At the start of 2018, there was an unofficial understanding among EU regulators that they were providing investment firms a six month ‘grace period’ for complying with MiFID II reporting requirements. Rather than monitor specifics of submitted data, regulators spent much of 2018 focused on identifying which firms haven’t reported under MiFIR.
During the second half of 2018, we then saw various regulators move towards analyzing the quality of data they were receiving. Specifically, regulators began to review for obvious format errors. Examples include reports with conflicting instrument data as well as incorrect formatting of buyer/seller details based on a firm reporting on a Matched Principal or Dealer basis.
With 2019 now upon us, at Cappitech, we are now seeing regulators asking for additional information from investment firms about other transaction related sections of MIFID II. Specifically, CySEC and the FCA have recently been conducting reviews around Best Execution; both for RTS 27/28 compliance and quality of execution questions.
Best Execution under MiFID II
Under MiFID II, Best Execution was revamped both objectively and subjectively. RTS 27 was put in place for trading venues to quarterly publicize pre and post trading details in a standardized format. The new regulation was unique in that it widened the scope of what is a trading venue from traditional organized exchanges to include market makers and brokers trading on principal with their clients. Also, the information required to be published is very granular compared to typical details disclosed by investment firms.
Less cumbersome of a report, but affecting many more companies is RTS 28. This report made it a requirement for asset managers and many brokers and banks to disclose the top 5 venues that client trades are executed with.
In addition to the standardized reports of RTS 27 and 28, MIFID II also brought stricter rules for monitoring client execution quality. According to ESMA’s Q&A on the subject, investment firms are required to publish their policies on achieving best execution as well as having in place a systematic process to monitor the policy is being adhered to.
One of the goals of transaction reporting under MIFIR, is that it provides EU regulators with insight into each touch point of a trade. Reviewing the date, supervisors can see when and where a trade was made, who initiated and placed the transaction and pricing details. For stocks and other products with a standardized ISIN, execution prices and quantities can be compared between reporting firms to find outlier trades.
Also helping to detect mis-priced trades is consolidated tapes of market data. For MiFID II, ESMA was tasked with finding consolidated tape providers (CTP) of various asset classes. The data would be made available as a reference point for regulators and investment firms to evaluate execution quality.
With MIFID II’s focus on execution quality, at Cappitech, we’ve begun to see more brokers and investment firms getting questions about it from regulators since Q4 2018. Execution questions have been focused on two areas; deviances to reference prices and irregularities to counterparty data.
For price deviances, a few regulators, most notably the FCA, has sent requests for additional information to random firms. Sell-side firms have been asked to explain why prices on MiFIR Transaction Reports of stocks and other liquid products are out of the market compared to consolidated market data.
Also, OTC executions have been reviewed by regulators. The main driver of this has been a large EMIR data quality review that is taking place across European NCAs, including the FCA, CySEC and CBOI. As part of their reviews of EMIR data, firms have been asked to explain differences between their trade reports and that of counterparties.
Are you complying with RTS 27 & 28?
Separate to the execution quality reviews, compliance with RTS 27 and 28 has gotten questioned. According to Cappitech’s MiFID II survey conducted in mid-2018, over 50% of firms required to create RTS 27 reports have yet to comply. Respondents answered that Effecting compliance was a lack of clarity on what was required to be reported as well as limitations to available data.
As the investment sector struggles with these reports, at the end of 2018 CySEC began a wide review of compliance for RTS 27 and 28. As part of their review, CySEC contacted investment firms that weren’t producing the correct reports or weren’t easily available to be found.
Best Execution in focus during 2019
The renewed focus on best execution from regulators isn’t surprising. Prior to MiFID II going into effect, the FX and LIBOR rate fix scandals of 2008 and 2013 triggered a global push among regulators to better evaluate execution quality.
While those scandals primarily focused on OTC transactions, transaction reporting data being collected from EMIR and MiFIR allows regulators to review both off and on exchange trades. Specifically, as transaction data gets standardized, it is easier to compare investment firm executions to each other as well as to consolidated reference pricing to spot problematic trades.
Have a question about your Best Execution and/or RTS 27-28 obligations? Contact us: