Will history repeat itself with MiFID II Delegated Reporting?
Two years ago the capital markets industry was busy investigating the feasibility of delegated reporting under EMIR. For many, the final decision to offer the service was almost a foregone conclusion; clients were looking to and expecting banks to report on their behalf. Banks were not keen to build costly in-house delegated reporting services, with the huge legal and reputational risks involved; however, the threat of losing clients to competitors served to overrule all of these concerns.
Do banks think it is right that they are still running an EMIR delegated reporting service now? Despite the overarching benefits of client retention, the sentiment within the industry suggests the burden of delegated reporting is too great and alternative solutions are required. In order to offer this service, banks have incurred significant costs. Challenges with collecting clients’ reference data and the additional controls required to support the service have led to high build and maintenance costs. And not all the pain is financial. There have been significant challenges for operations and client relationship teams who have been inundated by client queries and compliance issues.
The big question is whether banks will repeat the EMIR delegated reporting experience with MiFID II?
If banks do not carefully assess the options and engage with their clients now, they could find themselves in a similar situation to the one they were in two years ago. In order to avoid making risky and potentially costly last minute decisions regarding MiFID II delegated reporting, the market players should invest time now in assessing the three key options available to them:
1. Full in-house delegated reporting service
As with EMIR, the larger banks may look to develop a full client reporting offering in-house, seeking to capture and store client specific counterparty data and report that direct to the Approved Reporting Mechanism (ARM) on behalf of the client. The key difference between EMIR and MiFID II is the sensitive nature of the information that clients would need to disclose under MiFID, which will dampen their appetite to sign up to the in-house service. Names, dates of birth, and passport details of the investment decision maker and short selling indicator are all required. As this information can be different on every trade, a complex system to pass this information between counterparties would need to be built. Assuming this information can be shared, it is highly unlikely that firms would want their counterparties seeing such sensitive information. The regulation does introduce the concept of transmission of orders, which would relieve the transmitting firm of their reporting obligation, but even in this model, sensitive data would need to be passed between firms.
2. Tri-party delegated reporting service
An alternative option would be to leverage functionality that the ARMs are offering to the market. Both Deutsche Borse and UnaVista have announced “Tri-party” solutions which rely on banks submitting the common data of a transaction report to the ARM, with clients then enriching it with their data to complete the report and fulfil their reporting obligation. While this relieves data privacy concerns, there are two key drawbacks: firstly, this solution may be no less burdensome for the client than submitting a complete transaction report to the ARM; secondly, the ARM offerings are only explained at a very high level and there is no certainty that they will emerge in full. If banks put their faith in a tri-party service and it does not deliver they may have to build the in-house service anyway, as many did with EMIR.
3. No delegated reporting service
Finally, banks could decide not to offer delegated reporting at all. This would remove the legal and reputational risks of reporting on behalf of clients and reduce the cost of MiFID II transaction reporting, enabling banks to focus on their own reporting obligation. Banks will, however, need to keep abreast of any industry developments and communicate openly with clients to ensure that they are not caught out by an impromptu demand for the service, as there was with EMIR.
So will history repeat itself?
Due to the pain they experienced with EMIR, the sensitive nature of the data MiFID II requires as well as stricter regulatory accountabilities, it is no surprise that some large investment firms have indicated that they do not want banks to report on their behalf. Many investment firms are not up to speed with MiFID II yet, so banks will need to educate these clients on the new reporting challenges.
It might be in the banks’ best interest to go to market now explaining their intention to not offer a delegated reporting service for MiFID II. That will allow them to measure the appetite of their clients and manage accordingly. If a tri-party service presents itself banks can take advantage of these offerings along with their clients. Either way, banks should look to avoid building in-house services and make sure that clients are aware of their intentions early on so that they can start making their own plans for MiFID II reporting.