Mifid II Reconciliation: Key requirements and data considerations

Mifid II Reconciliation: Key requirements and data considerations

Mifid II Reconciliation: Key requirements and data considerations

By Manu Garg, senior associate in trading and risk management at Sapient Global Markets:

While the financial industry has intently focused on reporting requirements under Markets in Financial Instruments Directive (Mifid) II ahead of the January 3 deadline, the reconciliation requirements of reported data haven’t received nearly enough attention.

For investment firms, it is inevitable they will need to upgrade their existing technology to cater to Mifid II and remain ahead of any further evolutionary changes.

Ultimately, the end-goal for investment firms is to create an automated reconciliation process in which all data is sourced, cleansed, transformed and reconciled without user intervention or security concerns. Reducing touch points for data transfer across the entire value chain and applying consistent standards between market participants will alleviate time spent on manual processing and data administration.

Timely and accurate reconciliation depends on identifying and resolving the underlying issues related to data and technology for the reporting process. Regulatory compliance can’t be maintained unless firms have seamless connectivity to and from all required sources. Once connectivity is established, it is important for the reconciliation system to recognise data from various sources and process it for further pairing and matching.

To ensure successful reconciliation, firms must understand different data sources and types of data that are reported and intended to be reconciled:

Data from trade booking system : The data from trade fills generated by various trading systems, which belong to different asset classes in various formats and structures.

Enriched data from reporting system : All Information necessary for regulatory reporting is not available in trade booking systems. Data needs to be enriched and transformed to be readable by trade repositories (TRs).

Reference data product data and legal entity identifiers (LEIs) : International Securities Identification Number (ISIN), Classification of Financial Instruments (CFI) and LEIs are generally imported from external sources.

TR and ARM/APA data : Various reports published by TRs, APAs and CPTs, such as EOD open position, activity and submission reports and warning reports, have varying structures and formats depending on the traded asset class. This data must be transformed and normalised before it’s reconciled.

Reports from Regulator : Regulators are required to publish data reported to them via ARM/APAs. In turn, this data must be reconciled against data reported by financial institutions.

 

Regulatory Requirements for Reconciliation under Mifid II

From an investment firm’s perspective, the statutory reconciliation must be completed under RTS 22 and RTS 6 for trading records versus trade data from NCAs. Below I discuss two key reconciliations that need to be satisfied by investment firms.

 

  • RECON # 1: Investment Firm Trading Records vs Data from NCA(s)
    Mifid II - Article 15, Chapter 7, RTS 22

Regulators have asked firms to frequently reconcile their front-office trading records with trade data provided by NCAs. The intention of this reconciliation is the timely identification of any inaccurate and incomplete transaction reporting. Reconciliation should include confirming the timeliness of the report, ensuring individual data fields are complete and accurate and checking compliance against the standards and formats specified within the RTS document.

If the NCAs fail to provide trade data, then the investment firms are required to reconcile the following:

  • Front-office trading records versus transaction reports as submitted to ARMs, APAs and CTPs.
  • Front-office trading records versus transaction reports that ARMs or trading venues have submitted to NCAs.

Trade transactions from trade booking systems are subject to data cleansing, data transformations and trade enrichment, as well as complex reporting rules before submission. As a result, it becomes impossible to directly reconcile front-office trading records versus transaction reports as received from the regulators or transaction reports as reported by ARMs, APAs and CTPs to the NCAs.

To perform these reconciliations, the process needs to be broken down into such different use cases as:

  • Reconciliation between data from trade booking system versus unenriched data as received by the reporting system.
  • Trade data as reported by the reporting system versus transaction reports by NCAs and ARMs on behalf of the investment firm.

A successful reconciliation without any breaks on both of the above examples would ensure the investment firm’s timeliness of the transaction reporting, the accuracy and completeness of the individual data fields and compliance with the standards and formats specified by the regulator.

  • RECON #2: Investments Firm’s Trading Logs vs Executed and Outstanding Orders
    Mifid II - Article 18, Chapter 2, RTS 6 – Post-trade Controls

Esma has directed investment firms to implement post-trade controls to monitor market and credit risk. To do so, investment firms are required to have the capability to calculate their own outstanding exposure and that of their traders and clients in real time. Through post-trade reconciliation, investment firms are expected to reconcile their own electronic trading logs versus the records of executed and outstanding orders from trading venues, clearing members or central counterparties (CCPs).

A successful reconciliation without any breaks in the above data would ensure there isn’t any unaccounted risk exposure against the counterparty, thus reducing market and credit risk. As a result of this reconciliation, investment firms will also obtain a complete understanding of their outstanding orders and risk exposures as provided by the trading venue to which they send orders.

In addition, under Mifid II (Article 13, Chapter 2, RTS 6 - Prevention and identification of potential market abuse or breaches for position limits), investment firms must implement pre-trade controls to restrict potential market abuse or breaches for position limits as per the rules of trading venues. That means generating alerts on at least the following day. Pre-trade controls need to be conducted before an order is submitted to a trading venue.

Firms must reconcile their own electronic trading logs versus the records provided by trading venues. Discrepancies in reconciliation such as extra outstanding orders at a trading venue would identify signs of disorderly trading or a breach of their pre-trade limits.

Regulatory guidelines instruct investment firms to reconcile in real-time when market participants provide the information for all individual data fields with the standards and formats specified in RTS.

 

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