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Time is ticking


28 Oct 2020

Point Nine’s Alan Dzhanaev and Afroditi Anthi discuss the biggest challenges for third country firms under MiFID II and how ready they will be for 31 December transition date

Image: olgaarkhipenko/adobe.stock.com
How will ESMA’s draft technical standards for third country firms under MiFID II have an impact on the industry?

The proposed amendments to regulation (EU) No 600/2014 introduced by regulation (EU) 2019/2033 of the European Parliament and of the council require third-country firms providing investment services or performing investment activities in accordance with Article 46 of regulation (EU) No 600/2014 to report annually to the European Securities and Markets Authority (ESMA). This is the new step forward in order to harmonise and standardise practices not only in the EU but around the world, bringing more confidence to the market practice.

The requirements on third countries are based on the annual reporting flow, but it does not mean that throughout the year, the regulator will not cooperate with an investigation or an on-site

inspection carried out by ESMA in accordance with Article 47(2) of Markets in Financial Instruments Regulation (MiFIR).

The regulator will also have much better availability to the required information from all of the parties involved in the trade.

Nevertheless, many of the third country firms will have an issue with the implementation of the proposed annual report due to the lack of experienced personnel within the firms.

For these firms, it is recommended that they use third party vendors who are providing regulatory reporting services. Although this may seem the easier route to take, it will increase the operational expenses in compliance and IT departments which means that firms would need to decide which implementation technique they will use.

How will Brexit impact MiFID II transaction reporting for third country firms?

The Financial Conduct Authority (FCA) states that “firms and approved reporting mechanisms (ARM) should comply with the changes to their regulatory obligations by the end of the transition period on 31 December 2020”. The technical challenges moving into a new reporting regime should not be a big issue, but it will take some operation expenses to implement. In some cases due to the changing status of EU countries in UK and UK in EU countries there will be a dual reporting obligation. For example, if an EU firm executes translation via UK branch they would need to report both a UK ARM as well as an EU ARM.

What will be the biggest challenges around MiFID II and Brexit?

The upcoming challenges are mainly correlating with switching the reporting hubs in the ARMs facilities and to adjust internal systems to work in a new processing flow.

Additionally, firms would need to have two separate reconciliations on products in scope for reporting purposes. The FCA Financial Instruments Reference Data System (FIRDS) tried to make a reportable list of instruments to be as similar to ESMA’s system as possible, however, some difference remains and will require some extra IT resources for the implementation. Recently we witnessed the closure of regulatory reporting businesses in CME Group/NEX Abide and Deutsche Boerse, so some reporting firms will be searching and switching for the new regulatory service providers. The compliance team would need to make a strategic decision for the regulatory obligation to be fulfilled in accordance with the best practices available on the market and will look for the indirect reporting process via third party services.

Are there any opportunities for UK firms or the EU that could come from this?

There will not be many opportunities from the proposed changes for EU firms as they would need to make dual reporting only in some circumstances. Although, UK firms are going to have a switching task to be ready by 31 December 2020. The FCA Market Watch peridiotically reminds and highlights reporting firms where the weakest parts are of the reporting quality of the report and highlight where it is incorrect.

Do you think UK-based firms will be ready for the transition on 31 December?

It is hard to say for sure what readiness we are going to see on 31 December, but our team presumes that we won’t see a huge spike of firms failing to make a transition and probably the main part will succeed. However, a reporting firm must be aware that a submitted and accepted report by an ARM or national competent authority does not mean that it is accurate and should take reasonable steps to fulfil their regulatory obligations.
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