The EU launched MiFID II three years ago, but penalties for non-compliance continue to rise.
The number of sanctions issued by national competent authorities (NCAs) in 2020 quadrupled to 613 totalling €8.4m, up from 371 sanctions totalling €1.8m in 2019.
Firms incur penalties simply because their reports contain errors. According to a 2021 ACA report, 97% of regulated firms submitted reports containing mistakes, with 87% of those firms unaware they had made errors.
While the industry has focused heavily on MiFID II post-trade reporting requirements, one crucial facet is being routinely ignored – reconciliations.
To avoid future fines, it is imperative that investment firms understand the requirements of MiFID II, including how to successfully perform and report on mandatory three-way reconciliations.
What is MiFID II?
MiFID II is a legislative framework designed to increase transparency and standardise regulation across EU financial markets.
The EU first created MiFID following a G20 meeting in 2009. The approach to dealing with countries outside of the EU was left up to each member state. This gave non-EU firms an advantage because they were subject to less regulation.
The EU then introduced MiFID II in early 2019 to apply to all firms with EU clients, not just those in member states.
What is required from investment firms?
Firms must submit post-transaction reporting to regulators. This ensures over-the-counter (OTC) derivatives are properly reported and cleared through a central counterparty.
MiFID II post-transaction reporting requires investment firms that execute transactions in financial instruments to report complete and accurate details of those transactions to the regulator before the close of the next working day.
But adhering to these reporting requirements is a time-consuming task, largely because of the sheer volume of guidance.
It is likely that firms will therefore need to upgrade their technology to accommodate further changes. Without seamless connectivity to and from required sources, they will struggle to comply.
Why three-way reconciliations are vital
Under MiFID II regulations, firms are required to perform three-way reconciliations between their own internal data, a transaction reporting mechanism, and the NCA.
For European frameworks, including MiFID II, most firms choose an Approved Reporting Mechanism (ARM) to check the eligibility of transactions. But research suggests data integrity issues persist after reporting has taken place. Firms should not assume data sets returned by either reporting mechanisms or the regulator are automatically in line with expectations.
A successful three-way reconciliation surfaces gaps in the reporting process, including errors, late reporting, incorrect identifier codes between trading systems and incorrect volumes. An automated solution will help highlight errors and track their resolution.
Tips for successful three-way reconciliations:
- Download MDP files to check that front-office trades match what is reported to the trade repository or regulator.
- Download MDP files regularly. The FCA monitors these downloads and contacts those who don’t.
- Review trades in and out of scope for reporting, ensuring that data sent to the endpoint is accurate and complete.
Click here to find out how AutoRek can help with MiFID II compliance.