MiFID II Preparation: Trade vs Transaction Reporting and ARMs vs APAs
With us nearing 2017, the January 2018 date for MiFID II implementation is closing in quickly. Appearing with the regulation will be new and updated versions of reporting requirements facing financial firms. Two of the reporting obligations being put in place are transaction and trade reporting.
While in some ways similar, each report features different features such as client information requirements and how quickly reports must be sent by. Also, where reports sent plays is different with ESMA having created two separate types of entities; Approved Reporting Mechanisms (ARM) and Approved Publication Arrangement (APA).
In order to improve transparency of execution prices and how prices are quoted and formed, Trade Reporting requirements were created within MiFID II. Obligated to report is any investment firm that executes transactions for their own accounts or on behalf of clients for products such as shares, ETFs, and derivatives traded both on a trading venue or off-exchange.
The reports include execution information such as volume, price and venue. A key differentiator compared to transaction reporting, is that trade reporting information needs to be sent in near real-time and is to be made public. As public information, the MiFID II aims to provide greater transparency for investors and traders to review the execution quality of financial firms.
Approved Publication Arrangement (APA) – Receiving the trade reports are APAs which are chosen by the financial firm submitting the report. Once collecting the trade report, the APA is responsible for making the data available to the public. Similar to the obligation of financial firms to submit trade reports in near real-time, APAs are also required to publicize data as real-time as possible.
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While trade reporting reviews how transactions are taking place within the overall market, transaction reporting focuses on the parties of the trade. Similar to EMIR reporting, MiFID II’s transaction reporting greatly increases the data fields required when compared to trade reporting.
Fields reported include counterparty, who initiated the trade and behalf of whom the trade is for. The report also contains transaction related details such as timestamps, venue, asset type, and position size that are found in trade reporting.
In contrast to trade reports, transaction reporting isn’t obligated to be submitted in near real-time. In replace is a T+1 requirement.
Approved Reporting Mechanisms (ARM) – Like trade reporting, ESMA has created specific entities for submitting transaction reports to. Authorized by ESMA, ARMs undertake to collect transaction reports from financial firms. Once submitted, ARMs notify firms if reports are structured correctly and send rejection messages for errors such as required fields missing information and duplicate ticket submissions.
As an authorized entity, ARMs are required to store, maintain, secure and make the data available to ESMA and EU financial regulators to analyze reports. For financial regulators, the data is expected to be used to review risk exposure of reporting firms as well as to analyze who their counterparties are. Information on who initiated the trade will also help regulators review for market abuse to detect when a trader is intentionally filling customer orders to their detriment. (More on ARMs)