The MiFIR Transaction Reporting obligation is coming into force on 3rd of January 2018, aiming to provide the tools to National Competent Authorities (NCAs) to detect and investigate potential cases of market abuse, monitor the fair and orderly functioning of markets as well as the activities of investment firms. Following the EMIR derivatives transaction reporting obligation, the MiFIR transaction reporting obligation places new pressure to investment firms to comply with new reporting rules, which are quite different both in terms of scope and technical implementation.
As there are only a few days left until the obligation comes into force, we provide below a briefing on some important points of interest to note and have in mind during MiFIR transaction reporting preparations:
Scope of financial instruments captured under MiFIR transaction reporting
According to Article 26 of the MiFIR regulation, the details of transactions in financial instruments, consisting of a total of 65 reporting fields should be reported to NCAs no later than the close of the following working day (T+1 day).
The obligation shall apply to the following financial instruments:
- Financial instruments which are admitted to trading or traded on a trading venue or for which a request for admission to trading has been made.
- Financial instruments where the underlying is a financial instrument traded on a trading venue and
- Financial instruments where the underlying is an index or a basket composed of financial instruments traded on a trading venue.
The MiFIR regulation is a text with EEA relevance, thus the reporting obligation captures financial instruments which trade in EEA trading venues (Regulated Markets, Multilateral Trading Facilities or Organised Trading Facilities) and instruments which their underlying is traded within an EEA trading venue. The reporting obligation applies to transactions in financial instruments referred to in points (a) to (c) above irrespective of whether or not such transactions are carried out on the trading venue or over the counter (OTC).
Table 1 below, provides some examples, according to the above rules on which instruments fall within transaction reporting scope:
|Financial Instrument||Within Reporting Scope?|
|Adidas share traded on Frankfurt Stock Exchange||Yes|
|Adidas share, traded off-exchange||Yes|
|CFD on British Petroleum share
(dual listed on the London Stock Exchange and NYSE)
|CFD on Facebook share traded (only) on NASDAQ||No|
|CFD on CAC40 Index||Yes|
Identification of counterparties
As one of the main targets of MiFIR reporting is to capture the actual change in beneficial ownership during a transaction, in order to detect any possibility of market abuse, the counterparties to a contract (buyer/seller) must be identified by their National_ID code if they are physical persons or by their Legal Entity Identifier (LEI) if the buyer/seller is a legal entity.
ESMA has made clear that in order to be able to trade with a legal entity, the later has to provide its LEI first. In the case of physical person it gets even more complex. The construction of National_ID codes is dependent on the buyer/seller nationality, as each country gave a different priority on what to use as National_ID. So, if for example the buyer is a Cypriot national its National_ID would be described as the Cyprus ISO Code (CY) plus its passport number (e.g. CYE02364589), while if the buyer was a UK national its National_ID would be the UK’s ISO code (GB) plus its National Insurance number (e.g. GBAB123456Z). Thus, the investment firm must design its KYC procedures accordingly, in order to collect from clients the necessary information (both for new and pre-existing clients).
Further, the above imply that extraction of information from the investment firm’s trading system is not enough for MiFIR transaction reporting, as these data need to be combined with information (personal data) usually kept in the firm’s CRM system.
Identification of financial instruments
One of the issues creating a misperception among investment firms is how to identify OTC traded instruments, which currently are not assigned an ISIN (International Securities Identification Number). Let’s see an example below:
Example: An Investment Firm X trades a contract for difference (CFD). The underlying equity (Adidas) is admitted to trading on a regulated market (Xetra-Frankfurt), but the CFD is not traded on a Trading Venue (i.e. traded OTC) and has not been assigned an ISIN. The Number of CFDs traded was 10000. The price of the CFD is EUR 172.25. The ISIN code of the underlying equity (Adidas) is DE000A1EWWW0. The CFI code for the CFD is JESXCC. The price multiplier is 1 reflecting the fact that one CFD contract represents one unit of the underlying instrument. Table 2 below records some of the relevant fields to be reported along with their related values:
|Field Number||Reported Value|
|34. Price Currency||EUR|
|41. Instrument Identification code||Leave Blank|
|42. Instrument Full name||CFD ON ADIDAS|
|43. Instrument Classification (CFI Code)||JESXCC|
|46. Price Multiplier||1|
|47. Underlying Instrument Code||DE000A1EWWW0|
|56. Delivery Type||CASH|
Now, let’s focus and make a specific note on fields 41 and 47. When a financial instrument has an ISIN (e.g. assume trading on the Adidas Share, not a CFD on Adidas), then this ISIN shall be populated in field 41 (Instrument Identification Code). When field 41 is populated then the fields 42 to 56 of MiFIR shall not need to be populated (because reference data for instruments traded on trading venues will be transmitted by trading venues to ESMA, which shall maintain and publish a relevant list). On the contrary, when the trading instrument has not been assigned an ISIN (e.g. CFD on Adidas share, traded OTC) then field 41 is not populated but the submitting party must populate all related fields from 42 to 56. In this case field 47 (Underlying Instrument Code) must be populated with the ISIN of the underlying instrument (in the example above with the ISIN of Adidas equity i.e. DE000A1EWWW0).
MAP FinTech has developed an automated solution to help you comply with MiFIR transaction reporting obligation and its compliance team can guide you through all necessary fields that need to be populated, according to your needs.
Contact us if you would like to discuss how we can assist you to prepare for MiFIR transaction reporting obligation.