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Transaction reporting

Transaction reporting

The obligation to report transactions under MiFIR requires investment firms that execute transactions in financial instruments to report “complete and accurate details of such transactions to the competent authority as quickly as possible, and no later than the close of the following working day”. This first sentence of Article 26 of MiFIR hardly unveils the rigorous overhaul that MiFID II/MiFIR mean to transaction reporting.

A transaction reporting obligation was already implemented by MiFID I in 2007. However, the directive then predominantly addressed the issue of a harmonisation of reporting across European Union Member States. Accordingly, the application of the reporting obligation has been limited to financial instruments admitted to trading on a Regulated Market (and derivatives, where their underlying has been such an instrument).

In contrast, MiFID II/MiFIR aim at promoting the integrity of markets mandating national competent authorities (NCAs) and ESMA to enforce this integrity by monitoring investment firms’ activities as to their honest, fair and professional market behaviour. To this end, MiFID II/MiFIR introduced a revised and comprehensive reporting regime designed to enable authorities to apply their surveillance mandate efficiently.

Reportable instruments

The transaction reporting obligation under MiFID II/MiFIR captures:

  • financial instruments which are admitted to trading or traded on a trading venue or for which a request for admission to trading has been made,
  • financial instruments where the underlying is a financial instrument traded on a trading venue, and
  • financial instruments where the underlying is an index, or a basket composed of financial instruments traded on a trading venue.

While baskets are reportable where at least one of the financial instruments in the basket is traded on a trading venue, indices are reportable where all components of the index are traded on a trading venue. They are reportable based on a threshold or where the index is used as the underlying for a financial instrument captured by the first bullet.

Who has to report transactions?

Under MiFID II/MiFIR, operators of all trading venues (including Multilateral Trading Facilities, MTFs, and Organised Trading Facilities, OTFs) must report transactions traded on their platform when executed through their systems by a firm which is not subject to the regulation.

While all investment firms and trading venue operators are explicitly subject to the transaction reporting obligation, UCITS (Undertakings for the Collective Investment in Transferable Securities) and AIF (Alternative Investment Fund) management companies are not (necessarily). They are not, unless they carry out portfolio management and investment advisory services that are outside the mandate or they are given by the funds they act for as the management company.

Transaction and Execution of a Transaction

To assess the extent to which such exemption are available under MiFID II/MiFIR, it is necessary to look at what will constitute a “Transaction” thereunder, what is  the “Execution of a Transaction” and how the latter is to be segregated from the “Transmission of an Order”.

A Transaction, according to Article 26 of MiFIR, is the “conclusion of an acquisition or disposal of a financial instrument” which can be summarised as any change in an investment firm’s position and/or their client’s position in a reportable instrument. Examples for transactions that are not reportable under MiFID II/MiFIR are contracts arising solely and exclusively from clearing or settlement purposes, post-trade assignments and novations in derivatives, portfolio compressions or internal transfers within the same legal entity (if beneficial ownership remains unchanged).

The Execution of a Transaction includes:

  • the reception and transmission of orders in relation to one or more financial instruments,
  • the execution of orders on behalf of clients,
  • dealing on own account,
  • making an investment decision in accordance with a discretionary mandate given by a client, and
  • the transfer of financial instruments to or from accounts.

It can be described in short as any action that results in a transaction.

Transmission of an Order

It is not the Execution of a Transaction but the Transmission of an Order if:

  • the order was received from a client or results from its decision to acquire or dispose of a specific financial instrument in accordance with a discretionary mandate provided to it by one or more clients,
  • the transmitting firm has transmitted all relevant information according to ESMA's regulatory technical standards to another investment firm (“receiving firm”),
  • the receiving firm is subject to the transaction reporting obligation and agrees either to report the transaction resulting from the order concerned or to transmit the order details to another investment firm.

This agreement must be concluded in writing and shall specify the time for the provision of the order details by the transmitting firm to the receiving firm and provide confirmation that the receiving firm shall check the order details received for obvious errors and omissions before submitting a transaction report.

In addition, the transmitting firm is obliged to verify that it has in place robust systems and controls to ensure that the transmitted information is complete and accurate, plus, it cannot transmit orders to counterparties outside the European Union.

What has to be reported?

The number of details that have to be reported to identify the financial instrument, the parties to a trade and the venue has increased significantly. The information required has to list the entity submitting the report, branch reporting flags, a quantity notation, a price notation, the currencies, the consideration to trade, a Legal Entity Identifier (LEI) for legal entities eligible for a LEI, the unique national number for natural persons (where available), the decision-maker, further details for natural persons (name, surname, date of birth etc.), an instrument classification, OTC derivatives-specific fields, the Trader ID (investment decision and execution), the Algo ID (investment decision and execution) for algorithmic trades, short-selling-related flags, OTC post-trade flags, waiver flag, commodity derivative flag, result of exercise of options, repos, fields related to the transmission of orders, and a report matching number.

Who may perform the reporting?

As outlined above, the reporting obligation may either fall upon the investment firm or the trading venue. Firms may choose to report on their own directly to an NCA, through a trading venue or through an Approved Reporting Mechanism (ARM) while – as already mentioned – the report must be filed by T+1. Given the complexity of the reporting, it may be advisable for firms to employ an ARM for reporting their transactions.

An ARM is required to comply with the technical specifications determined by the competent authority of its home Member State as well as with those of the other competent authorities to whom the ARM sends transaction reports. It shall have in place adequate policies, arrangements and technical capabilities to receive transaction reports from investment firms and to transmit information back to those firms. The ARM must provide copies of the transaction reports submitted to the NCA on the investment firm’s behalf to this firm. Note, while firms may report to an NCA directly without being an ARM, any entity that is reporting on behalf of a third party (delegated reporting) has to register as an ARM.

MiFIR review report on the obligations to report transactions and reference data

ESMA has started the process the review of the obligations to report transaction. The full consultation paper as well as DBG’s response can be accessed here.