MiFID II: Why three-way reconciliations are key to avoiding penalties

It has been three years since the EU launched MiFID II. But many firms still struggle to contend with regulations – and the consequences have been costly.

Penalties for non-compliance continue to rise. In 2020, the number of sanctions issued by national competent authorities (NCAs) quadrupled to a staggering 613 totalling €8.4m, up from 371 sanctions totalling €1.8m in 2019

Firms continue to incur penalties simply because their reports contain errors. According to a 2021 ACA report, 97% of regulated firms submitted reports containing mistakes. More alarming is that 87% of those firms were unaware of the errors and believed their reports met requirements.

While the industry has focused heavily on MiFID II post-trade reporting requirements, there has been one key facet that has been routinely ignored – reconciliations.

Often regarded as a ‘to-do-later’ job, three-way reconciliation of data is mandatory under MiFID II. The above statistics clearly show that firms can no longer afford to put off this crucial task.

To help clear up confusion and avoid future fines, we’ve put together an essential guide to MiFID II, including everything you need to know about three-way reconciliatory reporting.

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 (Markets in Financial Instruments Directive) following a G20 meeting in 2009. However, the approach to dealing with countries outside of the EU was left up to each member state. This gave non-EU firms a competitive advantage because they were subject to less regulation.

To level the playing field, the EU 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?

To comply with MiFID II, investment 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.

A firm executes a transaction when it performs any of the following five actions:

  • Receiving and transmitting an order in relation to financial instruments
  • Executing an order on behalf of clients
  • Dealing on its own account
  • Making an investment decision in line with a discretionary mandate
  • Transferring financial instruments to/from accounts

Adhering to these reporting requirements is a labour-intensive, time-consuming and complex task, largely because of the sheer volume of guidance on requirements.

It is likely firms will need to upgrade their technology to accommodate further changes to MiFID II. Firms without seamless connectivity to/from required sources will struggle to comply.

Why three-way reconciliations are vital for post-transaction reporting

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 that 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 reconciliations:

  • Download MDP files to check that front-office trades match what’s 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

Want to alleviate that ‘I’ll do it later’ feeling? Book a free demo today to see how AutoRek can make three-way reconciliations much less exhausting.

Find more information on MiFID II and tips on how to carry out a successful three-way reconciliation, by downloading our free whitepaper here.

 

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