What does Level 2 say?
Consultation Paper 2014/1570 (CP2)
CP2 contains a draft RTS (in Annex B of CP2) that provides significant additional detail in relation to the transaction reporting provisions in MiFIR. The draft RTS contains the following key definitions:
- ‘transaction’ is defined as an acquisition, disposal or modification of a reportable financial instrument (subject to certain specific exceptions)
- ‘execution’ is defined as any action that results in a transaction if such action in a chain of events leading to the transaction is of enough importance that without that involvement, the transaction would not have taken place. CP2 makes it clear that this would include where an investment firm that carries out portfolio management deals in the exercise of its investment discretion (except where the exemption for transmitters applies).
ESMA has confirmed in CP2 that ‘transaction’ includes but is not limited to the following:
- Any decrease or increase in the notional of a derivative before the expiry date of a reportable financial instrument
- Issuance, allotment or subscription, placements
- Exercise of options, warrants or convertible bonds or other financial instrument that result in the purchase or sale of a reportable financial instrument
- Trades in rights
- Transfers between funds
- In specie transfers where there is a change in beneficial ownership, gifts and transfer of title
- Where the acquisition or disposal of the financial instrument or the conclusion or termination of the derivative contract was effected by the same investment firm but there was a change in beneficial ownership, and
- Where the acquisition or disposal of the financial instrument or the conclusion or termination of the derivative contract was between different investment firms belonging to the same group. This includes transactions between an investment firm and one of its subsidiaries or between two subsidiaries.
In addition, ESMA has expanded the list of excluded activities to provide greater clarity and to avoid transactions being unintentionally caught by the regime. ESMA confirms that the following will not be caught by the regime:
- Transactions that arise solely and exclusively for clearing and/or settlement purposes
- Transactions between branches of the same investment firm or between a branch and the head office of the investment firm provided that they are purely internal movements
- Assignments and novations of derivatives and portfolio compressions, and
- Creation and redemption of exchange traded funds by the administrator of the fund.
ESMA confirms that reportable instruments will include:
- All instruments based on indices which include in their composition at least one component that is a financial instrument admitted to trading or traded on a trading venue
- Financial instruments based on a basket provided that one component of the basket is a financial instrument admitted to trading or traded on a trading venue.
ESMA sets out in the draft RTS, the details of what needs to be contained in transaction reports. The detail contained in such reports will (if the proposal in CP2 is adopted) significantly increase (with the number of fields within the reports increasing from the current 23 fields to 81 fields). The details to be supplied include an ID code for the decision maker that made the decision to deal and, if different, the individual executing the trade and/or, if the trade was generated or executed by a computer algorithm, the relevant identifier code for the relevant algorithm(s). Transaction reports for physical short sales of EU listed shares and EU sovereign debt instruments will need to include a short sale flag, including, a specific flag to identify the situation where the transaction is an uncovered short sale by the person making the transaction report effected in reliance on the exemption for market makers and primary market dealers in the EU Short Selling Regulation.
For MiFID firms that wish to rely on the exemption for “transmitters”, the draft RTS sets out the conditions that would need to be complied which are as follows:
The transmitting firm will need to transmit the order in question to another MIFID firm. The transmitting firm will need to send to the other MiFID firm certain details relating to the order which include: (1) an identifier for the underlying client or clients to which the order relates; (2) where the order is a short sale of EU listed equities or EU sovereign debt, a short sale identifier; and (3) where the order is an aggregated order relating to multiple clients, the allocation as between those clients.
Additionally, the transmitting firm is required to have a written transmission agreement in place with the firm to which it transmits the order that sets out: (1) the circumstances (e.g. method of submission) under which the details of the order referred to above will be considered to have been properly provided; (2) the deadline by which such details must be provided by the transmitting firm to the other firm; and (3) confirmation that the receiving firm is subject to the MiFID 2 transaction reporting requirements and that, if the relevant order details are provided to it in the manner contemplated in the agreement by the relevant deadline, it will make a transaction report containing those details.
Where the above requirements are satisfied and the transmitting firm supplies the relevant details in the manner contemplated in the transmission agreement by the relevant deadline, the transmitting firm can rely on the report made by the receiving firm and does not have to make its own transaction report.
ESMA sets out a list of compliance and systems obligations for those firms making reports which include requirements to have in place mechanisms that avoid the submission of duplicate transaction reports, for identifying errors and omissions within transaction reports, for authenticating the source of the transaction report and identifying transactions that are reportable but have not been reported.