Subscribe to Itiviti Talks

Addressing MiFID II’s pre- and post-trade transparency rules

By Johannes Frey-Skött, Vice President Engineering Agency Trading, Apps, Itiviti
October 24, 2017
Share:

With under three months to go before MiFID II’s implementation date, market practitioners are grappling with the challenges posed by its new transparency provisions.

Transparency is a major aspect of MiFID II. By improving visibility, particularly around OTC derivatives, regulators are hoping to minimize the risk of a repetition of the 2008 Credit Crisis, which has been attributed in part to a lack of transparency in this marketplace.

Transparency in MiFID II takes several forms. For instance, the regulation introduces exchange-like trading facilities for OTC instruments, in an attempt to shift liquidity from dark pools to ‘lit’ execution venues. It also establishes new rules governing high frequency trading and the use of trading algorithms.

More broadly, MiFID II increases the number of reporting data points for brokerages and investment banks to more than 60, compared with 35 under its predecessor. It expands reporting requirements to cover a broad array of activities – affecting custodians, fund administrators, asset servicers and sell-side institutions – and asset classes (including fixed income and OTC derivatives vs. MiFID I’s equities-only focus). And as discussed in a previous blog, it sets higher standards for firms to demonstrate best execution for client orders.

Among the more challenging aspects aspects of MiFID II transparency are its pre- and post-trade reporting requirements for non-listed instruments. The new rules take three forms: First, market-makers and liquidity providers in certain instruments – notwithstanding whether they are registered as systematic internalisers – are required to publish their market orders in real time to so-called Approved Publication Arrangements (APAs). This is aimed at ensuring a level playing field for pre-trade price information and price discovery.

To date, more than 65 entities have indicated their intention to perform the role of APA, among them: Deutsche Boerse, London Stock Exchange/BOAT, TP ICAP (the merged Tullett Prebon and ICAP), Thomson Reuters’ TradeWeb and TRAX. Industry practitioners expect more APA operators to emerge, and they are now facing the additional challenge of assessing how many APAs to monitor in order to get a full picture of the markets they are active in.

Firms are also required to file two types of post-trade report. The first of these is the requirement to report trade information details – price, volume and time of execution – for all transactions they execute, again to their chosen APAs. This must happen within 15 minutes of the execution time-stamp to start with; regulators will later tighten the lag to five minutes.

Finally, firms are also required to file more detailed post-trade transaction reports, which include a broader set of data fields and must be delivered within a T+1 reporting period. These transaction reports are to be sent to so-called Approved Reporting Mechanisms (ARMs), such as those operated by Abide Financial, Bloomberg, Euroclear, Getco Europe, London Stock Exchange Unavista and TRAX.
In each of these three reporting instances, firms’ internal reporting mechanisms will need to draw upon reference data describing the assets and counterparties involved in the transaction, as well as the details of the trade itself in order to deliver reports seamlessly to the designated APA and/or ARM.
Firms will need to establish commercial relationships with and physical connections to their chosen APAs and ARMs. And they’ll need to set in place the analytics and reference data required to assess whether they or the other side to any trade is responsible for reporting the transaction.
This determination may depend on counterparty, instrument, buyer or seller, or whether the transaction qualifies for deferment. Where an institution is executing on a trading venue or systematic internaliser, then it is the venue or SI that reports the trade. Where the trade is between two institutions (OTC), then the seller has the responsibility to report. For transaction-reporting, meanwhile, all counterparties need to report transactions clearly identifying what was traded and the parties involved in the trade, either directly or through an ARM.
MiFID II’s pre- and post-trade transparency requirements involve many elements, requiring practitioners to establish correct processes and draw upon appropriate descriptive data and codes to ensure they meet the criteria. All reported data needs to be structured and validated before delivery into the chosen reporting mechanism, whether third-party APA or ARM, or direct to regulators, and this requires firms to understand the formats, frequencies and other nuances of how the recipient accepts reported information.

Download our MiFID II white paper

Related Content

The need to take an enterprise approach to testing

The need to take an enterprise approach to testing

FIX Infrastructure It goes without saying that it’s imperative for trading technologists to thoroughly test their systems before the put them in a production environment. Clearly, building a market-beating trading platform requires a high level of uptime and a propensity for failure that’s as close to zero as possible. And for years technologists have used a range […] November 5, 2018

Exploring the business side of Systematic Internalisation

Exploring the business side of Systematic Internalisation

Risk & Compliance Nine months into the MiFID II era, it’s time to look beyond the compliance issues and start considering the business opportunities presented to firms operating under the Systematic Internaliser regime. With the support from a value-adding regulatory solution, SI status can be used for competitive advantage, suggests Jonas Lindqvist, Principal, Trading and Trade Execution, Itiviti. […] October 9, 2018

Industrializing the trading technology stack: the benefits of UL Bridge

Industrializing the trading technology stack: the benefits of UL Bridge

Risk & Compliance Trading firms across the board are discovering that operational and regulatory requirements increasingly demand a consistent approach to connectivity, messaging and data management. To industrialize their response to these emerging requirements – to address the challenges in a streamlined, consistent and scalable way – firms need to put in place a centralized connectivity and messaging […] September 25, 2018

MiFID II: The implications for trading systems and infrastructure

MiFID II: The implications for trading systems and infrastructure

Risk & Compliance MiFID II marked a sea change in the approach to the handling of order, trade and transaction data. Rigorous new requirements around data capture, analysis, reporting and record-keeping made the communication of data a central theme in ensuring trading systems were MiFID II compliant, and connectivity – between external and internal systems, databases and processors […] August 14, 2018

Itiviti Talks

Itiviti Talks is your source for the technology perspective on the global capital markets. We have created this to be an engaging forum for sharing ideas with our clients, partners and other industry professionals. You will find videos, blog posts, white papers and more that deal with the needs and challenges of brokers, market makers and trading executives.
 
Watch, read and enjoy for new inspiration and insights.

By submitting this form, you acknowledge that data collected by us will be handled in accordance with our Privacy Notice.

Itiviti Talks

Get our view on global capital markets

Subscribe

Subscription successful

Thank you for subscribing!

Close window

Itiviti Talks

Get our view on global capital markets

Weekly email

    Trends in global capital markets from a technology perspective.

By submitting this form, you acknowledge that data collected by us will be handled in accordance with our Privacy Notice.