Welcome to Paper 2 of the Eversheds MiFID II Implementation Series.

Background: what is transaction reporting?

Regulation No 600/2014 (“MiFIR”) Article 26 transaction reporting is the reporting of post-trade data relating to transactions in financial instruments by investment firms and or trading venues (for non-MiFID firms) (or their delegees, which can be an approved reporting mechanism (“ARM”) or trading venue) to the competent authorities as quickly as possible, and within one working day of execution. Although this definition seems quite simple, in fact it is multi-layered, in that to truly understand the scope of transaction reporting, you need to consider whether you are dealing with a “reportable financial instrument”, and whether you are “executing a transaction” in that financial instrument.

When is a financial instrument reportable?

Under MiFID I, transaction reporting applies to financial instruments admitted to trading on a regulated market, plus any OTC contract which derives its value from any such instrument. MiFIR broadens the scope of transaction reporting to capture as reportable financial instruments:

  • admitted to trading or traded on an EU trading venue or for which a request for admission has been made. “Trading venues” now include Multilateral Trading Facilities (“MTF”), Organised Trading Facilities (“OTF”), the likely home for OTC derivatives subject to the trading obligation, and regulated markets.
  • where the underlying instrument is traded on a trading venue. This essentially widens the scope to capture all OTC transactions in such instruments, and means that a transaction does not actually need to have been executed on an EU trading venue to fall within the transaction reporting regime. For example, derivatives traded outside the EU where the underlying is traded on an EU trading venue will have to be reported.
  • where the underlying is an index or a basket composed of instruments traded on a trading venue. This means that just one component of either an index or basket will bring that financial instrument under the reporting obligation.

When is there “execution” of a “transaction”?

Execution is activity that results in an outcome, when that outcome takes the form of a transaction.

Transactions are defined as purchases and sales of reportable instruments, entering into or closing out derivative contracts (described in the recitals as “other cases of acquisition or disposal of reportable instruments”), and increases or decreases in the notional amount of a derivative. This is a deliberately broad definition, designed to cover those situations which give rise to market abuse concerns. Certain activities, however, are excluded from the definition of transaction, on the basis that they do not need to be reported for market surveillance purposes. This include certain types of clearing or settlement, portfolio compression, certain purely administrative tasks and cases where the relevant activity does not involve an investment decision.

An investment firm executes a transaction where it performs the following activities:

Please click here to view table.

Why have transaction reporting?

Transaction reporting broadly exists to fulfil both a general and a more specific purpose:

  • The general purpose: to enable competent authorities to detect and investigate potential cases of market abuse, to monitor the fair and orderly functioning of markets, as well as the activities of investment firms, and to promote market integrity.
  • The specific purpose: to identify the person who has made the investment decision, those responsible for its execution, and the clients on whose behalf the firm has executed a transaction.

MiFIR introduces a new objective of promoting “market integrity” as part of the rationale behind transaction reporting, which suggests that this will be a new area of regulatory focus. The definition of promoting market integrity, namely the “monitoring the fair and orderly functioning of markets”, is vague, however we suggest that the change in approach is illustrated by the new fields which need to be completed as part of transaction reporting, which we discuss generally further below (see section “What needs to be reported?”).

Who is responsible for reporting?

Generally, investment firms are responsible to ensuring the completeness, accuracy and timeless of their transaction reporting. However, where an investment firm reports via an ARM or trading venue, the investment firm shall not be responsible for failures attributable to that ARM or trading venue, but rather responsibility generally lies with the ARM or trading venue. Investment firms must nevertheless take reasonable steps to verify the completeness, accuracy and timeliness of the transaction reports which were submitted on their behalf.

What are the consequences of not reporting?

Failure to comply with transaction reporting requirements is a serious issue for regulators, and the scale of fines imposed for such failures have steadily increased. In 2015, the FCA imposed a fine of £13.2 million for transaction reporting failures by one firm, the eighth largest fine of that year, and indicated that the penalty for transaction reporting non-compliance would increase from £1 to £1.50 per breach, to ensure the industry takes more care over reporting requirements. There is no indication that regulators will be more lenient towards transaction reporting failures under MiFID II and, indeed, given the increased importance being given to such reporting, a more stringent line might be taken.

What needs to be reported?

Firms undertaking transaction reporting will need to do so in a specified format and their reports will need to contain specified information. The number of data fields which need to be completed under MiFIR has roughly tripled from the MIFID I requirements, to encompass more complexity and a greater breadth of instruments subject to reporting.

To read the whole paper, including a useful appendices showcasing a handy table of what needs to be reported and a graphical illustration of the issues of too much data, in a downloadable pdf click here.

Previous articles in Eversheds MiFID II Implementation Series

Paper 1 - Measuring your approach. Implementing the MiFID II Research Payment Rules