reported transactions that are exempt under MiFIR. ESMA's draft final technical standards propose that SFTs are not subject to MiFIR's transaction reporting requirements provided that they have been reported under SFTR.
Although some firms may opt to have separate implementation projects, efforts should be made to ensure that cross dependencies are identified and that the design of the overarching target operating model for reporting, including the monitoring and control framework, is considered holistically.
The use of data
With a large amount of time and expense being invested in reporting, firms should consider using the data available to them for their own internal initiatives such as conduct risk management, including best execution and market abuse monitoring.
Developing best practices in best execution monitoring is challenging for some firms. In their attempt to expand their best execution monitoring and surveillance capabilities, consideration should be given to understand to what extent the data generated through the reporting process, in conjunction with market data, could form part of this surveillance process.
Firms should also make sure that the data used for surveillance purposes are the same as those reported to the regulator. Transaction reports are used by the regulator to monitor market abuse and discrepancies between these two sets of data could expose firms to regulatory risk. Given that the FCA has increased its expectations of firms with respect to market surveillance, firms would be at a disadvantage if the regulator uncovered an issue which could have been detected from data available to the firm, but which had not been analysed. In this regard, firms should consider updating their surveillance methodologies to make sure they leverage the additional data captured by the various reporting regimes and use them to their advantage for assessing compliance with other regulatory initiatives, such as market abuse.
The emerging reporting regimes should be a catalyst for firms to put in place flexible and robust systems to make reports and also analyse the abundance of data available to them through their reporting systems. Taking a smart approach to capturing and managing data could thus result in increased efficiency and reduced operational costs for some firms.
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.