The FX industry faces a monumental system build in the next 12 months as financial institutions prepare themselves for MiFID II (MiFIR).
In particular, the Approved Publication Arrangement (APA) regime will bring new levels of transparency to the market and poses a number of operational challenges to market participants. The rules demand pre-trade transparency of some trades and post-trade transparency of all trades, and come into force in January 2017.
Under the new rules, banks acting as Systematic Internalisers (SIs) and trading venues will be required to report pre-trade price and volume data of all orders and RFQs if they are below a certain size and the financial instrument is liquid. SIs will also be required to make quotes available to their clients on request for illiquid instruments below a certain size, including price and volume.
SIs can choose how to make prices available to the market; options include their own infrastructure, their website or an APA. Much confusion reigns on what precisely needs to be made available to the market and when, given that most banks provide different prices to different clients depending on their credit relationship, amongst other factors.
Post-trade, all trade reports need to be sent to an APA or reported by the trading venue on a real-time basis. This information needs to be published to the market no later than 15 minutes after execution unless a deferral applies. Deferrals can range from 48 hours up to four weeks should a regulator deem it necessary.
A specific hierarchy applies when deciding who has the reporting obligation post-trade. Trade on a trading venue and the trading venue will report. Trade with an SI and the SI will be required to report. Otherwise, the seller will be required to report, meaning that the obligation can fall more widely than just the trading venues or the sell side.
Time is tight to get ready for these changes. While pre- and post-trade reporting is well known in equities, FICC markets have to adapt. Solutions for equities cannot be quickly or easily recalibrated to meet the requirements of FICC markets. Every asset class has its own nuances, with different information required and gathered from different places.
The infrastructure through which that data flows has been configured for a specific purpose. Reconfiguring it with new fields to allow new data to flow through it is not a simple task.
MiFID will apply from January 3, 2017. The final rules for pre- and post-trade transparency, which include the identification of liquid and illiquid instruments, as well as quantitative thresholds to demarcate ‘small’ trades, will not be available to the industry until the end of September when the European Securities and Markets Authority passes them to the European Commission for approval.
The industry cannot assume the implementation date will slip back. It will be legally challenging for regulators to formally change the deadline. Ultimately, they may show a degree of forbearance after January 2017, but if that is to happen (and no regulator has signalled that they will), they will only grant forbearance to institutions that can demonstrate they understand and have taken steps towards complying with the new rules.
That means the industry remains in a limbo on what the final requirements will be, and the implementation window continues to shrink.
Through all of this, uncertainty will reign. If you’d like to receive Thomson Reuters regulatory webinar and email updates, please let us know: firstname.lastname@example.org.
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