MiFID 2/MiFIR: What, When, Who and How? Transaction reporting

This article sets out a summary of the key issues to consider in relation to the transaction reporting obligations under MiFID 2.

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What does MiFID currently do?

Are these provisions currently in MiFID?

Directive 2004/39/EC: Art. 25

Yes, currently under MiFID all firms that execute trades in relation to a financial instrument that is traded on an EU regulated market are required to report transactions to their home state regulator as quickly as possible and no later than the close of the following working day. This obligation broadly applies to any security or derivative traded on EU exchanges. The purpose of the requirement is to assist EU regulators to detect and investigate suspected market abuse.

What are the key differences between the current regime and MiFID 2?

MiFID 2 has expanded the scope and level of prescription of investment firms’ transaction reporting obligations. Transaction reporting will apply to a much wider range of financial instruments and require the disclosure of additional mandatory data and imposes an obligation on firms that receive and transmit orders, but do not execute orders, to transmit certain required details of such orders to the receiving investment firm, or to report the order themselves.

What is MiFID 2 going to do?

What does Level 1 say?

Regulation (EU) No 600/2014: Art. 24 to 27

The obligation to report transactions will apply to:

  • Financial instruments which are admitted to trading or traded on a trading venue (now including MTFs and OTFs) 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 basket composed of financial instruments traded on a trading venue.

These obligations will apply irrespective of whether or not such transactions are carried out on the trading venue.

Mandatory data to be included in the report includes:

  • Identity of client
  • Identity of individuals responsible for execution (Trader ID) and/or any computer algorithms (Algo ID) responsible for the investment decision and the execution of the transaction
  • Designation to identify the applicable waiver under which the trade has taken place
  • Designation to identify short sale (as defined under the Short Selling Regulation) in respect of any physical sales of EU listed shares and EU sovereign debt, and
  • For commodity derivatives, an indication of whether the transaction reduces risks in any objectively measurable way.

Firms that receive or transmit orders or otherwise handle orders, but do not execute them are required to transmit certain required mandatory data relating to such orders to the receiving investment firm or report the order themselves.

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.

Will any Member States be gold-plating?

The aim of MiFID 2 is to harmonize transaction reporting requirements across the Member State as currently there is a considerable amount of divergence between how Member States implemented the transaction reporting obligations under MiFID. In addition the aim is to make the regime consistent with the Market Abuse Directive. It is not clear what approach Members States will take with regards to implementation. However, given the level of prescription under MiFID 2 it is likely that we will see a more consistent approach taken. It appears likely, though, that some Member States will apply the transaction reporting requirements to AIFMs and UCITS management companies.

When will it happen?

When will these provisions apply?

Member States are required to adopt and publish measures transposing MiFID 2 and delegated acts into national law by 03 July 2016. MiFID 2 and delegated acts under MiFID 2 will apply from 03 January 2017.

What happens next?

ESMA delivered its final technical advice for delegated acts on the 19 December 2014 to the EU Commission in the FR. The EU Commission shall adopt the delegated acts within 6 months which will then be published in the Official Journal. The European Parliament and Council have the right to object to a delegated act within 3 months (which can be extended by a further 3 months).

Deadline for responses to CP2 was 2 March 2015, following which ESMA will update the draft technical standards and send its final report to the EU Commission. ESMA is expected to publish its final RTS by July 2015 and final ITS by January 2016 and submit them to the EU Commission. In both cases the EU Commission will have 3 months to decide whether to endorse the submissions. It is likely that the technical standards will be adopted by way of regulations published in the Official Journal.

How is it going to impact my business?

Who will be affected by these changes and how will it impact their business?

Whilst ESMA has attempted in the proposed RTS (Annex B to CP2) to clarify as much as possible when a transaction will be reportable and which financial instruments are caught by the regime it has fallen short of producing one single exhaustive list as requested by many market participants. ESMA has also attempted to align these obligations with the reporting obligations under REMIT, EMIR and the Short Selling Regulation. However, it is impossible to completely harmonise the requirements given that the different reporting regimes exist for different purposes. Therefore, firms will need to navigate their way through the various reporting obligations and their technical differences which will be complex task for many.

Firms that will be subject to the reporting obligations will need to ensure that their IT systems are capable of tracking for each reportable transaction all of the relevant data that is required to be supplied in the report 81 separate fields and extracting the relevant data into a report in good time to permit submission of the report before the deadline for submission. The increase in the amount of reportable data and in the universe of transactions that are caught by the regime is likely to bring a need for order/position management systems to be upgraded significantly to accommodate the new reporting requirements, which will have cost and headcount implications. Firms that wish to help their clients to rely on the exemption for transmitters will need to put in place written transmission agreements with those clients. Again, this papering may have cost and headcount implications.

The requirements that need to be satisfied in order for a transmitting firm to rely on the exemption for transmitters are more onerous than under the current UK exemption for discretionary asset managers. Such firms will now need to monitor physical sales by their clients of EU listed shares and EU sovereign debt instruments in order to ensure that they have appropriately flagged any short sales of such instruments to their brokers. Similarly, where an order has been aggregated, the allocation between different underlying clients will need to be communicated to the receiving firm. This is traditionally something that asset managers have dealt with at primer broker/custodian level rather than something that has been communicated to executing brokers.

There are a number of situations in which a MiFID firm may be unable to rely on the exemption for transmitting firms. For example, a MiFID firm would be unable to rely on the exemption where it transmits an order relating to a reportable financial instrument to a non-EU broker. As mentioned above, the universe of financial instruments that will be subject to the reporting obligation is being significantly increased by MiFIR and so it will become more likely that transmitting firms will pass orders relating to some in-scope instruments with brokers from outside the EU. Additionally, where a MiFID firm is not transmitting an order to a receiving firm for that receiving firm to execute but is, instead, executing a trade directly with that other MiFID firm (for example, dealing on a request for quote basis with a market maker) the wording of CP2 implies that the exemption will not be available. In a similar vein, it is not clear from the wording of CP2, whether MiFID firms that use DMA systems provided by other MiFID firms to execute trades directly on an exchange would be regarded as transmitting orders to the broker (as opposed to executing trades) and, therefore, whether the exemption for transmitting firms would apply to DMA transactions.

In any event, even if MiFID firms can avoid all situations where the exemption for transmitting firms does not apply, such firms will still need to consider whether they ought to plan for the contingency that they are unable to provide the requisite details to the relevant receiving firm by the deadline specified in their transmission agreement, in which case, the transmitting firm will retain an obligation to make a transaction report.

Action for firms?

Q1 2015

  • Consider implications of ESMA’s FR and CP2 published December 2014 and responses to the CP2 published following the deadline on 2 March 2015.

Q2-Q4 2015

  • Review current practices and procedures within the business and perform impact analysis to determine changes required to business practices, procedures and IT systems. Assign budget/headcount for necessary IT enhancements.
  • Devise process/consider headcount requirements for putting in place written transmitter agreements with clients/service providers that are MiFID firms. Assign appropriate budget/headcount. Develop template transmitter agreement.


  • Prepare required internal and external documentation and/or amend existing documentation (compliance manual) in line with new requirements.
  • Negotiate and enter into written transmission agreements or arrangements with clients/service providers.
  • Upgrade order/position management IT systems to ensure that relevant data to populate reports can be extracted into transaction reports on time and information required to be provided to service providers by transmitting firms can be provided on time.
  • Carry out testing of upgraded IT systems
  • Ensure all adequate systems, controls and checks will be in place to meet reporting obligations and ensure staff are adequately trained and informed of their obligations.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.