On 4 November 2016, the European Securities and Markets Authority (ESMA) published a Q&A document outlining their guidance on MiFIR and MiFID II transparency requirements. Of note, ESMA highlighted that data will be made available on 1 August 2018 allowing investment firms to make assessments on their Systematic Internaliser (SI) obligations, requiring compliance by 1 September 2018. Page 13 of the Q&A reads: ESMA will publish the necessary data (EU wide data) for the first time by 1 August 2018 covering a period from 3 January 2018 to 30 June 2018.
Investment firms will have to perform their first assessment and, where appropriate, comply with the systematic internaliser obligations (including notifying their National Competent Authority (NCA)) by 1 September 2018.
As a result of this delay, between the implementation of MiFID II on 3 January 2018 and the start of the SI regime in September 2018, there will not be a requirement for SIs to operate. Some investment firms could in theory volunteer for SI status, yet the likelihood of firms volunteering for this status (especially on non-equity instruments), and thus exposing their firm to pre-trade transparency obligations, is improbable.
Impact on the buyside
This will have a detrimental impact on the buyside as they will have a wider obligation to trade report via an Approved Publication Arrangement (APA) in the first eight months of 2018, once MiFID II takes effect, due to the expected paucity of SIs. Figure 1 demonstrates the buyside obligation to trade report prior to 1 September 2018 when they are the seller in a transaction of an in-scope instrument.
In addition to the greater scope required to trade report prior to the 1 September 2018 assessment period, it is expected that buyside firms will not be able to delegate their reporting obligation in the same way as they currently do today. buyside firms are of course always free to outsource the performance of this activity by way of a specific agreement, but any such agreement cannot serve as a delegation of responsibility for either the obligation to report in the first place, or the liability for failures.
Reference data challenge
MiFID II also requires that SIs report reference data to ESMA on financial instruments that were admitted to trading or that were traded through its system and where the underlying is an instrument traded on a venue. With the delay of the assessment period and without the requirement for SIs for the first eight months of MiFID II, instruments traded through an entity that would otherwise be an SI will not be reported to the ESMA reference database. While Multilateral Trading Facilities (MTFs) will maintain the requirement to report reference data to ESMA, the lack of SI reference data reporting leaves a potential gap in the level of necessary data to be reported to the regulator and hence available to the market.
This means that firms with a reporting obligation will need a comprehensive source of reference data to determine if a particular instrument is in-scope and creates a significant challenge for investment firms as they will still have the obligation to report even without a complete ESMA reference database.
What next?
It’s critical that all buyside firms understand how MiFID II will impact their business and take action to implement the necessary processes to meet their regulatory obligations. Particularly, given the delay to the SI assessment period, the obligation to trade report via an APA will become more onerous on the buyside. buyside firms should connect direct to APAs, to limit their exposure to regulatory compliance risks.
Investment firms will also need to consider their visibility on in-scope instruments based on an accurate reference database. Assessing the eligibility of instruments will require significant internal operational processes, especially as the obligation to report under MiFID II will capture a far broader group of instruments*.
Trax has been working extensively with both buy- and sellside firms to help them prepare for MiFID II and has built a critical mass of industry support. We will register as an APA under MiFID II, offering full pre- and post-trade transparency solutions, a range of tools to assess the liquid status of instruments and firm reporting responsibility as well as real-time monitoring tools. We also have the ability to assist with instrument eligibility based on a real-time cross-asset class reference database of over five million securities.
*As defined by MiFIR Article 26(2), the scope of reportable instruments includes all non-equities, including fixed income and derivatives (both the derivative and its underlying), that are, broadly, listed on a regulated market (RM), Multilateral Trading Facility (MTF) or Organised Trading Facility (OTF) operating within the European Economic Area (EEA).