Trade reporting requirements have always been daunting for the derivatives industry. Now, as firms begin to ramp up their existing reporting infrastructure to comply with MiFID II as well as new G20 mandates like ESMA L2, MAS3 L2, and SEC regulations, they need an even more robust control framework to avoid fines related to heightened regulatory scrutiny of more complex data. This infrastructure also needs to ensure that firms avoid under- or over-reporting trades, which can also incur sizeable penalties.
In Europe, MiFID II requires swaps dealers to show what they did, how they made the decision, what rules were applied, and what succeeded and failed throughout the trade lifecycle. The new regulations aim to level the playing field by imposing the same pre- and post-trade transparency requirements across regulated markets, multilateral trading facilities (MTFs), systematic internalisers (SIs), and organised trading facilities (OTFs). These risk controls are particularly stringent on firms that perform algorithmic or high frequency trading.
The quality and availability of market data is the crux of MiFID’s goal of promoting transparency, competition, and investor protection. Firms must consider format, cost, and capacity for consolidation to ensure that data is available and meaningful to clients. Furthermore, not only does MiFID II require all trade parties to report what was traded, but also who participated in the trade. In addition to being highly sensitive, these details will stretch the capabilities of existing trade reporting platforms to validate the accuracy of newly required data fields.
Pre- and post-trade transparency requirements are extremely tough for firms that trade derivatives eligible for central clearing and those submitted to trade repositories. The expansion of rules under MiFID II to include OTC derivatives, requires more pre- and post-trade information to be available to clients, including enhanced transparency around fees and commissions paid to investment firms.
With swaps dealers now facing the same requirements as cash equity dealers, they must act quickly to elevate existing control systems in order to remain competitive and thrive in a transforming marketplace. With so much data to account for, every firm must ensure it is doing exactly what is needed to be compliant while operating efficiently and profitably. It’s a tall order.
By Lloyd Altman, Global Head, Validate.Trade