Trade & Transaction Reporting under MiFID: The Politics vs. the Economics: Trade & Transaction Reporting under MiFID: The Politics vs. the Economics Jean-Pierre Casey Head of Research, European Capital Markets Institute 23 March 2006 European Capital Markets Institute


Art.s 25 & 28 in Level 1: Art.s 25 & 28 in Level 1 Significance First time EU framework for transaction reporting Purpose Art. 25: market integrity Art. 28: market efficiency


Objectives of Art.s 25 and 28: Objectives of Art.s 25 and 28 Intermediate Policy Objective(s) Market Integrity More effective & convergent market oversight Article 25 Article 28


Efficiency concerns: Efficiency concerns 2 separate reporting requirements means 2 separate transaction reports 3 reports potentially, if clearing is counted in Efficiency concern: any way to combine these reports? Difficulty: reports contain different information points However, significant overlaps in data points to be submitted => Way to produce integrated format for both reports?


Reporting under MiFID Levels 1 & 2: Initially, unclear how detailed the content of each report would finally turn out to be Earlier Level 2 drafts: added a number of required data points to contents of both sets of trade reports (art.s 25 and 28) Neither report a complete subset of the other initially => Even if a consolidated information system, investment firms still must invest in filtration solutions or continue to submit dual reports for each trade Reporting under MiFID Levels 1 & 2


Art.s 25 & 28 in Level 2: Art.s 25 & 28 in Level 2 All contents of Art. 28 trade reports now contained in Art. 25 transaction reports Earlier drafts, neither was a subset of the other Introduces possibility to eventually submit a single trade report But: this will depend on whether centralised reporting exists at EU level


Improvements in Level 2: Improvements in Level 2 Restrict possibilities for gold-plating through tight wording Streamlining Art.s 25 and 28 Art. 28 Art. 25 Final Draft Implementing Regulation Earlier Draft Implementing Regulation Art. 25 Art. 28


Gold-plating?: Gold-plating? Big risk of gold plating, at least initially Divergent practices in market oversight? Divergent quality of market oversight? Implementing Regulation Art. 12.3: « MS may require reports made in accordance with MiFID Art. 25.3 to contain information additional to that specified, where that information is necessary to enable the CA to monitor the activities of investment firms to ensure that they act honestly, fairly, and professionally, and in a manner that promotes the integrity of the market. » However, certain conditions must first be met Costs of gold-plating potentially serious for investment firms


Decentralised reporting: Decentralised reporting


Centralised reporting: Centralised reporting


(Dis/)advantages of decentralised reporting: (Dis/)advantages of decentralised reporting Advantages Avoids sunk costs of investing in new system Easiest road to take given current system Disadvantages Effectiveness of market oversight depends on other parties More scope for errors, information shortfalls SR considerations prevailing over LR benefits?


(Dis/)advantages of centralised reporting: (Dis/)advantages of centralised reporting Advantages Greater global efficiency by reducing investments into IT solutions More effective market oversight Less reliance on foreign CAs that may be less efficient Disadvantages Short-term costs Politically very difficult


TRACE reporting system(US corporate bonds): TRACE reporting system (US corporate bonds)


Comparing TRACE and MiFID trade/transaction reporting: Comparing TRACE and MiFID trade/transaction reporting TRACE an integrated system, used for: Market surveillance Price/volume dissemination U.S. clearing firms now establish compatible interface Trade reporting in U.S. corporate bonds can now be done in a 1-stop shop format Problems in EU apart from the need for centralised reporting lack of consolidation in clearing systems


A modified EU reporting system: A modified EU reporting system


The way ahead: The way ahead 3 different solutions: Continuing dual reporting (and possibly 3 reports, including those for clearing firms) Duplicative investments into IT solutions for filtering Centralised reporting CBAs by investment firms to determine optimal solution


Conclusion: Conclusion CCD reporting would be more economically efficient IT savings for investment firms More effective market oversight Implications No longer need up to 25 different CAs conducting investigations into market abuse simultaneously Single EU agency for market oversight? Only detecting market abuse and insider dealing No need to invest it with legal powers Enforcement remains in hands of national CAs Problem: how to overcome political sensitivities?