Differences in national regulators’ technical capabilities and inability – or lack of willingness – to invest in software developments could add to the commodity position-reporting headache that comes with the second Markets in Financial Instruments Directive (Mifid II)’s position limits regime, which is due to come into force on January 3.
On the face of it, the phases of the reporting appear simple: implementing technical standard (ITS) 4 outlines a format in which Mifid II investment firms and trading venues must report open positions at the end of each trading day. But problems could arise if the reporting format delivery mechanism varies from regulator to regulator, meaning firms with exposures across different jurisdictions could find themselves with a variety of submission requirements. There are signs that could indeed be the case.
Under previous regimes, the European Securities Markets Authority (Esma) – the entity responsible for building Mifid II – has provided a voluntary, standardised XML (extensible markup language) document to national regulators, who have then built a web platform that allows the market to automatically feed through their open positions.
But for the Mifid II position limits regime, Esma will not be providing an XML. Some national regulators, recognising the need to make the process as smooth as possible, have built their own and indeed some have worked together to attempt to make things easier for those with multijurisdictional commodity market exposure.
The UK’s Financial Conduct Authority (FCA), for instance, has invested in the Market Data Processor, with its 33-page manual and instructional videos. The Norwegian and Dutch regulators have set up joint initiatives to create an XML and web platform that will mimic the FCA’s. But others are yet to clarify their plans, and some market participants are becoming concerned they will have to conform to different systems in different jurisdictions. A quick look at recent Esma-delegated EU-wide regulatory history suggests those concerns could be justified.
In the Netherlands, a Word document is attached and sent via email, the Irish and UK regulators ask for an Excel document, and in Bulgaria the regulator asks for a fax
Take the short selling regime, which came into force in November 2012, in which a fund manager short selling stock must report it to the relevant national regulator. German regulator Bafin created a platform allowing fund managers to upload a report via an application programming interface, utilising an XML. It’s a fully automated process. In France, however, the details are the same but must be uploaded manually to the Autorité des Marchés Financiers, the nation’s regulator, via an online form. In the Netherlands, a Word document is attached and sent via email, the Irish and UK regulators ask for an Excel document, and in Bulgaria the regulator asks for a fax.
Another example is the Transparency Directive Amending Directive, finalised in 2013 and enforceable from November 2015, in which firms must disclose economic interests such as cash-settled derivatives and a variety of other exposures. In that instance, Esma did publish an example XML for national regulators to use, but 25 different versions were created across as many European jurisdictions. Three months into the regime, Bulgaria and Romania still hadn’t issued technical guidance, and when they finally did they asked for a document attached to an email. Worryingly, neither of those jurisdictions have announced filing systems for the position limits regime, nor were they able to add clarity for this article.
It’s far from a surprise that some national regulators do not sit at the leading edge in technological innovation. Indeed, in some jurisdictions, financial regulation is far from prioritised and is funded accordingly. But it’s a cause of concern for those they regulate.
One hedge fund with multijurisdictional commodities exposures foresees a situation in which some national regulators provide automatic reporting systems, while others will effectively require them to hire more staff to scan physical documents and send emails. One energy company, already wary that it has neither the staff nor the expertise to regularly fulfil the already-cumbersome daily disclosure and reporting requirements in single jurisdictions that Mifid II will subject it to, is outsourcing much of the work to third-party IT vendors. Further challenges await should a variety of reporting systems – be they antiquated or modern – arise across the continent.