What Is Transaction Reporting?
In its early days, MiFID I was introduced to represent the European Union as a way to target and legislate all financial markets. This occurred in 2007 and was designed to offer a wide array of reporting options for incoming and/or outgoing transactions. Everything was controlled by the EU but with MiFID II, it is being passed onto the European Commission as it aims to focus on any form of market manipulation.
Transaction reporting aims to understand the nuances of each order (small or large) and maximise the use of waivers. This is a way to understand short selling, illiquid financial instruments, and any misdoings with commodity derivatives.
Transaction reporting is aimed to regulate and apply across national legislation.
All financial instruments have to be legally reported as soon as the trading is completed. This is done with the “request for admission” and is required under the Multilateral Trading Facilities category. It is an obligation that is necessary for all European markets. Reporting has to be done while trading is completed on a “trading venue.” This helps protect additional transactions that may not have been legally reported in the previous legislation. It provides details on all OTC transactions and will include a wide array of financial instruments. This is one of the main reasons for implementing robust MiFID II Transaction reporting.
Details for Reporting.
Investment managers have to design their own transaction reports and it has to be done for several reasons including personal benefits such as executing trades and/or engaging with non-EU brokers.
The aim to is to execute transactions and then report directly to the home-state such as the FCA in the UK. The deadline is straightforward as the transaction has to be reported within one working day. To do this properly, the investment manager is more than welcome to report through the ARM (Approved Reporting Mechanism) or do it directly. It can also be done through the trading venue (if possible).
With MiFID II, there have been changes in what is reported after the transaction is processed. The older method required 23 fields, while the newer one requires a robust 81 fields to deliver exact information on the client and trade. This is a way to stay compliant and make sure the parties responsible have done their due diligence in advance. It is also done as a way to identify parties after the reporting is processed. With all managed accounts, the party is required to have an LEI code (Legal Identity Identifier).
Compliance with MiFID II Transaction Reporting.
How does one stay compliant with the new form of transaction reporting?
It starts with an understanding of what the local agency is looking for (i.e. the FCA) and begins analysing the various details needed to gain approval. If there are breaches, there will be consequences and these breaches can include incorrect IDs, inaccurate trade times, wrong buy and sell indicators, failure to report, and/or incorrect identification codes. MiFID II is designed to focus on the accuracy of each transaction and make sure it follows the established regulations in place. To make sure everything is accurate, it’s also important to avoid over-reporting transactions and ensure they’re accurate down to the last decimal.