With the latest information published by ESMA, the impact of a no-deal Brexit on the reporting and data publication under MiFIR is becoming clearer.
This article aims to provide an overview of topics related to reporting which require immediate attention by investment firms and other reporting entities in the remaining EU-27 countries ahead of a potential no-Brexit scenario after March 29th this year.
A domino-run of changes
While the L1 and L2 level MiFIR regulations will remain unchanged from the perspective of the regulatory texts, the MiFIR data reporting landscape in the EU-27 countries after a no-deal Brexit will change significantly in operational terms.
Taking on the appearance of a ‘regulatory domino run’, changes in the Financial Instruments Reference Data System (FIRDS) is where the first impacts will begin to materialise in the areas of data reporting, transparency and double volume cap calculations.
The removal of UK single-listed financial instruments from FIRDS
Starting from March 30th, the UK FCA will no longer have access to FIRDS. The most visible impact of this is that the current volume of instruments collected within the system will drop by approximately 30%, and FIRDS will no longer contain any information on the instruments that are currently available for trading only on UK trading venues (single-listed UK instruments).
The most direct consequence of the removal of the UK’s access to FIRDS will be that transactions concluded after March 30th where the financial instrument (or derived financial instrument) is a single-listed UK instrument will no longer be reported to the EU-27 Competent Authorities. The same logic holds for transactions in financial instruments where the underlying instrument is the UK index or a basket composed only of single-listed UK instruments.
In addition to the above-mentioned changes to FIRDS, a no-deal Brexit will have further impacts for firms in EU-27 countries who have delegated the reporting process to a UK-based Appointed Reporting Mechanism (ARM). For any firms in this case, it is the strict responsibility of the reporting entity itself to ensure that the previously selected UK-based ARM will keep its status and be allowed to continue the reporting process behalf of reporting entities located in EU-27 countries.
Reported data scope
The scope of the information reported on transactions in other financial instruments remaining in FIRDS after Brexit remains unchanged. Should there be any further changes to the ISO 20022 messages that define the scope of the reported data, such changes will be a natural evolution of the reporting system based on the experience collected thorough the year 2018, and not a direct result of Brexit.
As previously mentioned, we are expecting a significant drop in the volume of transactions reported after March 30th due to the exclusion of the UK from FIRDS. However, there could also be a further impact of some significance, namely the annual transparency calculations which include, amongst others, the most relevant market (MRM) in terms of liquidity for the use of reference price waivers.
Once the UK-related data is no longer included in these calculations, the current results of the MRM calculations will change. As informed by ESMA, this has not happen for the calculations published by 1st of March 2019 referring to data collected for the year 2018. These initial calculations will include UK-related data collected by ESMA. However, subsequent publication of the transparency calculations will include amendments to the MRM by ensuring that the MRM is within the EU-27.
Additionally, changes in FIRDS will include ensuring that any instrument for which the UK FCA is a Relevant Competent Authority (RCA) will be updated to another RCA, which shall be chosen by virtue of it being the most relevant market in terms of liquidity within the EU-27. This change, however, will have little if any impact on the market, although it will impact the Transaction Reporting Exchange Mechanism (TREM) system which is shared among the Competent Authorities (CAs), and not accessible to the public.
Double Volume Cap
Removing the UK single-listed financial instruments from FIRDS, as mentioned above, will also affect calculations under Double Volume Caps (DVC). Consequently, changes in the published information regarding the waiver obligation for market operators and investment firms operating a trading venue having to make certain information publicly available, are to be expected.
As informed by ESMA, removing all UK-related data from the DVC calculations in one go would lead to substantially different results published under DVC, from one publication period to the next; in light of this, ESMA has decided that the UK-related data shall be removed gradually between May 2019 and 2020, in order to avoid a brutal ‘cliff-edge’ effect in the published calculation results.
Minimum actions to be undertaken
Should you be a reporting entity submitting data to the CA, the following list enumerates certain topics worthy of special attention:
1. When validating transactions reported to the CA, an error code CON-411 and CON-471 may mean that you are submitting a transaction in an instrument which is no longer subject to reporting under MiFIR;
2. In case you delegated the reporting of your transaction data to an ARM, it is important to ensure that your chosen ARM is still permitted to submit data to the CA on your behalf;
3. In case you are using FIRDS only for data validation, it is important to be aware that changes to the RCAs will not have any impact on the validation results after March 29th;
4. Lastly, it is recommended to continue monitoring the DVC information for the coming 12 months, as the number of the instruments suspended from dark pool trading may increase continually.