During a recent webinar, ICE Data Services and the Association of National Numbering Agencies’ (ANNA) Derivatives Service Bureau (DSB) joined forces to explore key industry concerns surrounding MiFID II. Here, we summarise those issues and answer firms’ most pressing questions.

Despite the rapidly approaching implementation date for the Markets in Financial Instruments Directive II (MiFID II), only 10.4% of firms see meeting the 3rd January 2018 deadline as their most significant challenge. The predominant issue firms currently face, according to the webinar attendees, is the sheer level of data required (40.3%) under MiFID II.

Given the complexity involved, firms are also struggling with the volume of additional regulatory guidance required (29.9%) to become compliant with MiFID II. In addition, nearly one-fifth (19.4%) are finding it difficult to accurately define the ‘trading obligation’ under MiFIR, the regulation which accompanies MiFID II.

Against this backdrop, it is unsurprising – even at this late stage – that firms still have a number of concerns surrounding certain MiFID II requirements and how to implement them.

Specific Concerns

ISINs for OTC Derivatives

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ISINs for OTC Derivatives

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Finding a detailed, universal product identifier for OTC derivatives has been a provocative issue since MiFID II was announced. It took much deliberation to find a solution, but in September 20151 EU regulators settled on requiring ISINs for OTC derivatives as part of MiFID II – and the mandate for this fell to the ANNA, or more specifically, the DSB.

What is the role of the DSB?

In a nutshell, the DSB is the technology numbering platform within the ANNA organisation that provides ISIN services for OTC derivatives, as well as the associated reference data. The DSB has been specifically designed to meet the particular requirements of the derivatives markets, including near-real time allocation of ISINs upon application by a user. Its underlying technology platform handles multiple taxonomies of definitions and descriptive data for OTC derivatives.

It is important to note that, while initially set up under a mandate from EU regulators, the DSB is designed to operate globally. The DSB has been in user acceptance testing (UAT) since April 2017 and will go live at the beginning of October 2017.

How is an OTC derivatives ISIN formatted?

An OTC derivatives ISIN is a 12-character code beginning with the letters ‘EZ’. The DSB is currently issuing OTC derivatives’ ISINs for five asset classes - rates, credit, FX, equities and commodities - and already has 72 product definition templates available in UAT.

Who can connect to the DSB?

There are no restrictions on who can request or search for an OTC derivatives ISIN or data associated with the ISIN. There are also a variety of ways in which users can connect to the DSB. For example, users can interact directly with the DSB via a GUI, or via third party firms, such as data vendors, who are connected to the DSB. The DSB also offers programmatic access via both REST and FIX APIs - and can provide data on an end-of-day and intraday basis, dependent on user needs.

1http://www.anna-web.org/home/derivatives-service-bureau/

ToTV Versus uToTV

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ToTV Versus uToTV

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The second issue addressed during the webinar was the definition of ‘Traded on a Trading Venue’ (ToTV) and ‘Underlying Traded on a Trading Venue (UToTV)’ under MiFID II. Although the concept of ToTV is usually straightforward for instruments that are centrally issued and fully standardised, this is not the case for OTC derivatives.

In fact, according to the live polling results, 74.8% of firms say they are not comfortable with their understanding of each term. Yet ToTV and UToTV are vital concepts in determining MIFID II reporting requirements for OTC derivatives, so it is critical that firms have clarity around them.

How is ToTV defined?

As the name suggests, ToTV covers any instrument which is traded on a trading venue – but it also includes any instrument quoted on a trading venue. So, even though an instrument may not have traded on a trading venue, if it has been quoted on a trading venue, it falls under the scope of ToTV. If an instrument is available on a venue but has not been quoted or traded, this will not typically be classed as ToTV, except where an RFQ process has occurred.

Interestingly, ESMA issued an opinion in late May 2017, stating its belief that only OTC derivatives sharing the same reference data details (covered under RTS 23) as the derivatives traded on a trading venue should be considered as ToTV. On that point, any off-venue trades of instruments which share the same reference data characteristics as a ToTV instrument are eligible for reporting requirements. Therefore, even when trading off-venue it is critical to determine whether an instrument is ToTV. 

How does ToTV differ from the obligation to trade on a venue?

The determination of instruments which are subject to the MiFIR trading obligation is separate to ToTV. The trading obligation applies to instruments that are subject to the clearing obligation under the European Market Infrastructure Regulation (EMIR) and which also satisfy certain venue availability and liquidity tests. Although instruments with a MiFIR trading obligation will be ToTV, there will be other instruments which do not have the trading obligation and yet are also ToTV.

What precisely is UToTV and what is its significance?

If an OTC derivative itself is not ToTV, but has one or more constituents whose underlying(s) are ToTV, then the instrument is defined as UToTV. For example, with a single-name CDS, if the underlying bond is ToTV, then the CDS will be defined as UToTV. Similarly, with structured products, such as index swaptions where an index rather than a cash instrument is the underlying, if one or more of the constituents of the reference index is determined to be ToTV, then the instrument itself will be flagged as UToTV. 

Instruments which are defined as UToTV are subject to certain reporting requirements under MIFID II, notably in relation to RTS 22 and 23 (see section 3 below for more detail).

How does ToTV relate to Systematic Internalisers?

When the Systematic Internaliser (SI) regime becomes effective in September 2018, this is expected to result in significant updates to what is determined as ToTV - and to the liquidity thresholds which impact trading and transparency reporting requirements. It is anticipated that ESMA will require a period of time to review the additional data that is reported before making informed decisions on instrument liquidity used in its ToTV and SI threshold determinations. There will then be quarterly reviews of these classifications.

It remains to be seen how many firms will voluntarily elect to be SIs before the regime becomes effective. Some larger organisations in the derivatives space may volunteer to become an SI for commercial reasons, or to pre-empt what they see as an inevitability. For many, however, greater clarity is required from the regulators as there are currently differing interpretations of applicable instruments, whether at the asset class level, product or sub-product level. If the requirement is at the asset class level, then SIs will also need to ensure that ISINs can be requested for non-standard or exotic instruments. 

Reporting Requirements & Workflows

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Reporting Requirements & Workflows

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Understanding the various reporting obligations and workflows relating to the MiFID II regulatory technical standards (RTS), and how ToTV and UToTV feed into them, was the third challenge raised during the webinar. Discussion concentrated on:

  • RTS 2: Transparency requirements for trading venues and investment firms
  • RTS 22: Transaction Reporting (T+1)
  • RTS 23: Daily Reporting

How does ToTV feed into RTS 2?

Any instrument which is ToTV is eligible for both the pre-trade and post-trade transparency reporting requirements set out in RTS 2. The industry is struggling most with the pre-trade requirement, which is proving extremely challenging to implement.
An important aspect of this pre-trade work involves determining who is required to report the trade, where transparency reporting is required. If the instrument is traded on a venue, the venue will need to report the trade. If the instrument is traded with an SI, they are responsible for reporting the trade. For bilateral trades where no SI is involved, that obligation shifts to the seller. Therefore, it is important to determine who the seller is. ESMA have provided guidance on this - for example in the case of CDS it is the protection seller, while for interest rate swaps it is the receiver. 

Then there is the separate question of whether an instrument is deemed sufficiently liquid as defined by ESMA. If so, there is a pre-trade obligation under RTS 2, whereas non-liquid products have no such obligation.

Elsewhere, the size of the trade can determine whether post-trade reporting is required straight away or can be deferred to a later time - and ToTV plays a role in that. Where applicable, the waiver and deferral information for an ISIN will be available from the DSB or via a third-party who carries this data.

Where does ToTV figure under RTS 22?

RTS 22 covers transaction reporting which can be carried out directly to a National Competent Authority, a local regulator or via a central Approved Reporting Mechanism (ARM). It is a T+1 requirement, will affect all parties in a trade, and the required transaction details are much more extensive than what is typically communicated today. For example, firms will now need to provide the ISIN, as well as the ToTV or UToTV flag, and details of the trade decision-maker, trading branch, national ID or passport ID of those parties, to complete their post-trade obligations.

How does RTS 23 relate to ToTV?

RTS 23 drives the reference data, and in turn, what is defined as ToTV. It involves a 48-data point report which EEA venues (including SIs) will be required to provide daily detailing eligible instruments. There are still a number questions around how many data points are applicable per instrument type, however.

In particular, there is confusion around the inclusion of strike price for options across all five asset classes and fixed rate for forward rate agreements (FRAs) and interest rate swaps. There is an expectation that ESMA will remove them as required attributes of reference data and they are not currently included by the DSB in the UAT, but would be added if required.

Finding Solutions

The challenges discussed during this webinar highlight why it is vital for firms to be able to access the right data, at the right time in the trade cycle, to make the right decisions and ensure timely and accurate MiFID II reporting. Without this data, firms run the risk of under-reporting or not being able to fully report due to lacking information. Over-reporting is an equally significant risk.

How can ICE help?

With established multi-asset solutions for MIFID II, ICE Data Services has a number of clients that are already consuming data for derivatives including pricing, best execution and reference data. Our clients are often looking for a one-stop shop where they provide us with a trade and we can determine their obligations, including pre-and post-trade reporting, transaction reporting and the data that needs to be included in the report.

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