The European Commission’s revamp of the Markets in Financial Instruments Directive—the pan-European capital markets regulatory framework first introduced in 2007—finally arrived on Wednesday, January 3, leaving market participants facing the daunting task of reporting more data to regulators than has ever before, notably around the requirements covering transaction reports.

Under Mifid II, the scope of these reports has expanded from 24 fields under the original rulebook to 65 fields today. These reports are sent to each European country’s local regulator—known as National Competent Authorities (NCAs)—either directly or through an Approved Reporting Mechanism (ARM). To be able to consume this data—as well as to perform spot-checks on its accuracy—the local regulators have been tasked with building out their own IT systems. But the mammoth scale of this task has prompted some market participants to question whether regulators themselves will actually be able to ingest and then digest the mountains of data they will now receive, and how much attention they will actually be able to pay to reviewing it. 

Turn Down the Volume

“Most of the NCAs and some of the ARMs seem to be having the issue with massive data volumes,” says a Mifid II project lead at a global bank. “During the first week, we saw trades queued at the ARMs for days because they could not be submitted to the NCAs, due to issues at the NCAs,” including the UK Financial Conduct Authority (FCA), the project lead adds. “Generally, everyone in the industry—the entire value chain—seems to be having reference data and/or eligibility issues one way or another.”

Another source tells Inside Data Management that software for some of the designated ARMs has simply not been ready, meaning firms have been unable to test their interfaces back to the regulator. “We’re not sure whether trades have actually been sent back to the regulator. We might think they are, but then they’ve got a different status. It’s software testing issues—they just haven’t been ready in time,” the source says. “All the pipes connecting the different systems… there just hasn’t been enough time to test it all properly. And the software developers are just releasing, releasing and releasing all the time.”

Inside Data Management stablemate Waters recently reported how technical problems with Tradeweb’s Approved Publication Arrangement (APA) prevented a number of banks from submitting trade reports in the first days of new transparency rules.  Tradeweb is one of six APAs authorized by the FCA.

Naomi Clarke, a data management expert, says this has created an environment that is “a little chaotic” but that this is largely down to software providers not being ready, and final technical specifications only being delivered late last year. “Testing has not been able to happen in a sufficient way, but I think it will settle down,” she says.

Despite these early problems, Clarke says that European regulator the European Securities and Markets Authority (Esma), the FCA, French watchdog the Autorité des Marchés Financiers (AMF) and the Dutch regulator Autoreit Financiele Markten (AFM) have all made it clear that “they will be taking a more extensive look at the data we’re sending,” and have built the required architectures to allow support firms’ submissions. At Inside Data Management’s European Financial Information Summit last year, a representative at AMF described the efforts undertaken by the regulator to build a new Big Data system to deal with the volumes of data they will now receive. The ICY system will use Big Data technology, pattern recognition and machine learning, which will enable the regulator to exploit large volumes of data to detect market abuse. 

So while they may not be ready to begin reviewing data on an ongoing basis from day one, regulators will more likely take a more intensive look at the data sent by firms over the course of the year, Clarke says. “I don’t think we can just be complacent and say ‘They’ll never be able to look at it.’ I think it’s going to be difficult, but if they’ve got the resources to build the infrastructure—and it sounds like they do, because it’s so crucial to abuse of the market—then I believe over the next year, the regulators will invest sufficient resources into starting to use Big Data techniques on these datasets.” 

Quality Control

But to achieve this requires a standardized dataset, which Clarke says is why regulators have placed such emphasis on data quality. “The regulators can’t really do anything if they’ve got poor data,” she says. “That seems to be the lesson they’ve learned from Mifid I. It didn’t really work because data quality was poor. This time they’re not going to have that much tolerance for breaks in data quality.” Without guaranteed data quality, regulators won’t be able to get the datasets in a standardized format, she adds. 

The original implementation of Mifid also predated the widespread adoption of industry-standard identifiers, such as the legal entity identifier (LEI) or universal product identifiers. “The way of matching similar deals together by product on the over-the-counter (OTC) market didn’t exist. You need all these things that uniquely identify things across different counterparties and parties providing trades in order to be able to recognize they’re the same thing or similar. Hence, mandating LEIs, mandating that certain attributes have to be on there…. The whole environment is better. So as long as they’ve got the database environment to do it, they can then apply more Big Data techniques to get at what they need,” Clarke says. 

Matthew Luff, Mifid II consultant at Henderson Global Investors in London, says regulators will expect some initial teething issues, and in the early stages of Mifid II, will primarily be looking to see that reports are being submitted, and that the basic information—such as execution time, ISIN, quantity, price, LEI—is being reported effectively, he says. “I don’t think there is any expectation that there will not be issues in each firm. But they will be looking at the preparedness and documentation as to how each company ran their projects, known issues and a timeline for remediation.  Most of the problems will simply be due to new processes, inability to test effectively due to very late builds, and confusion as to who is expected to do what, but these will be solved relatively quickly now we are in a live environment,” Luff adds.

When asked their main focus in the run-up to Mifid II at an industry event last month, a head of European execution strategies at a US bank, said their priority was getting their reference data in order.  “We’ve got a dozen people just mucking around with reference data right now in terms of gathering if from clients who themselves are figuring out in many cases what their legal structure is,” the exec says, adding that the key difference now is the level of granularity at which firms must understand that data. “We’ve never really had to worry about it in quite the same way,” he said. 

As Mifid II can be implemented in different manners across EU member states, this could also create some discrepancies in what firms are expected to provide. The bank exec also said he has no idea of the level of preparedness among regulators to be able to digest the masses of data they will now be receiving. “That’s going to be one of the interesting things that comes out in the wash. We’re all producing tons of data—around transaction reporting in particular. Who’s going do what with it? I think that’s where we’ll start to see a little bit of difference in quality and implementation from the regulator side.” 

Luff agrees that whether regulators will be able to handle their new data demands is “the million dollar question,” though he says the FCA at least has been “bullish” about its IT projects and believes it has a handle on the data requirements. “In terms of whether anybody will look at it, I assume that spot checks will be performed on an ongoing basis, but that the real benefit will be unravelling what happened after the fact, so will be remediative rather than preventative.” 

Missed Opportunity? 

The US bank executive described transaction reporting as a “missed opportunity” for the whole industry, adding that documents issued by Esma contain enough “wiggle room” that there can be different interpretations of what the regulators are looking for. “The problem is that no one is wrong. You end up with a very expensive mess for the industry. If there is anyone who can actually ingest all this data, they are going to find that the same type of transactional flow between firm A and firm B will not be represented in the same way as between firm C and firm D. I think that will start to raise some eyebrows for the regulatory community. There are still some major industry questions that need to be answered. Assumptions have to be made,” he said, adding that there will likely be rewrites of the directive as “people start to grapple with the results of what has happened—assuming anyone is scheduled to look at the data at all, which is a hell of an assumption.”

Luff says that while what is required in terms of the basic information is “pretty self-explanatory [with] little room for misinterpretation,” there are “slightly stranger ones such as complex trade ID or OTC flag [that] throw up too many interpretive variations and so are unlikely to be overly helpful. I am not sure what opportunity transaction reporting was supposed to create, but… I feel as though many companies have missed the opportunity to improve internal data storage and transmission, and have just built on top of what they already have.”

At the same event in December a director at a French bank said that at least in the UK, the regulator has been giving the impression it will treat reading the data produced as a priority. 

“The FCA has said it will be focusing on trade transaction reporting. They have said, ‘Whatever you do, get it right. We understand there are numerous fields that need to be added, but focus on the main economics of the trade.’ It’s the main thing they want to understand…. They want to see this data, so we should assume they want to read this data as a first priority,” the head of business development says, adding that local regulators have so far professed a common stance on trade and transaction reports. “I think that this is the number one priority that all regulators are looking towards. Because it’s [about] market abuse… [and] market practices, most of them—and definitely the FCA and AMF—are going to be focused on what data is out there, and we can probably expect some reviews by each regulator to review the quality of the data. We have a common feeling of what to expect.” 

Rebecca Healey, head of EMEA market structure and strategy at Liquidnet, and co-chair of FIX Trading Community’s EMEA Regulatory Subcommittee, notes that during Esma’s November conference, European Commission officials said they expect Esma to take significant control over National Competent Authorities going forward, with Esma granted greater powers to do so. “Clearly there is going to be a big stick at some point to get the NCAs in line,” she says, adding that the EC now realizes that it needs to up the ante. “The EC has recognized that NCAs are picking and choosing, and delaying, and making assumptions that it doesn’t really apply to them…. You start to question who is taking this seriously and who’s not.”

Healey also questions what impact the UK’s exit from the European Union will have. “Will Brexit take away resources from Esma to be able to push forward and have the mandate that they want to have for NCAs? There are a whole host of unknowns that we’re going to see in Europe that we haven’t seen played out yet. But there is definitely a momentum in the EC and Esma to make sure that national competent authorities are brought in line.”

Esma has “certainly said that they will bring NCAs into line,” Luff says, though he adds that Esma’s options for enforcing this may be limited to “a frown and a strongly worded letter.”

There is also an issue over how many NCAs have transposed Mifid II into law—itself a lengthy process. 

“The real time is spent on the original regulations whereby the European Parliament voted on the wording. If something does need to change, at this point it is very difficult to return to parliament, which means that Esma will tend to ‘clarify’ parts of the text rather than send them back. In terms of becoming law in each member state, Mifir being a regulation obviously passes into law without any amendments, so things are cleaner and quicker,” Luff says. “However, Mifid is interpreted and enacted into law by each member state, and so takes longer and has the ability to be significantly different in each country.  Whether it is a regulation or directive, the enforcement of the laws is still up to each NCA. So regardless of the process of how they become laws, each NCA has the ability to concentrate on certain parts and have a more lax approach to other parts.” 

This means it can be difficult for companies to figure out where they should be putting their resources and deciphering what’s going to be correct and what’s not going to be correct, Luff adds.