MiFID II and buy side firms
MiFID II’s objective is to support market integrity. It is the EU legislation that regulates firms who provide services to clients linked to ‘financial instruments’ (shares, bonds, units in collective investment schemes and derivatives), and the venues where those instruments are traded. It’s primary function is to detect suspected market abuse.
To comply with MiFiD II reporting rules, buy side firms will need access an extensive range of reference data on the instruments they trade. Firms are required to understand what needs to be reported and be able to generate the data required for each existing and new data field.
From January 2018, MiFID II broadens the scope of transaction reporting to capture:
- Financial instruments admitted to trading or traded on an EU trading venue or for which a request for admission has been made. “Trading venues” now include Multilateral Trading Facilities (“MTF”), the new category of Organised Trading Facilities (“OTF”), the likely home for OTC derivatives subject to the trading obligation, as well as regulated markets.
- Financial instruments where the underlying instrument is traded on a trading venue. This includes all OTC transactions for those instruments.
- Financial instruments where the underlying is an index or a basket composed of instruments traded on a trading venue. This means that just one component of either an index or basket will bring that financial instrument under the reporting obligation.
Under MiFID II the data fields for each individual transaction report has risen from 23 fields under MiFID I to no fewer than 81 fields under MiFID II, including:
- New flags detailing specific trade types in certain instruments, including: Waiver indicator, short sale indicator and Commodity derivative indicator.
Specific details of every client (fund, account or natural person) will have to be identified in a standardised format.
- For funds and managed accounts this must be a valid Legal Entity Identifier (“LEI”) code.
And, bearing in mind the additional levels of identification of natural persons (including dates of birth and residence post codes for the client field, and ID/Passport numbers for traders making investment decisions and executing).