Earlier this month, Cappitech published some of what we’ve learned from the first month of MiFID II going into effect. One of the items covered was our decision to report client Transaction Reports to an ARM versus directly to an NCA. Today we delve deeper into our ARM vs NCA decision and some of the pros and cons of the two.
ARM vs NCA – The Basics
When it comes to complying with MiFID II’s Transaction Reporting requirements (found under the MiFIR portion of the new legislature more here), investment firms have two options of where to submit reports.
National Competent Authorities (NCAs) – These are country regulators like the FCA in the UK, BaFin in Germany and AMF in France. As per ESMA’s guidelines, each NCA is required to build a platform for consuming Transaction Reports and providing feedback messages for licensees under their jurisdiction.
Approved Reporting Mechanism (ARM) - These are third party firms that operate depositories for accepting Transaction Reports. Once submitted and accepted, the ARM passes the report to the NCA of which the investment firm is licensed under. The NCA then reviews the report and passes on feedback messages if it was rejected or approved.
***The result is that even when reporting to an ARM, the end report reaches the NCA and approval messages are available to the investment firm.***
If the report ends up at the NCA, why not just report to them directly. Is there a benefit of using an ARM? Below are some of the key items to consider when deciding.
ARM vs NCA Pros and Cons
- Costs – Many NCAs currently don’t charge investment firms to submit reports directly to them. Even those that do, there is a fixed yearly fee regardless of the amount of trades being submitted.
- Reconciliation – As the MiFID II report is sent directly to the NCA, it is easier to reconcile feedback messages to an investment firm’s raw files to ensure that all trades are reported.
- Single file format – NCAs only support a single file format of XML for reports submitted to their platform.
- Costs (specific to the FCA) – While the vast majority of NCAs don’t charge submission fees, the FCA does. Therefore, in the UK, working with an ARM can be cost effective regardless of the additional services an ARM provides that isn’t available at an NCA
- Support and testing – NCA reporting platforms have been found to be less robust than those of ARMs. Therefore, users have experienced outages with testing environments. In addition, feedback from investment firms has been that NCAs tend to provide less support to their connectivity and report structure questions than ARMs.
- Validation feedback - Transaction Reports sent to an ARM are validated for submission errors. This allows firms to fix reports before they reach the NCA; thus significantly reducing the rejected reports reaching the NCA. Many large investment firms believe this is the single most important benefit of an ARM as it reduces the likelihood that an NCA would flag them for low-quality reports.
- Multiple NCA connections – To satisfy client needs, most major ARMs have integrations with multiple NCAs. As such, investment firms with licenses in more than one country can use a single ARM connection to report to different NCAs.
- Support – An ARM’s business is based on being an alternative to reporting directly to an NCA. As such, offering support to answer connectivity and compliance questions is part of their core offerings.
- Security/Encryption – While not available at every ARM, some of them, including Cappitech’s partners, provide additional security for handling client and internal personal details that are part of the Transaction Report.
- Costs - Depending on the underlying NCA, ARM fees may be considerably more expensive. This is especially so for companies with high trade volumes.
- Regulatory feedback – When an investment firm submits a report to and ARM, that data is then shared to NCA. For this step, most ARMs limit to submission to the underlying NCA to two or three times a day, with the latest being in the afternoon. Therefore, submissions by an investment firm after the daily cutoff time may not be received by the NCA until the following day. This will trigger delays in getting report feedback from the NCA.
Why we chose to work with an ARM vs NCA
The rationale behind the decision:
Complementary to Cappitech: "If it ain't broken, don't fix it" - Prior to going live with MiFID II, Cappitech's reporting solution stands out by its technology. This includes the ability to handle multiple regulations such as EMIR, ASIC and MiFID, a great backend analytics dashboard (learn more) and ability to handle multiple client file formats. Therefore, a key part of our ARM vs NCA decision rested on what process would continue to work best with our existing platform to provide the best value to our customers. Having an existing relationship with Trax's ARM for MiFID I meant that we knew their integration played well with our technology. For MiFID II, this meant we could focus on providing our clients the same great experience and UI they have for other Transaction Reporting needs and adapt it for MiFID II.
Operational efficiency: At Cappitech, we support customers under multiple NCA jurisdictions. Therefore, reporting directly to an NCA meant having to have in place integrations with multiple NCA report submission environments. While the NCAs each support similar XML file formats, they have slightly different integration requirements (some of these changed when MiFID II went live). This includes the need of data security checks and file sizes they can consume.
An advantage with Trax’s ARM is that regardless of which NCA an investment firm is under, there is a unified integration and folder location for submitting files. Once submitting to Trax, they handle the NCA integrations. This allowed Cappitech to focus on the single integration with Trax instead of managing multiple connections for each of our clients. This is especially a key feature for our clients that manage entities in multiple EU countries and can send a single trade file that is split by Cappitech and Trax to the corresponding NCA. Looking ahead, with Brexit getting nearer, many of our UK clients are contemplating launching mainland EU entities which should increase the importance of supporting multiple NCA connections under one roof.
Security: A big change of MiFID II vs MiFID I was the inclusion of client and internal personal information such as names and passport details. This posed a new challenge for Cappitech and our clients as it meant solving how to minimize the external repositories where client personal info is kept.
One of the advantages of working with Trax is their ‘token’ system of handling personal details. With it, a personal detail file is uploaded directly to Trax and held as a reference file. The personal details are matched with an internal code, often an account number. Now, when Cappitech prepares a client’s Transaction Report, we only use the internal code. Upon the report submission to Trax, the ARM matches the personal details they have on record with the internal code.
This process does add an additional layer of data collation and submission that Cappitech clients are required to handle. However, the tradeoff is that personal information only needs to be uploaded once instead of on each day’s Transaction Report. This reduces potential data leaks and is also uses a secure connection trusted by major financial firms such as Goldman Sachs and Blackrock.
Cost effectiveness - With a wide range of clients such as retail brokers with millions of trades per month and asset managers with monthly trades in the single digits, we needed a commercial plan that could support our customer base. Having worked with Trax to submit client reports under MiFID I, we continued that partnership under MiFID II.
Support - Compared to MiFID I, MiFID II greatly expanded the scope of reportable products and data fields required. Working with an ARM allowed Cappitech to discuss with them best practices of how various trades should be reported. Also, the testing environment would allow us to validate submissions before they go live. For Cappitech, the additional support and validation Trax provides has been a great value add that we are able to pass onto our customers.
Dual sided: As a last note, Cappitech's partnership with Trax has been mutual for both parties. In addition to report client trades via their ARM, Trax has licensed Cappitech's reporting technology for supporting the onboarding of some of their clients.