1. No-One Else Will Do It For You

Investment Managers (IM) have enjoyed something akin to a free ride under previous reporting regimes. Under MiFID I, at least in the UK, reliance could be placed on the broker’s report of having done a trade with the IM.  In these circumstances, and assuming the trade was done by the IM under a discretionary mandate, no separate report was required of the IM. The majority of firms took advantage of this benefit, with the result that many buy-side firms have done little or no MiFID transaction reporting in the past. When EMIR came along the buy-side found that it could generally delegate its trade reporting obligation to its market counterparties. This was specifically allowed in the regulation and was facilitated by most major sell-side firms.

The regulators have given buy-side firms a straw to clutch at in the shape of the Receipt and Transmission of Orders (RTO) exemption, though anyone who has studied this option for more than five minutes has concluded that it does not help a great deal. The basic idea is that, provided a party acting as agent has sent all relevant order information to their upstream counterparty, this information can be incorporated into the counterparty’s transaction report, allowing the agent not to submit a separate report.

However, under MiFID II there is no exemption from reporting, no matter who has reported a trade against you, and there is no easy route to delegation. For these reasons many IMs are now faced with developing their own reporting systems from the ground up.

Disadvantages for the buy-side firm include:

• The need to have a separate legal contract with each market counterparty, covering items such as format of data and timeframe for delivery
• The need to collect and send some of the most difficult to source and sensitive information related to a transaction, such as the national identifiers of the employees making investment and execution decisions
• The need to have a fall-back infrastructure for independent reporting in the case that the timeframes for order transmission cannot be achieved

Disadvantages to the sell-side firm that is offering to facilitate this structure include:

• The need to agree delivery timeslots and submission protocols under a legal contract with every agent who wishes to use RTO
• Taking responsibility for the safety of client’s personal data
• Maintaining a dual infrastructure to cater for non-receipt of data by the agreed time, which triggers a very different reporting pattern

Not surprisingly, there has been limited enthusiasm for this option from either quarter, leading us back to the initial assertion – investment managers will need to prepare to do full transaction reporting under their own steam.

2. Reporting Volumes Will Be Higher Than You Expected

Investment managers are used to their brokers working orders in the market and booking out an average price transaction once the order is complete. Fill level information may be supplied intra-day for information purposes, but under MiFID I an agency broker is allowed to accommodate a client who prefers to receive a single contract note at an average price and to transaction report in the same way.

Transaction Reporting User Pack, Section 9.4

A firm may receive an order from a client that can only be filled by executing two or more transactions at different prices, but the client wants one or more contract notes showing an average price…

As there is only one client, where Firm X is acting in an agency capacity, Firm X can:

1. report the two agency buy transactions from Firm Y (identified in the counterparty field) and include the identity of the client on each (in the customer/client identification field), even if the firm has issued a single contract note at the average price; or
2. report two market-side transactions with the word ‘INTERNAL’ in the customer/client identification field and one client-side average price report with ‘INTERNAL’ in the counterparty field and the client reference in the customer/client identification field.

In other words, an agency broker could reflect the client’s confirmation preferences in their transaction reporting structure, and the client could mirror this structure if making a separate report of their own. This concession disappears under MiFID II.

Level 3 guidance – Block 5.22 – One order for one client executed in multiple transactions (p82):

Even though the client wants an average price, the transaction reports have to reflect that every single market fill is immediately passed on to the client because the Investment Firm is dealing in a matched principal capacity.Investment Firm deals on ‘any other capacity’ basis.

The transaction reports of Investment Firm X dealing on an ‘any other capacity’ basis are exactly the same as the reports for matched principal above except that the trading capacity is reported as ‘AOTC’ rather than ‘MTCH’.

In other words, where market side brokers are acting in an AOTC (ie Agency) or MTCH (Matched Principal) capacity, they will have no option but to report against their clients at market fill level. Investment managers in turn will need to report from their perspective in a way that matches this level of granularity.

The other available trading capacity is DEAL (Principal). Principal brokers will still be able to take market fills onto their books intra-day and then book them out (and report them) at an average price once the order is complete. However, other sections of MiFID II militate against the use of Principal Brokers as a silver bullet for buy-side firms.

• Investment Managers may not be able to select brokers based solely on the convenience of the resulting reporting arrangements, given that they have fiduciary responsibilities towards their clients to obtain the best available prices (which may be offered by agency or matched principal firms)
• Principal brokers’ aggregated bookings to their clients are likely to be seen as off-exchange transactions in venue-traded products, given that they differ in size, timing and price from the market fills. This could trigger post-trade transparency publication by the broker and over time a requirement to register as a systematic internaliser in each traded instrument. To avoid these outcomes, we expect even Principal brokers to move towards fill by fill allocation once the ramifications of the alternative arrangements become clear to them.

To summarise, we expect that most buy-side firms can anticipate a much higher volume of transaction reports to be required than would be indicated by the number of orders they are submitting.

One further complication for investment managers is that separate reporting patterns are required depending on whether an order is allocated to one underlying fund/client or to multiple accounts. If the allocation is to multiple accounts, then each fill can be reported as between the market counterparty and INTC (a dummy temporary holding area) and all allocations as between INTC and the relevant fund or client. However, if only one client is to receive an allocation then each fill related to the order must be reported as between the market counterparty and that managed account.

3. Trade Publication May Not Pass You By

Trade publication, trade reporting and post-trade transparency are commonly-used terms for the same requirement – the need for the market to be informed promptly of the most recent prices at which venue-listed instruments have changed hands.

Are you trading instruments ON or OFF Venue?

In the case of trades which take place on-venue, the venue itself takes care of this publication. However, if the venue-listed product is traded off-exchange, for example via a bilaterally negotiated transaction, the regulator still wants the public to be informed of the price at which this happened, so as not to impair the transparency of the market as a whole. All trade publication other than by venues must be effected via an APA. The most frequent users of APAs will be Systematic Internalisers, who make a regular business of trading venue-listed instruments off-exchange. Note that no-one else needs to publish a trade report in this case. Unlike the case with T+1 transaction reporting, only one publication is required for every linked chain of trades, to avoid the market being misled as to the volume of trading taking place.

For equity share dealing it is most probable that there will be a venue or Systematic Internaliser (SI) involved in all equity trades given that a Trading Obligation will be in effect as soon as MiFID II reporting begins, and that obligation will demand that share dealing only take place via a venue or SI. In any case where neither a venue nor an SI is involved in a reportable trade, the onus falls on whichever MiFID Investment Firm (IF) sold the product, assuming that the trade took place between two IFs. It is at this point, somewhat at the margins of their business, that some

Investment managers will trigger a trade publication requirement. Let us take as an example a sale by the IM of a corporate bond. The bond market is not subject to the Trading Obligation, and bonds are not currently widely traded on-venue, which makes it highly feasible that an IM may sell the bond to an IF which has not registered as an SI. Under these circumstances the IM would be obliged to report the trade to an APA in order to allow publication within fifteen minutes of the trade taking place. In fact, diligent research at the Investment Association has highlighted a number of scenarios where the investment manager may need to make use of the APA services. Apart from the bond-trading scenario above, these include cases where the IM transacts with a non-EU entity or a non-MiFID firm within the EU, and where they undertake agency crosses between funds.

In all of these situations the IM is the only IF involved in an off-exchange trade. Where that trade involves an EU venue-traded instrument, the IM is the only party available to publish the trade.

Investment managers are not typically geared towards real-time extraction of data from trading platforms and quasi real-time reporting of that data. Even the presence of a tiny percentage of trades which require submission to an APA might call for wholesale architectural changes and development projects. IMs should not assume they are exempt from this requirement before putting all of their business flows and minority transactions under the microscope.

To contact Abide Financial:

Mark Kelly, Director of Professional Services: [email protected]