THE DATA CONUNDRUM.
Heather McKenzie looks at the impact of the new MiFID II reporting regime.
In January, the MiFID II regulations were rolled out. Between them, they ushered in new reporting requirements and tests that will increase the amount of information available and reduce the use of dark pools and OTC trading.
The transparency regime is composed of two core obligations. Pre-trade transparency, which is designed to provide market participants with near real-time broadcast of basic trade data around firm quotes. And post-trade transparency, which aims to provide market participants with near real-time broadcast of basic trade data around executed trades.
For trade reporting, MiFID/MiFIR requires reports that are near real-time broadcasts of trade data for price formation and operation of best execution obligations. These are reported via trade reporting venues from where they are disseminated to the market.
Challenges exist regarding the exchange of information and availability of data between and within counterparties required for timely and accurate reporting, according to Association for Financial Markets in Europe (AFME). Its report, MiFID II/MiFIR post-trade reporting requirements, understanding bank and investor obligations, states that these challenges can exist both before and after the trade is reported.
The challenges before a trade is reported include that the time required to manually input trades may exceed the reporting timeline. Missing data may lead to late or erroneous reporting. Contextual factors including counterparty status confirmation (SI/QIF/third-country venue for transparency, etc), deferral period, product scope within ‘traded on a trading venue’, counterparty location and waiver flags can also cause problems.
After-trade reporting challenges include the requirement for a transfer of information once the trade has been reported. AFME says agreeing on a trade identifier could help with end of day reconciliations. Further data may also need to be extracted from the Approved Publication Arrangement (APA) trade report to meet transaction reporting obligations (e.g. OTC post-trade indicator). Where a client is FIX-enabled, the transfer of data may be automated. Voice may be the fall-back mechanism for data transfer.
“The challenges of trade reporting are numerous, and the wide net of financial instruments captured by MiFIR/MiFID II means that many data fields are proving problematic,” says Virginie O’Shea, research director, Aite Group. “For example, securities identifiers such as ISINs have been inconsistently applied to securities across the globe and they are a particularly poor choice of identifier for the OTC derivatives markets; hence the very basics of identifying a security are complicated. There are a plethora of duplicate identifiers popping up because the mandatory fields for reporting these instruments are not sufficient and it makes price transparency opaque – thus negating the point of reporting. Firms are embroiled in these headaches and that is just one field of many.”
Brian Charlick, regulatory SME consultant, CGI believes many banks are struggling with MiFID II reporting requirements. “Firms are compliant, but a lot of remediation work is being done. To maintain quality and control they are using many more manual work-arounds than they would like.”
As with so many challenges, the core of the problem is data. Charlick says data quality and consistency is “still not good”, which means firms must work hard to ensure their data is up to scratch. Years of working with legacy systems that have been amended over time, or with data that was never as robust as it is now required to be, are taking their toll. “Regulators require much more information to be stored than previously. Doing that in a consistent way is the problem for most banks. They are trying to link all their client data together, but one problem is that names change over the years; often the links to accounts aren’t good. Getting information out of old Cobol systems and siloed databases is creating more problems than were first realised.”
Getting data out of a multitude of systems in time to meet reporting obligations is a significant challenge, says O’Shea, especially as firms can no longer “throw the data over the fence” at a counterparty for delegate reporting. “Both buyside firms and sellside firms are liable for the quality of the data and they cannot over-report, which has been a typical strategy for some time under MiFID I. The approach of burying the regulators under data so they cannot see the wood for the trees is not a sensible strategy in this environment.”
Most firms’ main strategy has been to employ “armies” of compliance staff to deal with the clean-up. Smaller firms, particularly those on the buyside, “hope they will pass under the radar for as long as possible,” she adds.
A good “first step” in solving trade reporting challenges is to take a confederated approach to providing standardised data, says Charlick. Some firms have put in applications for basic customer information that hold a series of links to other systems that maintain related data, such as finance and risk systems. Legal entity identifiers can be maintained in all systems and used to link them together.
Data dictionaries, where all the information is in the form of metadata (data that provides information about other data), can link data across different fields. If a customer is described in one system as 1, 2 or 3 and in another system is defined as A, B or C, the information can be linked to produce a standard view of that customer.
Charlick’s colleague, Jerry Norton, head of strategy, global financial services at CGI, says the linking idea is a good way of working around trade reporting challenges. “Banks don’t want yet another data warehouse,” he says. “Data warehouses didn’t deliver what they promised to. By federating data, firms can build virtual data warehouses, which means it doesn’t matter where the data is because firms will still be able to get to it.”
It’s one thing getting to the data and another being able to exploit it to a firm’s advantage. David Pagliaro, EMEA head of State Street’s data analytics arm, Global Exchange, says it is still early days for firms on trade reporting. “However, I think we can look at how we can do more across all our data sets and customers to derive insights from trade reporting,” he says.
Such insights can help firms better benchmark their performance. For example, by examining block order executions over a period, portfolio managers and traders can look at how successful trades were and what drove any success. “There’s an opportunity with the data to do a lot of benchmarking on elements such as the cost of trade and success of one trade versus another. This is good information that will feed back into a firm’s best execution requirements,” says Pagliaro.
Cian Ó Braonáin, global lead of Sapient Global Markets’ regulatory reporting practice, says more value can be derived from data if firms follow basic data management principles. Owners should be assigned to different data elements on a wide scale across an organisation. Each owner will be responsible for the quality of the data, whether it meets certain criteria for regulatory reporting, and how it can be reused. “This cannot just happen; it has to be an organised effort across a firm because there may be too many weak links in the chain to guarantee the value of data.”
Data lakes, which are simple internal trade repositories can ensure that a ‘golden copy’ of data is used by everyone within the firm. Doing this should reduce reconciliations problems and ensure the right data is reported. “A data lake provides a use case that goes beyond regulatory reporting. It also allows firms to drive better revenues and reduce costs. Every piece data will have a specific purpose and be available to add value to clients,” he says.
Pagliaro adds that given that regulatory requirements have increased the amount of data that must be stored and reported, firms should use that information to become more targeted in terms of what they offer to clients. “The investment industry is being forced to become more like consumer markets, where information is captured in a more systematic fashion. By capturing these new layers of information, firms can better plan and make much more informed decisions for their clients.”