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Paul Yau, Advise Technologies

Centralise your data management to cope with transaction reporting

MiFID II aims to increase the accountability and transparency of the financial services industry and represents the latest in a long line of regulatory developments since the '08 global financial crash. 

Both buy-side and sell-side MiFID regulated firms are busy focusing on exactly how reporting obligations will impact their existing IT system configurations. According to Paul Yau (pictured), Senior Regulatory Counsel at Advise Technologies, whose Consensus Regulatory Management System is used by investment managers for a repeatable, reliable, and automated filing process, the current environment reminds him of when firms were preparing for Annex IV reporting under AIFMD a few years ago. 

"This was a substantial regulatory hurdle faced by alternative fund managers. There were a lot of questions being asked, people attended industry events and working groups and I feel the environment is similar with MiFID II, specifically as it relates to transaction reporting. 

"One manager I spoke to recently was discussing transaction reporting and working on an implementation roadmap, ahead of Q3, but had not yet decided whether to develop a reporting solution in-house or use an outsourced provider," says Yau. 

This ultimately depends on figuring out what transactions need to be reported and the amount of work that will be involved sourcing and managing that data. 

One big issue that both the buy-side and sell-side are trying to figure out is the extent to which managers can delegate transaction reporting under MiFID II. The increase in data that will need to be reported will be substantial. 

By the time buy-side organisations go through the exercise of collating all that data, submitting it to their broker(s) to delegate the reporting, which leads to an additional layer of data reconciliation, they might as well just report themselves. Delegated reporting may end up being more operationally burdensome, according to Yau.

That said, there might be a bit of a complication in that while some brokers might offer a delegated reporting system, other brokers may choose not to. As firms have a best execution obligation to act most favourably in how they execute trades for their clients, choosing a particular broker just because they offer delegated reporting will not necessarily mean the client is also getting best execution services. 

"This is something managers need to think about. They shouldn't just select a broker because they can do delegated reporting. The amount of personally identifiable information that a manager has to provide in a transaction report, means that some brokers are going to be reluctant to offer that service. One manager I spoke to recently feels that they will not be able to rely on their broker for transaction reporting given the complexity of the data involved and are looking instead to use an Approved Reporting Mechanism," confirms Yau.

He confirms that Advise Technologies intends to provide a solution offering to help with transaction reporting by becoming a registered ARM with the FCA. This is currently going through the authorisation process.

If one compares it to Annex IV, ultimately transaction reporting is a data gathering exercise. 

Asset managers need to do a gap analysis on what they need to report and then pull together all the necessary counterparty data, trade data, risk data, investor data, and so on, from different sources, including static fund data. 

"It is important to put all of the data from these different sources in a central place, given the volume of data that will be reported under MiFID II. It is increasing from 23 data fields under MiFID I to 65 data fields for transaction reporting under MiFID II. My advice to clients is, `Get your data organised, clean it and make sure it is accurate, so that you can report directly or pipe it directly to an ARM'," says Yau. 

This ability to leverage data from a centralised hub is something that alternative fund managers have been increasingly doing with their fund administrators in response to greater regulatory and investor reporting demands. 

By working in tandem with IT vendors, those buy-side firms who build their own internal (or hosted) centralised hub are going to have far easier lives. If they can avoid having to reinvent the wheel every time a new regulation is introduced, that is going to help improve their business efficiency.

"I do think a side benefit to all of this regulation is that it can lead to improved operational efficiencies. If they can get their data more organised it will help managers to deal with the deluge of regulation they face and handle obligations like transaction reporting more smoothly," says Yau.

Another element of the reporting obligation under MiFID II, is near real-time trade reporting, compared to T+1 for transaction reporting. Trade data will need to be disseminated in a machine-readable format and made available to the public using an Approved Publication Arrangement. 

This was already required under MiFID I for all equity trades. Now, the responsibility extends to report on all financial instruments, including OTC derivatives and FX, under MiFID II. Another important difference is that, whereas under MiFID I the requirement for reporting equities was within three minutes, under MiFID II, reporting must be done within one minute. 

"Granted, technology is highly advanced but still, that will present quite a task for a lot of firms," comments Yau. "For the first three years of the regulation trades must be published within 15 minutes, and thereafter it will be reduced to within five minutes after trade execution. It's not going to get any easier. 

"I think that most firms who trade derivatives will need time to adjust to these demands. For equities, the requirement has long been in place under MiFID I. For those who have not previously reported non-equities, they are going to have to figure out how to get on top of this. 

"In terms of the post-trade report itself, there are 18 fields for non-equity instruments compared to nine reporting fields for equities. The amount of post-trade information will be substantial but nowhere near as granular as the 65 fields of information required for transaction reporting."

Pre-trade transparency is not a reporting requirement. Rather, firms will need to provide market data on bid and offer quotes to facilitate price discovery. Under the non-equity requirements for pre-trade information, firms will need to be prompted by a client to provide that information and will need to agree to provide the quotes. 

"Such quotes must also be made available to other clients in a non-discriminatory manner," adds Yau.

Currently, there is still a lot of detailed discussions between fund managers and their counterparties as they roadmap their obligations and understand exactly how, where, and to what extent, MiFID II will impact their day-to-day business operations. 

"The buy-side needs to work out the necessary contractual agreements to move forward in line with the requirements, especially for things like research. This is something that legal and compliance will need to focus on and potentially redraft contracts. With all of these new requirements, my advice to clients is to start the conversations now," concludes Yau. 

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