Pickles: the ESMA consultation matters

Pickles: the ESMA consultation matters

The European Securities and Markets Association is consulting financial institutions on which messaging protocol and data formats would be best for trade reporting under MiFIR. As the timeframe for reporting comes ever closer to real-time, the consequences could be serious.

Under MiFID II and EMIR, a host of trade reporting obligations are being phased in, obliging capital markets participants to report derivatives transactions to a trade repository and to use central clearing wherever sufficient liquidity is available. The ESMA questionnaire deals specifically with the technical formats for MiFIR, the regulation arising from MiFID II. The regulator is looking for one (or more) particular solution(s) that could be considered as the future MiFIR reporting format for transaction reporting and instruments reference data.

A shortlist of technical formats for MiFIR reporting and financial instruments reference data has already been drawn up:

  • Financial Products Markup Language primarily aims at providing an open source XML standard for electronic dealing and processing of OTC derivatives. It was developed to exchange data on OTC transactions.
  • Financial Information eXchange is an industry standard for electronic trading, particularly for equity trading. Although FIX originally started supporting mainly pre-trade messaging for equity products, it now includes many other asset classes and post-trade messaging in its specifications.
  • ISO 20022 is the ISO (International Organization for Standardization) Standard for Financial Services Messaging. It describes a metadata repository containing descriptions of messages and business processes, and a maintenance process for the Repository Content.
  • Transaction Reporting Exchange Mechanism / Reference Data System is a proprietary format developed by NCAs and ESMA for a specific IT System used to facilitate the exchange of transaction reports amongst regulators.

Beyond the choices made in the consultation, there are also other questions to be resolved about how the original G20 objectives agreed in Pittsburgh in 2009 can be achieved. Chief among these was transparency, which was particularly emphasised as the solution to opaque OTC derivatives markets that were perceived as a contributor to the financial crisis. But according to Chris Pickles, independent fintech consultant and member of the Bloomberg open symbology team, there are serious challenges before the industry can reach a situation in which each participant knows what it is trading, with whom, in real time.

“The speed of trade reporting is increasing, and we are moving from a world of end-of-day reporting to one where reporting is expected every 15 minutes – with the expectation that the time limit will eventually be cut down to five minutes or less,” he said. “The choices made now will define the ability of the industry to automate trade reporting.”

Pickles has a horse in the race already, since he runs a campaign to get the Financial Instrument Global Identifier recognised universally as an industry standard. FIGI was developed originally by Bloomberg, and consists of a method of securities identification. The idea is to ensure that all trading firms know what they are trading. According to Pickles, FIGI would be a useful complement to the LEI, which was introduced in the years after 2008 as a means of ensuring all financial institutions also know who they are trading with. “In 2008, the answer to both questions was ‘no’,” he said.

Pickles is concerned about some of the details in the consultation – including the choices that are available in the questionnaire. In particular, he notes that reporting by spreadsheet is one of the available options. “Some people may tick that box,” he said. “My knees wobbled when I saw that! That’s going to lead companies to be scrambling to comply with the regulation, particularly if they thought that paper was a viable option, then realised that they can’t realistically submit an updated spreadsheet containing all their activity every five minutes. It’s not the way.”

More broadly, the industry still faces some serious questions about how to identify counterparties and securities themselves. While ESMA has indicated its preference that International Securities Identification Numbers should be used, in practice that would be difficult to achieve. Some asset classes, such as derivatives, hardly use ISINs, while others such as fixed income have limited coverage which does not extend beyond vanilla securities. Pickles reports that 28 million instruments have an ISIN out of a total pool of 225 million – a number which increases by five million every month. To make matters more complicated, in the UK the Financial Conduct Authority has mandated that derivative transactions must be reporting using the Alternative Instrument Identifier standard.

“The lack of use of standards by the regulators themselves is a problem,” he said. “If the regulator says, ‘send us the data and we’ll make sense of it, only when that data comes in do they realise what a task that is. Most regulators across the EU don’t have the resources to monitor the data on the fly through the day. They have to dig through data after the event, rather than acting while it is happening. That’s why it’s important that before ESMA decides the technical standards, there is an opportunity here to sit down with the regulator and make a difference. This is our rallying call to the industry to take this positively and get involved.”