With MiFID II soon to be put into practice, it’s more important than ever for Financial Institutions to understand what the MiFID is, and what is required of them to follow their regulations. One of the biggest areas for confusion is trade and transaction reporting. Both fairly similar, the confusion is understandable but it is simply to understand the difference. Making a FinTech investment can aid you in gaining the correct technology to make this easier, but we’ve looked deeper into these two report types, and what the differences are.
What is MiFID?
The Markets in Financial Instruments Directive (MiFID) is an EU legislation that provides regulation to firms and financial institutions who provide services to any clients linked to ‘financial instruments’ such as shares, bonds, units in collective investment schemes, and derivatives, as well the venues in which these are traded. MiFID was first applied in the UK in November 2007, and is currently undergoing changes to improve the function of financial markets since the financial crisis and to strengthen investor protection. These changes and revisions will be known as MiFID II, which will not only include the revised MiFID, but also the new Markets in Financial Instruments Regulation (MiFIR).
MiFID has two different forms of reporting, but these can often be confused by their users. Trade and Transaction reporting are these two types of reporting, but despite their similar names, they are in fact very different.
Trade Reporting
Trade reporting is a near real-time communication of any trade data. This broadcast will be used for price formation, and the operation of any best execution obligations. Any investment firm that is executing transactions for their own accounts or on behalf of clients for shares, ETF’s, derivatives and more, are obligated to make this kind of report.
This report will include any information about the execution of the transactions, including the volume, price and the venue. The key difference between trade and transaction reporting is, quite simply, that trade reporting must be done in near real-time, and the information must be made accessible to the public. APAs (Approved Publication Arrangements) are usually in charge of collecting this trade report and making it visible to the public, and have an obligation to do this in as near to real time as possible.
Transaction Reporting
Transaction reporting is far more focused on the parties involved in the trade. The MiFID II’s transaction reporting will greatly increase the data fields required compared to trade reporting, such as including counterparty data, who initiated the trade and who the trade is for. Details such as timestamps, venue, and asset type and position size will also be included, making it fairly similar to Trade reporting. This kind of report isn’t required to be submitted in real time, which helps form the major difference in Trade and Transaction reports.
An ARM (Approved Reporting Mechanism) is a specific entity used for submitting transaction reports. ESMA (European Securities and Markets Authority) has authorised the ARMs to collect the transaction reports from financial firms. After the submission of the reports, the ARM will notify the firm if the report is correctly structured, and issue any rejection messages if they’re required. They then store the information, maintain it and secure and make the data available to the ESMA, and the EU financial regulators to allow for report analysis. This information is usually used for reviewing risk exposure of the reporting firm, and to check to make sure that there is no foul play.