Rely on the most comprehensive, up-to-date legal content designed and curated by lawyers for lawyers
Work faster and smarter to improve your drafting productivity without increasing risk
Accelerate the creation and use of high quality and trusted legal documents and forms
Streamline how you manage your legal business with proven tools and processes
Manage risk and compliance in your organisation to reduce your risk profile
Stay up to date and informed with insights from our trusted experts, news and information sources
Access the best content in the industry, effortlessly — confident that your news is trustworthy and up to date.
With over 30 practice areas, we have all bases covered. Find out how we can help
Our trusted tax intelligence solutions, highly-regarded exam training and education materials help guide and tutor Tax professionals
Regulatory, business information and analytics solutions that help professionals make better decisions
A leading provider of software platforms for professional services firms
In-depth analysis, commentary and practical information to help you protect your business
LexisNexis Blogs shed light on topics affecting the legal profession and the issues you're facing
Legal professionals trust us to help navigate change. Find out how we help ensure they exceed expectations
Lex Chat is a LexisNexis current affairs podcast sharing insights on topics for the legal profession
Printer Friendly Version
Rosali Pretorius, partner at Dentons UKMEA LLP, assesses the new European Securities and Markets Authority (ESMA) Guidelines on implementing the transaction reporting, order record keeping and clock synchronisation requirements under MiFID II, highlighting the key issues that businesses and lawyers need to be aware of and how they should prepare themselves for the proposed changes.
On 10 October 2016, ESMA issued final guidelines (ESMA/2016/1452) on transaction reporting, order record keeping and clock synchronisation under the recast Markets in Financial Instruments Directive 2015/65/EU (MiFID II) and the Markets in Financial Instruments Regulation (EU) 600/2014 (MiFIR). ESMA also published its final report which sets out the feedback ESMA received to its consultation on these topics.
Following the publication by ESMA in September 2015 of regulatory technical standards (RTS) on transaction reporting (RTS 22), order record keeping (RTS 24) and clock synchronisation (RTS 25), and the adoption by the European Commission in June and July 2016 of delegated regulations with respect to those RTS, ESMA has finalised guidelines (ESMA/2016/1452) to ensure the consistent implementation of these new rules. As of the date of publication of this interview, the delegated regulation based on RTS 22 is still under the scrutiny of the European Parliament and Council. The guidelines may therefore require further amendment should there be any objection to that delegated act.
The draft guidelines did much to clarify the requirements and have generally been welcomed by those in the industry, and there are calls for similar guidelines for pre- and post-transparency.
The idea is to help investment firms, trading venues and approved reporting mechanisms (ARMs) and regulators to prepare for compliance ahead of the rules’ application date. Market participants told ESMA in the consultation phase for the RTS that they wanted guidance. In ESMA’s view the detail required meant that guidance rather than additional detail in the RTS would be appropriate. After consultation, these guidelines are now in final form. They will apply from 3 January 2018 when MiFID II and MiFIR, respectively, come into effect.
The ambition of the project is to provide regulators with an accurate and holistic view of financial market activity—how did the transactions arise, who was involved, and who are the counterparties to those transactions. Although part of the MiFID II framework, the information gathered under the RTS' and in accordance with the guidelines will no doubt be extremely important for market surveillance.
Transaction reports must contain information on those executing transactions and instrument reference data, as well as information on the actual traders or algorithms involved with the transactions.
The ESMA guidelines emphasise that all of the 65 data fields that are relevant to an actual transaction, both market side and client side, need to be reported. This will require firms to set up a streamlined and comprehensive database to hold client information, trade specifics and algorithm and trader data. Firms will need to review and upgrade their infrastructure during 2017, not least because many fields require firms to obtain and store information (such as national identity numbers for individuals) which has not been gathered for this purpose before, and the obligation to provide this information on clients is not being phased in.
Firms will need to carefully examine how transactions came into existence, what capacity it was acting in and how many reports it will as a result have to make. So, for example, executing a matched principal trade for a client requires one report—a report that you executed a trade for a client—but entering into a trade on own account and then subsequently a client trade requires two. Also important, is to analyse whether the firm is executing an order (which it would do when it acts as principal (ie on own account or as a matched principal)) or transmitting an order (where it is an agent or arranger), as transmitters should not submit transaction reports.
The guidelines reiterate that the reports need to make clear what a firm’s overall position is. Faithfully reporting individual transactions will certainly not be enough. This is clearly a challenge for firms who report via several different avenues. The guidelines mention own reporting, ARMs and trading venues. Creating a holistic view is similarly likely to create headaches for firms with many branches that execute trades: all transactions executed via a branch have to be reported to the regulator of the home Member State, and presumably a single position for the firm worked out and reported, as suggested in article 15(5) of RTS 22.
Unlike the draft guidelines, the final guidelines do not include guidance on the circumstances in which the reference data as defined in MiFIR, art 1(1) need to be reported (RTS 23). The guidelines do not purport to offer guidance in relation to RTS 23. Other changes were mainly clarificatory and are outlined in the accompanying final report.
Yes, albeit possibly not in the form respondents wanted. So, for example, respondents wanted ESMA to set out requirements for all transactions and order activity. ESMA does provide 147 examples of how to complete reports in different fact patterns. But it does not assert that these are exhaustive. Instead, the guidelines set out general principles and advise firms to include elements of the most relevant scenario to construct their records and reports.
In response to market concerns about the contravention of privacy law, ESMA has made refinements in relation to the identification of clients and natural persons, while reminding the industry that the identification of the persons responsible for the investment decision is a level 1 requirement. ESMA has relaxed requirements for investment firms to verify names based on passports or any other official identification document to allow for more flexibility on verification. However, it has reminded the industry that it is essential to ensure consistency in the identifiers used so that the information can be easily cross-checked to identify potential instances of market abuse (eg front running).
ESMA also agreed with respondents that transfers of collateral should be excluded from the definition of ‘transaction’ and so proposed an explicit exclusion for transfers of collateral to the Commission after acknowledging that the omission was unintentional.
ESMA also clarified that references to a trader at a firm meant a trader acting for the firm. This will cover not just employees or those on site, but anyone who can bind the particular firm.
The guidelines are to be supplemented by related technical documents on reporting instructions, to include:
ESMA expects to publish these by the end of October 2016.
Regulators must also notify ESMA whether they comply or intend to comply with the guidelines, with reasons for non-compliance, within two months of their publication.
Lawyers and clients alike will be looking to these guidelines to provide some clarity on some of the trickier areas of the MiFID II regime. Firms will need to review their existing systems, looking at the processes through which they carry out transactions, the accuracy of the data gathered and the information which is held in relation to both the processes and the data. It is likely (given the complexity of modern trading relationships) that they might need to turn to lawyers to understand the life of each trade in their system and confirm which order and transaction reporting obligations arise, so that system build is consistent with legal obligations and guidelines.
Interviewed by Susan Ghaiwal.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
0330 161 1234