300 Pages of Confusion in the Name of Transparency

The problem with the trade and transaction reporting changes under Mifid II is not only the length of the documentation—over 300 pages—but also the content itself. Everyone I spoke to for this month’s feature described it as one of the most confusing texts they had ever encountered. One member of the buy-side community spoke to me for almost an hour and used the words “confusion,” “complicated” and “obscure” more than 30 times. 

Out of this enormous piece of regulation, there are a couple of key points to focus on in order to appreciate how the European regulatory bodies plan to bring about their anticipated goal: the creation of a transparent trading environment across all European markets. 

The European Commission and the European Securities and Markets Authority (ESMA) have pointed to the establishment of two mechanisms: Approved Reporting Mechanisms (ARMs) and Approved Publication Arrangements (APAs). These entities will be responsible for the success—or failure—of regulators’ aims to create a transparent market. APAs will make quotes available and publish trades in real time across all asset classes, while ARMs will aggregate transactions on a post-trade basis, including significant additional information regarding accountable parties to those transactions.

Volker Lainer, global head of regulatory solutions and data connections at data management technology provider GoldenSource, says these mechanisms will give regulators what they need to monitor the way trading takes place in the European markets. “It is a major widening of the breadth and depth of transparency and it gives significant insights into liquidity,” Lainer says. 

Large Data Flow

How effective will a trading environment be where data volumes reach unprecedented levels?

The industry is set to face a significant increase in dataset sizes and volumes, given that firms need to produce detailed reports on responsibilities and who did what. Via the ARMs, firms and individuals need to be identified using both legal entity identifiers and country-assigned identifiers. Anne Plested, head of Fidessa’s regulation change program, explains that the reporting of over-the-counter (OTC) trades is an indication that regulators will seek to monitor every aspect of the trading workflow. “The introduction of a number of new post-trade data flags will standardize the publication of trade information,” she says. “This applies across a wider universe with the scope of the post-trade transparency rules extended to cover equity-like instruments such as exchange-traded funds (ETFs) and non-equity instruments such as bonds, structured products, and derivatives.”

Rob Boardman, CEO of equities broker ITG, says the massive amount of required data will force brokers to demand more information from their clients, an unpopular issue on the buy side, especially smaller firms. “I know that big firms are considering an in-house solution for this, but there are some firms that don’t want to do that on their own and they’ll need some help,” he says. “There is the issue of time and people working on investigating every transaction or trade, and a small firm doesn’t have enough human and capital resources to do that.”

Even if we consider APAs and ARMs as the key to unlocking the complexity of the new regulatory regime for trade and transaction reporting, a number of critical questions remain: How effective will a trading environment be where data volumes reach unprecedented levels? Who ensures that the providers of ARMs and APAs will work on equal terms, and who can guarantee that the differences in the quality of the service won’t affect the performance of each portfolio manager? How well can a market function if all trading activity is under rigorous scrutiny and constant monitoring? And, who can guarantee that these changes won’t introduce unfavorable conditions, especially for OTC trading, forcing investors to abandon the European markets all together? These are the questions regulators need to address well before Mifid II takes effect in January 2018.