How Does a Regulator or ARM Ascertain MiFIR Reportability?
The current application of MiFIR requires both the regulators and ARMs to filter through vast quantities of data to determine which transactions should be reported. A key component of this process is the Financial Instruments Reference Data Systems (FIRDS), established under Article 27 of MiFIR and requiring trading venues and systematic internalisers (SIs) to submit standardised reference data on financial instruments to ESMA and, in the UK, to FCA. While FIRDS is a MiFIR mechanism supporting transaction reporting and transparency requirements, it also plays an important role in assisting regulators with market monitoring under MAR and in facilitating coordination actions such as trading suspensions.
What is FIRDS?
FIRDS is a database containing reference data for financial instruments subject to MiFIR reference data reporting obligations, uniquely identified by their ISIN. They aim to present data in a harmonised way that allows market participants as well as regulators to determine whether instruments traded across the EU or the UK are reportable.
Following Brexit, there are now two separate FIRDS databases, one for each regime. The two FIRDS databases are constructed in largely the same manner, however, there have been some divergences in the classification of trading venues since inception, which have led to a mismatch between the UK and EU FIRDS lists. This means that a security may be traded on a trading venue (TOTV) under ESMA but not under the FCA in certain scenarios.
A. EU FIRDS
EU FIRDS is maintained by ESMA. Trading venues and SIs are required under Article 27 of EU MiFIR to submit identifying reference data to ESMA and to update that data whenever changes occur.
Following the EU MiFIR Review, a new category of entity, Designated Publishing Entities (DPEs), is also required to submit identifying reference data to ESMA. This obligation covers certain OTC derivatives within the scope of the new Article 26(2)(d) that are not already captured by the trading venue reporting obligation.
B. UK FIRDS
UK FIRDS is maintained by the FCA. Article 27 of UK MiFIR provides that trading venues and SIs are required to submit identifying reference data to the FCA for the same purposes.
There is no DPE regime under UK MiFIR.
What Makes a Transaction Reportable?
The reportability test differs between the two regimes:
A. EU MiFIR
The EU has adopted a four-limb reportability test. Although the existing pre-2024 rules continue to apply under transitional provisions, the amended Article 26(2) is the framework that will govern EU firms once those technical standards come into force. A transaction is reportable if it involves:
- Article 26(2)(a): Financial instruments which are admitted to trading or traded on a trading venue or for which a request for admission to trading has been made, irrespective of whether such transactions are carried out on the trading venue — with the exception of OTC derivatives other than those referred to in Article 8a(2), to which the obligation applies only when carried out on a trading venue.
- Article 26(2)(b): Financial instruments where the underlying is a financial instrument that is traded on a trading venue, irrespective of whether such transactions are carried out on the trading venue.
- Article 26(2)(c): Financial instruments where the underlying is an index or a basket composed of financial instruments that are traded on a trading venue, irrespective of whether such transactions are carried out on the trading venue.
B. UK MiFIR
A transaction is reportable under UK MiFIR if it involves:
- Article 26(2)(a): Financial instruments admitted to trading, traded on, or for which a request for admission has been made to a UK, Gibraltar or EEA trading venue, irrespective of whether the transaction is carried out on the trading venue.
- Article 26(2)(b): Financial instruments where the underlying is a financial instrument traded on a trading venue.
- Article 26(2)(c): Financial instruments where the underlying is an index or basket where one or more constituents is traded on a trading venue within UK MiFIR scope.
FIRDS Network
The reportability framework outlined under Article 26 MiFIR for ESMA and FCA, coupled with the requirement for trading venues, SIs and DPEs (in the EU) to submit reference data creates a network which maintains the FIRDS database in real time and allows ARMs and regulators to stay on top of new instruments as well as existing ones that fit the criteria to be reported under the regime.
Weaknesses of FIRDS
There are scenarios where FIRDS cannot be relied on for complete accuracy. It is possible for a financial instrument to be TOTV, however due to oversight issues by the venue, not be included in the FIRDS dataset. TRAction’s view is that an attempt to report the transaction is enough to comply with a firm’s obligation. This is a situation we mitigate for our clients by cross-referencing any newly traded products against both the relevant FIRDS and LSEG Data & Analytics (formerly Refinitiv), so they don’t have to worry about it.
Summary
The FIRDS system creates a dynamic data series which helps the regulatory bodies to function by leveraging the use of market participants to provide information on a continuous basis. This creates an environment where market oversight is more manageable amidst the extensive sea of securities and transactions across the EU and UK landscape.
