Under MiFIR, a transaction is reportable where the relevant instrument is being admitted to trading or traded on a trading venue. An international securities identification number (ISIN) is a product identifier code required under the MiFIR framework. However, there are some instances where an ISIN is not always present or available for a product in the financial instrument reference data system (FIRDS) – this does not mean the relevant product is not reportable under MiFIR.
Reasons for an absent or missing ISIN from FIRDS could be that the ISIN for a product is not yet being reported to FIRDS by a trading venue operator or the product with the ISIN has been admitted to trading but not yet traded. Where an ISIN has not reached FIRDS, the regulator holds a report and waits for a short period to see if FIRDS is later populated with an unknown ISIN and deals accordingly. We discuss below in detail, the MiFIR framework, examples of missing or absent ISINs from FIRDS and regulators’ responses.
MiFIR Reportability Overview
- MiFIR reportability is based on the concept of ‘traded on trading venue’ (TOTV). For more information on TOTVs, please see our article here.
- MiFIR also has real time reporting systems and approved publication arrangements (APAs) that populate FIRDS. (Note that Post-Brexit/since 2021, FIRDS has been split up into the ESMA FIRDS and FCA FIRDS).
- In theory, all reportable trades should be in FIRDS but for a number of reasons, this is not always the case.
How does a transaction become reportable under MiFIR?
Paragraph 2 of Article 26 (Obligation to report transactions) of MiFIR states a transaction is reportable in relation to:
“(a) financial instruments which are admitted to trading or traded on a trading venue….
(b) financial instruments where the underlying is a financial instrument that is traded on a trading venue, irrespective of whether such trans¬actions are carried out on the trading venue;
(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;
(d) OTC derivatives as referred to in Article 8a(2), irrespective of whether such transactions are carried out on the trading venue.”
For this reason, it cannot be assumed that a simple check of FIRDS for an ISIN will ascertain if a product is reportable.
Examples where a product is within the legal definition of ‘reportable’ but isn’t in FIRDS
- The product is admitted to trading on a venue but only trades off venue (e.g. an OTC derivative), creating no records in FIRDS.
- The product is admitted to trading but has not traded yet.
- The trading venue operator or systematic internaliser (SI) has neglected its responsibility to report to FIRDS.
- The copy of FIRDS in use by the National Competent Authority (NCA) is a static version without the latest updates from APA reporting – which can lead to rejections from the NCA.
- The reverse can also be true – an ISIN may have made its way into the FIRDS database but not be TOTV.
What does the regulator do when an ISIN isn’t in FIRDS?
The regulator holds a report for 7 days, waiting to see if a firm populates FIRDS with the unknown ISIN. If it is not there after 7 days, the regulator rejects the trade and the Approved Reporting Mechanism (ARM) shows an NCA rejection.
ESMA’s transaction reporting instructions state:
“Transaction reports will be held and may be processed on T+1. When reports are received where the ISIN is not on FIRDS, our Market Data Processor (MDP) system will acknowledge the report as received, but as pending. The flow for the validation is set out in the instrument validation tab of the reporting instructions.
Every day, for up to 7 calendar days, the system will look for the instrument reference data again. If the reference data becomes available, the transaction report will be processed and the validations related to the instrument will be run. The report will either be accepted or rejected.
If the instrument reference data has still not been received after 7 calendar days, the transaction report is rejected. It is possible that the financial instrument on the rejected transaction report has been over-reported, but this is not necessarily the case and the executing entity may want to check the accuracy of the instrument with the trading venue before resubmitting the transaction report.“
Technical Reporting Instructions – MiFIR Transaction Reporting
What happens if a product I traded, with an ISIN, makes its way into FIRDS several months after I traded it and didn’t report it due to NCA rejections?
To understand how FIRDS is populated is a difficult thing to grasp. An ISIN that was previously rejected by the NCA, could suddenly be traded on a venue and make its way into the FIRDS system and therefore stop getting rejected by the NCA. For this reason, some firms may choose to continually report transactions under a specific instrument or ISIN, regardless of the NCA rejections, in the anticipation that they may suddenly appear in FIRDS and get accepted.
TRAction’s suggestions on how to deal with this issue
- MiFIR firms should start by reporting all transaction that meet any of the criteria in paragraph 2 of Article 26.
- MiFIR firms should keep a log of the NCA rejections that were attributable to the relevant ISINs not being in FIRDs. Note that TRAction places the file of rejections in the handback folder for its clients.
- At the end of the month, MiFIR firms should review the rejections in the handback folder and in their reporting, software set the MiFIR reportability flag to ‘No’ for the instruments that were rejected after 7 days.
Background
The purpose of MiFIR reporting is to provide fair outcomes and protect the markets from abuse. It focuses on the technical issues relating to reporting and transparency. The purpose of MiFID II is to deal with concerning investor protection and business conduct. For more information on MiFIR/MiFID II, please see our article here.
How can TRAction assist?
TRAction, being a third-party service provider, closely monitors the reporting requirements for regulations such as MiFIR and ensures our clients are compliant with the latest updates to regulations.
If you would like to discuss your MiFIR reporting or have any other questions, please do not hesitate to contact us.
