On 19 December 2014, the European Securities and Markets Authority (ESMA) published its much anticipated final technical advice and launched a consultation on its draft regulatory technical and implementing standards (RTS/ITS) on MiFID II and MiFIR which had been consulted on 13 May 2014.
The new drafts are open for public comment until 2 March 2015 and there will be a hearing held in Paris on 19 February 2015. ESMA is looking to finalize its draft RTS and send for approval to the European Commission by mid-2015 and its ITS by January 2016. MiFID II/MiFIR and its implementing measures will be applicable from 3 January 2017.
The changes will have considerable impact on all FCA authorized firms with transaction reporting obligations. Not least, portfolio management firms, many of whom presently enjoy a provision set out in SUP 17.2.2 under MiFID I for reliance on the broker’s reporting of a transaction. Clearly, the current provisions set out in SUP 17.2.2 does not allow for complete reliance as there are several instances in which this provision does not apply, for example, where the portfolio management firm executes via a broker which is not a MiFID investment firm or where the counterparty is another firm providing a service of portfolio management.
Under the new regime, it will still be possible for a third party to report on behalf of a portfolio management firm but this option is looking less likely to be adopted by firms. MIFIR provides for a special definition of “transmission” of an order, which does not need to be preceded by receipt of the order. This will allow a portfolio management firm to transmit an order it has generated itself for transaction reporting purposes. The receiving firm would then need to transaction report to the competent authority.
However, the requirements to fulfil this obligation set out in the RTS are onerous and not particularly attractive. This includes having written bilateral agreements in place with all its brokers concerning the circumstances of transmission and receipt of an order by the firm and broker (as opposed to its execution between them) and providing up to 81 sets of data (many of which would not ordinarily be present on an order).
Firms will need to provide more detailed information to the broker at allocation level, including the full client identification details and information concerning the investment decision maker and whether the client is short selling. Furthermore, a residual obligation remains on the firm to report a transaction itself in the event that all the required information is not transmitted to the broker in accordance with the agreement.
Having discussed the implications with numerous buy side firms, there is a gravitational pull towards firms taking responsibility and ownership for making their own transaction reports under MiFIR. Given that the new requirements are extensive, with the number of fields increasing from 26 under the current regime to 81 under MiFIR, firms will need to begin in earnest assessing the impact of these changes on its business.
The clock is ticking, there are less than 24 months before implementation, and the industry is scrambling to identify and hire the most experienced advisors and analysts to help with projects. Do not underestimate the timelines; competent authorities will be unforgiving of firms who have not implemented the requirements by 3 January 2017.