How the Tradeweb APA will help firms fulfil their MiFID II reporting requirements

The implementation of post-trade transparency rules under MiFID II will require real-time public reporting of detailed information for the majority of trades across a wide range of asset classes. Transactions executed on trading venues can be reported by that venue, while transactions executed off venue or over the counter (OTC) will need to be reported by a counterparty to the trade using an Approved Publication Arrangement (APA).

In the second in our series of MiFID II-focused webinars, our regulatory experts provided an overview of the new reporting requirements, and discussed how the recently announced Tradeweb APA service can help the buy-side meet these obligations.

Summary of reporting obligations

The Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR) will jointly replace, and significantly expand, the original MiFID, a European Union law aimed at increasing competition and consumer protection in investment services.

While the existing MiFID I transparency rules only relate to shares admitted to trading on regulated markets (RMs), MiFIR specifically introduces a new pre- and post-trade transparency regime for non-equity (bonds, structured finance products, emissions allowances and derivatives traded on RMs) and equity-like instruments (depositary receipts, exchange traded funds, certificates and similar instruments).

One of the key objectives of MiFID II is to encourage more trading onto regulated trading venues. To achieve this, it sets out an enhanced set of pre-and post-trade transparency obligations when trading financial instruments off venue, particularly for systematic internalisers (SIs) and other investment firms. 

The pre-trade transparency rules require SIs, RMs, and multilateral trading facilities (MTFs) to publish in real time current orders and quotes relating to shares. Other investment firms are not subject to the rules when trading off venue.

SIs are required to publicly disclose firm quotes in respect of non-equity instruments where:

1. There is a liquid market (if there is not a liquid market, SIs are only required to disclose quotes to clients upon request should they agree to provide a quote)

2. They are prompted for a quote by a client

3. They agree to provide a quote

According to the post-trade transparency regime, SIs that conclude transactions in financial instruments traded on a trading venue (either on own account or on behalf of clients) are required to publish the volume, price, and the time at which they were concluded through an APA. When transacting with a MiFID firm and a non-SI counterparty, the seller will bear the responsibility of post-trade reporting. If the counterparty is not regulated in the EU, then the MiFID firm will always be required to report the trade. The information to be made public and applicable time limits for various financial instruments will be the same as for trades conducted on trading venues. For non-equity instruments, each individual transaction must be made public once through a single APA.  

Tradeweb reporting options

Tradeweb offers a range of solutions to satisfy both on- and off-venue transparency reporting obligations.

When opting for our on-venue solutions, Tradeweb will assume all pre- and post-trade reporting responsibility. These include:

1. The Tradeweb standard Request for Quote (RFQ)

2. The Tradeweb process trade, where pre-trade price discovery is conducted off venue (via voice or bilaterally) and sent through the Tradeweb system, adhering to our rules.  

Off-venue trades need to be reported almost immediately post execution, which can be a real challenge. Non-equity trades must be reported 15 minutes from execution, while the timeline for equity/equity-like trades is even tighter at one minute.

There are two possible approaches for reporting via the Tradeweb APA:

1. Direct reporting, where the reporting party has direct connectivity to the APA and submits its own trade report

2. Assisted reporting, where a buy-side firm agrees with its counterparty to submit the trade to the APA on its behalf. Buy-side firms will still require direct connectivity to an APA unless all their counterparties agree to provide this service. Furthermore, buy-side firms still maintain the obligation to report, even if they receive assistance from their counterparties. To help facilitate this requirement, the Tradeweb APA will extend the use of the APA GUI to enable “assisted firms” to monitor and track trade reports being made on their behalf to ensure compliance.

Who needs to report?

As an MTF, Tradeweb will be reporting all on-venue executed trades, easing the regulatory burden for investment firms. For off-venue or OTC trades, however, the reporting obligation may lie with MiFID firms and non-SIs depending on who their counterparty is.

For instance, when transacting with a non-European counterparty, firms will need to report the trade irrespective of whether they’re a buyer or a seller. If the counterparty is regulated in the EU, then firms will need to ask the following questions:

1. Are they the seller? – If the answer is no, then their counterparty has the obligation to report via an APA. If the answer is yes, then firms may need to report depending on their counterparty’s SI status.

Answering this question may be fairly straightforward when trading bonds or shares, but not so simple for instruments such as swaptions or options, where the buyer is the counterparty that holds the right to exercise the option, and the seller is the party that sells the option and receives a premium. A useful list of different scenarios with respect to buyer/seller direction can be found in the RTS 22.

2. Is their counterparty an SI? – If the answer is no, then firms have to report via an APA. If the answer is yes, then it’s the SI’s responsibility to report via an APA. 

Why choose the Tradeweb APA?

Tradeweb is well-positioned to deliver an effective APA solution for market participants to meet the new post-trade transparency rules, and this is why:

• We operate both a successful MTF and SEF, and this is an extension of our proven and integrated solutions for regulatory-compliant electronic trading and reporting.

• We’re able to offer our members an APA Early facility enabling clients to connect, test and be ready well ahead of MiFID II implementation.

• Ten leading financial firms have already committed to use our APA service, establishing a standardised reporting process across participating firms.

• Our APA is managed separately from our execution services, so we’re providing firms with the confidence in how their data will be used and reported.

• Our clients have access to comprehensive reference data showing new MiFID classifications aligned with a complete view of reported market trade activity.

• We’re engaged with more than 40 buy-side firms and lead Order Management Systems with the view of providing a standardised workflow for clients.

• We’ve already submitted our application to the FCA to be authorised as an APA.

Market participants need to be prepared and ready to report by 3rd January 2018. With the delay to the SI regime, buy-side investment firms are likely to have an increased reporting obligation until 1st September 2018. Therefore it’s imperative that firms are reviewing reporting options now and selecting their APA by the start of the second quarter this year to be ready.

At Tradeweb, we’re intensely close to the challenges and, perhaps more importantly, the industry solutions. This makes us a strong strategic partner to help firms navigate these challenges, and build an effective reporting solution.