PwC Warns on MiFID II Transaction Reporting 

Shanny Basar

PwC has warned that regulators will first enforce transaction reporting rules under the incoming MiFID II rules despite the problems in collecting data under existing regulations.

At the end of last month the European Securities and Markets Authority released the final regulatory technical standards for MiFID II, the rules covering financial markets from January 2017.

Andrew Strange, director of PwC’s Financial Services Risk & Regulation Centre of Excellence and Dominic Muller said in a blog last week that under MiFID II firms will need to give more granular  information about specific individuals and algorithms making investment and execution decisions.

“The final RTS has removed the opportunity to designate a committee (as opposed to an individual) as the responsible internal entity, meaning that firms will still need to identify one person even in cases of collective decisions,” added PwC. “This poses interesting questions for governance and accountability.”

Firms must also add an exclusive designation to each unique set of code that constitutes an algorithm. PwC said Esma has ceded a large amount of discretion to investment firms in determining when changes should be considered new algorithms and in classifying the interrelationships between algorithms that form a chain.

Additional categories of financial instruments will have to be reported under MiFID II, including those traded on a venue where the underlying is an index or basket composed of financial instruments that are bought and sold on a trading venue.

PwC said: “Unfortunately, in the final RTS, Esma failed to provide a ‘golden source’ of covered instruments; instead firms will need to monitor the trading status of underlying financial instruments, indices and baskets.”

The final MiFID II RTS has to be endorsed by the European Commission in three months and then sent to the European Parliament and the European Council for approval before being passed.

“Transaction reporting is likely to be one of the areas where regulators will first seek to enforce MiFID II rules, as there’s greater certainty in the rules relative to other areas,” continued PwC. “For this reason, firms should quickly digest the finalised standards and get systems prepared for the live date of 3 January 2017.”

Under existing regulation firms have found it difficult to accurately collect and report transaction information to the six authorised trade repositories in Europe. In particular, both sides of derivatives trades currently have to report transactions and this led to reconciliation problems.

In April Esma launched two projects to improve the low standard of data collected from the trade  repositories in Europe and create a central access point for regulators to the 300 million weekly reports on derivatives contracts received from 5,000 different counterparties. Esma aims to be able to collect data directly from 300 EU trading venues or six trade repositories in a more efficient and harmonised manner and make them available to national authorities and to the public through a centralised system over the next two years.

Last week a survey by Accenture and consultancy Greenwich Associates found that 70% of capital markets firms said data quality was a top issue affecting their trading infrastructure, and 47% said they are struggling to meet regulatory requirements.

Owen Jelf, global managing director of Accenture’s capital markets business, said in the report: “Though capital markets institutions spend more than $6bn a year on reference data, the industry continues to operate on legacy systems that often don’t align, and data comes from multiple sources, in disparate formats that require continuous data cleansing and reconciliation. Firms would benefit from focused end-to-end multiple year investment in developing ways to make meaningful, holistic changes to fix this problem.”

The study interviewed 133 front, middle and back office executives in capital markets firms.

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