From 3 January 2018 onwards, investment firms face a significantly increased compliance burden, brought in by MiFID II and MiFIR. The provisions, especially those relating to the reporting obligations of investment firms, have been perceived as extremely onerous by the banking and financial services sector: the Association of German Banks has estimated that the increased compliance burden will cost German banks as much as EUR 1 billion on implementation alone and has predicted that it will lead to “information overload”.

The following is an overview of the essential components of the new transaction reporting regime.

Implementation in Germany - the current position

The act implementing MiFID II and MiFIR, designated as “Second law amending financial market regulations on the basis of European legal acts” (2.FiMaNoG) was published on 23 June 2017. BaFin, the competent supervisory authority, has declared that the German regime is now substantially compliant with the Guidelines.

2.FiMaNoG will significantly change the modus operandi of most investment firms and credit institutions that offer investment services. Additionally burdensome is the complexity of the legal landscape that accompanies the law. MiFID II and its supplementary Directive (Directive 2017/593) had to be implemented into the national law of Member States. On the other hand, MiFIR and its supplementary Regulation (Regulation 2017/565) are directly applicable. Regarding Level 3, ESMA has published eight Guidelines with one still to come. Furthermore, the European Commission has released more than 40 Regulatory and Implementing Technical Standards. In this regard, it is Regulation 2017/590 (the Delegated Regulation) which sets out the detail of the reporting obligations.

Key changes to reporting obligations

Reporting obligations under MiFID I solely applied to transactions in financial instruments admitted to trading on a regulated market, or to OTC contracts derived from such instruments (cf. section 9 German Securities Trading Act in its current form). The new Article 26 MiFIR now extends this obligation.

Reportable transactions

Article 26 para. 2 MiFIR broadens the definition of “reportable transactions” to the following:

  • financial instruments which are admitted to trading or traded on an EU trading venue or for which a request for admission to trading has been made; the definition of ‘trading venue’ now includes Multilateral Trading Facilities
  • financial instruments where the underlying is a financial instrument traded on a trading venue, and
  • financial instruments where the underlying is an index or a basket composed of financial instruments traded on a trading venue; one element of the basket/index would bring the entire collection within the ambit of the obligation.

The legislation has extra-territorial effect, in that derivatives transactions executed outside of the EU will have to be reported if the underlying obligation is traded on an EU trading venue.

Who must report?

The entity obliged to report the transaction to the authorities differs, depending on whether the investment firm which transmitted the order was a regulated entity under MiFIR; or not.

If the transaction was transmitted by a non-regulated entity, the relevant trading venue has to report the details of that trade to the authority. In these circumstances, the investment firm must supply the necessary details (together with transmission of the order) to the trading venue.

If the order has been placed by a regulated investment firm and is submitted by another regulated entity, it depends on the contractual agreement between the firms who fulfils the reporting obligation. In this case, the parties need to agree upfront who will be responsible for the submission of the order details to avoid a breach of their obligations. Alternatively, investment firms may use a trade repository which is registered as an Approved Reporting Mechanism (ARM) by a national competent authority (e.g. BaFin).

This ‘chain of reports’ has its challenges in detail (e.g. how are the different parties identified in case of such a reporting chain?). ESMA addresses this and other questions in its (recently updated) Q&A On MiFIR Data Reporting.

Data submission

Data has to be transmitted to BaFin by remote data transmission. For this purpose, BaFin envisages the use of its reporting and publishing platform called ‘MVP-Portal’.

Data to be reported

The list of data to be included in the transaction reports of each transaction includes 65 different fields which are defined in Table 2 of the Delegated Regulation. Since electronic submission is obligatory, the format of the submission is prescribed in Table 1. MiFIR closes the gap between existing reporting obligations as set out inter alia in EMIR, MAR, AIFMD or CRR in the sense that each reporting entity has to use a Legal Entity Identifier (a unique alpha-numeric code). Surprisingly, this has been a challenging issue for numerous investment firms according to ESMA which has now published a briefing on the topic.

“Transaction” under MiFIR

MiFIR uses the term “transaction” extensively, but does not include a definition. Instead, it is the Delegated Regulation which defines “transaction” as follows: “For the purposes of Article 26 [MiFIR] the conclusion of an acquisition or disposal of a financial instrument referred to in Article 26(2) of Regulation (EU) No 600/2014 shall constitute a transaction” (cf. Art. 2(1) Delegated Regulation).

Within Article 2 Delegated Regulation, the Commission lists in detail the trades treated as transactions that trigger reporting obligations. However, this richness of detail is perceived lukewarmly by the industry as creating more problems than it solves.

For example, should one report a bond that is to be listed? Following the wording of Article 26(1) MiFIR, this might qualify as a transaction in “financial instruments […] for which a request for admission to trading has been made”. A listed bond issue is not explicitly set out in 26(1) sub-paragraph 1, which gives examples of included transaction types. Neither is it an exclusion in sub-paragraph 2. Assuming therefore that this type of transaction has to be reported, when does the reporting obligation arise? Is it at some stage during the application for listing process (which is going to stretch out over some days or even weeks, depending on the exchange) and if so, when? Is this logical, since an application can be refused/delayed? The timing is significant, because the deadline for reporting is “as quickly as possible, and no later than the close of business on the following working day”.

Conclusion

MiFID II and its implementation remain controversial subjects in the German financial services market.

In less than two months, reporting obligations with their attendant compliance burden will increase significantly for investment firms and banks offering investment services. Michael Kemmer, General Manager of the Association of German Banks, must surely echo the sentiments of many in the industry in stating that “Banking regulation has lost sight of the big picture. A large number of good individual measures don’t necessarily make a coherent whole. At over 20,000 pages, the sheer size of MiFID II shows that it is mired in details and goes too far”.

The European Commission, having already delayed the commencement for a year, has repeatedly said that there are no plans for further postponements. However, according to the German market, there are still a lot of questions to be answered.