ESMA is consulting financial institutions on which messaging protocol and data formats would be best for trade reporting under MiFIR. As the timeframe for reporting comes ever closer to real-time, the consequences could be serious.
Under MiFID II and EMIR, a host of trade reporting obligations are being phased in, obliging capital markets participants to report derivatives transactions to a trade repository and to use central clearing wherever sufficient liquidity is available. The ESMA questionnaire deals specifically with the technical formats for MiFIR, the regulation arising from MiFID II. The regulator is looking for one (or more) particular solution(s) that could be considered as the future MiFIR reporting format for transaction reporting and instruments reference data.
A shortlist of technical formats for MiFIR reporting and financial instruments reference data has already been drawn up:
According to Chris Pickles, independent fintech consultant and member of the Bloomberg open symbology team, there are serious challenges before the industry can reach a situation in which each participant knows what it is trading, with whom, in real time. “The speed of trade reporting is increasing, and we are moving from a world of end-of-day reporting to one where reporting is expected every 15 minutes – with the expectation that the time limit will eventually be cut down to five minutes or less,” he said. “The choices made now will define the ability of the industry to automate trade reporting.”
Pickles is concerned about some of the details in the consultation – including the choices that are available in the questionnaire. In particular, he notes that reporting by spreadsheet is one of the available options. ”Some people may tick that box,” he said. “My knees wobbled when I saw that! That’s going to lead companies to be scrambling to comply with the regulation, particularly if they thought that paper was a viable option, then realised that they can’t realistically submit an updated spreadsheet containing all their activity every five minutes. It’s not the way.”
More broadly, the industry still faces some serious questions about how to identify counterparties and securities themselves. While ESMA has indicated its preference that International Securities Identification Numbers should be used, in practice that would be difficult to achieve. Some asset classes, such as derivatives, hardly use ISINs, while others such as fixed income have limited coverage which does not extend beyond vanilla securities. Pickles reports that 28 million instruments have an ISIN out of a total pool of 225 million – a number which increases by five million every month. To make matters more complicated, in the UK the FCA has mandated that derivative transactions must be reporting using the Alternative Instrument Identifier standard. “The lack of use of standards by the regulators themselves is a problem,” he said. “If the regulator says, ‘send us the data and we’ll make sense of it, only when that data comes in do they realise what a task that is. Most regulators across the EU don’t have the resources to monitor the data on the fly through the day. They have to dig through data after the event, rather than acting while it is happening. That’s why it’s important that before ESMA decides the technical standards, there is an opportunity here to sit down with the regulator and make a difference. This is our rallying call to the industry to take this positively and get involved.”
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