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The Trading Mesh

MiFID II: Time to Tackle Transaction Reporting in Detail

Tue, 25 Apr 2017 03:01:57 GMT           

By Steve Barnes, VP of Technology, AQMetrics.

Following the recent changes to mandatory transaction reporting (TR) being introduced under MiFID II, there are now a number of vital new reporting obligations which the markets must rapidly become familiar with. Yet as was revealed by a recent webinar I took part in on TR data and data management challenges, it was clear that the industry is hungry for additional clarity and detail around the specific changes to these reporting requirements.

Scale of the challenge

A particularly concerning point for firms, which I covered in the webinar, involves the new set of reporting fields and the potential difficulties involved in extracting this data from their existing systems. For example, general fields will require extra steps in an ETL process to continue to ensure the quality of the data. There is also an emphasis on the mandatory use of Legal Entity Identifier (LEI) codes. In the case of the buyer and seller fields, all legal entities will need to be referenced against a global LEI database before submitting to the regulator – or the report will fail. This requires extra due diligence to protect the data quality.

In the case of the buyer consisting of an actual person, details such as their first name, last name and date of birth may need to be obtained from the human resources department. A firm’s internal systems may never have had to interface with HR before and, depending on the size of the organisation, the data may also be in siloed systems. This might involve developing a data programme to get these systems working together. Accessing these systems may take a longer time than firms initially expect, which is especially worrying for firms that have not started the process yet.

Additional considerations

Furthermore, the addition of OTC derivatives has complicated matters further in relation to data fields. This is mainly due to questions around how to classify OTC derivatives under the ISO data standards. The algorithms needed to differentiate between decision maker and executer, alongside additional challenges indetermining where to apply the pre-trade waiver to commodity derivatives are proving a certain level of complexity exists above and beyond that seen under MiFIDI. Sourcing the data can also be problematic, particularly if the systems have not interfaced to before, or if they have not been updated for some time.This will ultimately prove to be a key data reporting challenge for most firms.

Webinar participants were also interested in the potential impact of the incoming General Data Protection Regulation (GDPR), due to come into force in May 2018, and the wider data protection issues raised by the mandatory collection of data about individuals. In terms of details such as names and date of birth being required then they ought to be protected by existing data protection rules. In terms of third-party data through an Approved Reporting Mechanism (ARM), then ARM service providers will need to have a GDPR policy.

Effort that pays

Overall, data quality is key to most of these requirements. For example, AQMetrics uses programmatic regulatory control checks to ensure the data quality meets the required standards before submitting to the regulator. These checks are relatively simple for certain numerical fields, dates and country codes,  but problems can arise when the data is unstructured such as names or passport details. The source system data may originally be of poor quality for historical reasons. As a result, performing a data quality exercise on the existing systems before data gets channelled through for transaction reporting is essential. Data control is especially key under MIFIR. Moving from manual systems, such as records held on excel spreadsheets, to more automated systems may involve a third-party who can implement better auditing and governance processes.

AQMetrics offers a full range of risk and compliance solutions for MiFID II transaction reporting. AQMetrics is authorising as an ARM under the Central Bank of Ireland and plans on passporting its MiFIDII transaction reporting services to regulators throughout Europe . Firms tend to find that once their TR is being correctly implemented, then the benefits for getting MiFID II right go further than just regulatory compliance. It is very useful for firms to have a single view of the data they are collecting, where is came from and knowing the limits of their systems. This data can then be used elsewhere in the organisation. But the main takeaway I hope practitioners gained from the webinar was simply to not leave updating their systems for the new requirements to the last minute. Many of the necessary changes may be much bigger and more expensive than initially expected, so it really does pay to start early.

The full webinar recording: “MiFID II: Data for transaction reporting” is available here.

Webinar link:

http://resource.datamanagementreview.com/webinar-recording-mifid-ii-mar2017