In the initial days of the new regime, the problems consisted mostly of technical troubles with reporting, with some regulators and Approved Reporting Mechanisms (ARMs) experiencing shutdowns. Now, nearly six months post-implementation, most of those early, post-go-live wrinkles have been ironed out, though firms, vendors and data experts report that they continue to deal with some stubborn data problems—primarily around instrument reference data and identifying execution venues.

“Out of the top five rejection reasons that we see from transaction reporting, three are related to reference data. I think we are getting to a better place with it, but there are definitely still gaps,” says Nick Moss, regulatory reporting project manager at Trax, a subsidiary of bond trading platform MarketAxess. “You can have all the systems built in the world to help you overcome the challenges of Mifid II, but if you don’t have the reference data underlying it, then they’re essentially meaningless.”

Richard Young, Bloomberg’s head of industry and regulatory affairs, and co-chair of the FIX Mifid II Reference Data committee, says some of the issues that emerged at the start of the year remain problematic, but others have diminished as regulators have made “bits of clarity” available. “A lot of it was related to information and clarity on things like the Esma [European Securities and Markets Authority] website and the various reference data systems that Esma is putting out now, on which the market has a considerable dependency,” he says.

Technically Sub-standard

Although Mifid II came into force at the beginning of the year, firms had a little more breathing room for RTS-28, which is designed to increase post-trade transparency through increased best-execution obligations. The regulatory technical standard requires firms to report their top five venues for all trading, with disclosures to be published by April 30.

Matthew McLoughlin, head of trading for Liontrust Asset Management, says the firm produced its RTS-28 data on time, but “it was a challenge to put together…. We had a vendor do some work for us to produce it, but it wasn’t as easy as it could have been.”

While not an operational problem, there is concern that the data required is not particularly useful to end-users or clients, and could potentially be deceptive.

“If anything, we think it’s misleading, if not downright confusing,” says Andrew Munro, global head of trading at Henderson Global Investors. RTS-28 mandates that reports differentiate between client orders executed directly on venues, versus those executed via brokers. “Until Mifid II came in, we didn’t differentiate between that as an electronic trade as a venue, or just a captured affirmation process. We do going forwards, but for that we needed to strip it out of our dataset when we reported on RTS-28 because we felt it was very misleading.”

Munro says that in initial talks between the buy side and regulators, the latter seemed to agree that end-counterparty data was of greater interest. “But it turned out that because of the way the rule was written, the RFQ [request-for-quote] platforms are a venue, and so that’s what needs to be reported,” he says.

Esma developed the standards, which will become even more stringent in 2019.

“It’s going to have to be even more prescriptive with the passive-aggressive information that we’ll have to provide,” McLoughlin says. “If you’re a buyer and you stay on the bid side, then you’re passive. You have to provide that next year for certain asset classes.”

Firms are also working toward compliance with RTS-27, which comes into force at the end of June, and ramps up data requirements for trading venues, systematic internalizers, market-makers or other liquidity providers.

“Getting the RTS-27 data in the same format and as something we can actually make use of might be a challenge” that much of the industry is not yet ready for, McLoughlin says.

The rule requires a quarterly best-execution report that is free of charge and can be downloaded from company websites in machine-readable format.

Instrumentally Difficult

The trickiest problem, however, might be RTS-23, which requires trading venues to provide instrument reference data to their National Competent Authority (NCA).

“The general challenges that we’re seeing have been around instrument reference data, and a lot of that has been around firms being able to classify whether an instrument is traded on a trading venue or whether the underlying instrument is traded on a trading venue. That’s key to being able to make an accurate assessment as to whether or not you have to either transaction report or trade report that particular instrument,” Moss says.

Young agrees that accurate “traded on a trading venue” (TOTV) data has been a Mifid II sticking point for firms “because there wasn’t a definitive, dependable list of all the trading venues.”

Moss says this list is crucial, because so many of the transaction reporting rules depend on how a trading venue is classified. “A lot of the rejections we were seeing come back on transaction reporting were because firms weren’t able to make accurate assessments about whether the trading venue was actually regulated within Europe, or whether it was an unregulated trading venue,” he says. “It now looks like the list Esma produced is more up to date. It has much more coverage, and I think it’s pretty close to now having full coverage of the European trading venues. So that’s much better, but initially—certainly for the first two or three months—the coverage there was very weak.”

Young agrees that Esma’s comprehensive list has “helped enormously,” but says there remains “an issue around TOTV in the context of over-the-counter derivatives—not so much because you don’t know where they’re trading, but simply because of the complexity of those instruments.”

There is an extensive list of attributes contained that are required for reference data against OTC derivatives, Young says, and the last input from Esma on the requirements was in an opinion published during May 2017, when the regulator clarified that “only OTC derivatives sharing the same reference data details as derivatives for which trading venues submitted reference data” should be subject to the Mifid II transaction reporting requirements.

“There is still some additional clarity that we’re expecting from Esma, to try to give a bit more granularity around how to make the distinction between an interest rate swap that’s actually on a venue and one that isn’t,” Young says. “There’s a little bit further to go on that one.”

In the Garden of Esma

The lack of available data within Esma’s Financial Instruments Reference Data System (FIRDS) presented issues immediately after Mifid II went into effect, Moss says.

“Post go-live, there were quite a few gaps within FIRDS where the reference data just wasn’t there, so firms found it quite difficult to assess whether or not they need to report,” he says, adding that this meant when the regulators received transaction reports, “they were making incorrect determinations as to whether that instrument needed to be reported as well. That manifested itself by firms seeing rejections for transactions from the regulators that they shouldn’t have gotten, because the regulators thought that they weren’t reportable since they didn’t have the information in FIRDS to be able to make that assessment accurately.”

Because those reports did not go through, Moss says, the instrument data did not make it into FIRDS, which has a knock-on impact to the transaction reporting. “Some of the RTS-23 challenge was around venues not having the systems in place to do the reporting. But a lot of it came down to not having the reference data to be able to make a complete report,” he says.

Esma rules state that if the regulator receives a transaction report on an instrument for which it does not have data, it will hold the report for seven days before rejecting it. Moss says that right after the Mifid II deadline, the grace period was 30 days, “and that was the cause of the data gaps that existed in FIRDs at the time.”

He says seven days is better, but still creates “an additional monitoring process for up to seven days” after a report is submitted, which “creates an operational headache because firms need to continue to monitor that [and] resubmit it every time it comes back, which is burdensome.” Clients then “resubmit it continually” until the data exists in FIRDS. “In some cases, we’ve seen this going on for a month,” he says.

Young agrees that the introduction has “not been glitch-free,” with incorrect reports and inaccurate data going into FIRDS as a result, but says that this will ultimately correct itself—or, as he puts it, will “trickle out at some point.” The general trend is that things are improving and “regulators are getting on top of things they know aren’t quite working, and where they know there are inconsistencies between different databases,” he says, adding that FIRDS is central to these improvements.

“I would not say that everything is rosy in the FIRDS garden, but it’s certainly getting rosier,” he says, though he adds that there is another lingering FIRDS problem with the delta files of what new reference data has been added to the database, as Esma’s daily updates are not always released on time.

“This is quite important for TOTV purposes—to know which instruments have been traded on a venue—because if they’ve been traded on a venue, they will be reported into FIRDS. If there are missing files, you wouldn’t necessarily be completely up to date with what’s been traded on venues up until the day before. People are reliant on that file from FIRDS to keep them up to date with what’s reportable and what isn’t,” Young says.

Mind the ISIN Gap

Another data gap in OTC derivatives reporting is the result of a requirement that firms have an International Securities Identification Number (ISIN).

“All of the Mifid II reporting is very much centered around having an ISIN code. If you haven’t got that ISIN code, it creates issues,” Moss says.

The Association of National Numbering Agencies (ANNA) set up the Derivatives Service Bureau (DSB), a fully automated ISIN generator for OTC derivatives, to create near-real-time ISINs for OTC derivatives to support the Mifid II reporting obligation.

At the recent North American Financial Information Summit, hosted by Inside Market Data and Inside Reference Data, Roger Fahy, vice president and COO of Cusip Global Services, told delegates that ISIN data isn’t making it into FIRDS.

“As of April, 8.2 million OTC ISINs have been created. Surprisingly, only 16 percent of those ISINs made it into Esma’s FIRDs database. That’s only 1.3 million. The majority of the records are within the swaps asset class category, and specifically equity swaps,” Fahy said.

Moss says the FIRDS ISIN data gap has a knock-on impact for ANNA DSB, “particularly for the pre- and post-trade transparency reporting that needs to be done, because one of the key identifiers used for that is the ISIN code. The [late] timing of getting ISINs back is causing firms difficulties around reporting.”

In addition, Young reports ongoing issues with the Financial Instruments Transparency System (FITRS), an Esma-published liquidity assessment for bonds subject to the pre- and post-trade requirements of Mifid II.

“I think people are still getting used to how FITRS works and interpreting it, and that’s still got some way to go before people are comfortable with how that’s working,” Young says. “That has become more important just recently because, particularly on bonds, there were temporary transparency calculations that were being used initially, and those have now gone away, and what’s in FITRS is the definitive story as to how Esma is classifying these instruments.”

He says FITRS data is important because liquidity determines much of whether or not firms report, and whether there are waivers.

Coercing Cooperation

Young says ongoing reference data issues are an innate part of the Mifid II journey, because the regulators’ approach was not to let “perfect” get in the way of “good.”

“The regulators want to get this process moving, to get the processes proven—that the data can be received and made available, and then the glitches within it will be sorted out over time. The priority has been to get this dataflow—this workflow in both directions—in place, and I think that has largely been achieved,” he says.

As the industry continues to untangle the issues, McLoughlin says the quest for solutions has created a friendly atmosphere for partnerships and smart firms will take advantage. As firms, vendors and venues continue to increase communication to solve Mifid II problems, he predicts that the industry “will see partnerships grow over next couple of years.”

For the buy side, “One of the most important things is partnering with vendors and brokers,” and communicating needs, as opposed to the historical approach of waiting for solutions to appear, he says. “The partnership between buy side and sell side, buy side and vendors, buy side and execution venues, has never been more important than it is now.”