LSEG Response to CESR MiFID Consultation Paper TRANSACTION REPORTING

Transcription

1 MIFID REVIEW LSEG Response to CESR MiFID Consultation Paper TRANSACTION REPORTING Matthew Leighton Regulatory Strategy London Stock Exchange Group 0044 (0) May 2010 Submitted online at INTRODUCTION The London Stock Exchange Group (LSEG) welcomes the opportunity to respond to CESR's consultation on Investor Protection and Intermediaries. Detailed responses to the questions posed can be found below. This submission represents the views and experience of London Stock Exchange plc, Borsa Italiana and other market operators and investment firms within the LSEG. In this Response, we have grouped a number of questions together and provide a collective answer (Questions 2-14). In order for the MiFID Review to deliver the outcomes that genuinely maintain and improve market efficiency and, ultimately, deliver the desired market model, we are strongly of the view that the Commission and CESR should adopt an evidence-based approach to the development of proposals. This would require regulators to measure the adverse market effects of a particular activity, identify the cause and propose appropriate corrective measures, describing the intended outcome. Adoption of such an approach would produce comprehensive and clear proposals which would ensure buy-in from the broadest possible range of market participants. London Stock Exchange Group plc Registered in England & Wales No Registered office 10 Paternoster Square, London EC4M 7LS

2 Question 1: Do you agree with the above analysis on trading capacity and the proposal to introduce a third trading capacity (riskless principal) into transaction reports? We note that the analysis and proposed solution should also be considered in the context of post trade transparency. There is currently a lack of harmonisation across countries and venues in terms of what is reportable and a common approach is required to avoid trades being reported more than once, and to avoid both market and client side legs of the same trade being reported. Greater clarity is also required in terms of which firm has the obligation to publish an OTC transaction. In London, although not in Italy, the concept of riskless principal is already established. Participants submitting orders to the SETS order book have the option of specifying dealing capacities representing agency, principal or riskless principal orders. Analysis of order execution in April 2010 shows that 24% of order book executions (both buys and sells) were as a result of riskless principal orders. However, as a venue, we recognise both risk principal and riskless principal trades with clients in legal terms as two contracts and agency trades as one contract. The legal distinction between acting as a principal versus as an agent should not be lost. It is fundamental to the equity market in the UK and to the application of default rules. Subsequent client legs to principal executions by participants on the order book can be reported as on-exchange or as OTC trades to the LSE, or to other venues. Where these legs reflect riskless principal executions, and to the extent that they are reported on-exchange to the LSE, they contain a not to mark flag, to ensure that they are not published to the market. The requirement to report client legs of riskless principal executions on the order book reflects the recognition in legal terms of two contracts and mirrors current requirements in the UK for separate transaction reports. We support the concept of an additional dealing capacity of riskless principal where only one transaction report would be required (with the client ID field populated). This would give participants the option of making their transaction reporting arrangements more efficient and would also maintain the current requirement that client ID fields remain blank in principal transaction reports. However, this assumes that such a report can function as both a market leg and a client leg report which would only work if both legs were on Exchange or OTC. This would not work where the different legs were on different venues. MiFID allows for this where an investment firm sits in the middle of a trade so that one leg (the market leg, typically on an order book) may be executed on one venue while the client leg (typically done away from an order book) may be reported to a different venue (either Regulated Market or OTC). With regard to the use of an additional dealing capacity we would also make the following observations: a) Possible inconsistency of interpretation. MiFID cannot override applicable law of agency and principal in a jurisdiction that may not 28 May 2010 Page 2 of 5

3 allow for such a dealing capacity/trading activity, or define it differently; it is not clear whether CESR has considered these issues or their potential impact. b) As mentioned above, firms identifying transactions as riskless principal using the new dealing capacity are still deemed to be trading in a principal capacity in a legal context. This is important when it comes to the application of default rules. For instance, the LSE default rules define the procedures specifically for relevant principal contracts and relevant agency contracts and do not take riskless principal trades into account. c) The use of a riskless principal dealing capacity and the submission of one report would have implications for firms using straight-throughprocessing (STP) to generate transaction reports to the competent authority from trade reports submitted to trading venues. STP does not easily accommodate client ids as the up front trade may not have that information at that point and could delay that market side report. In reality, firms would need to submit separate client legs, removing the advantage of the new dealing capacity. Questions 2 14: Collection of the client identifier/meaningful counterparty identifiers. With increasing levels of fragmentation in equity trading, competent authorities need to be able to track trading by counterparties and clients across execution/reporting venues and would therefore benefit from improved harmonisation in this area. We support CESR s proposal to improve market supervision and the detection of market abuse by mandating the inclusion of counterparty and client identifiers on transaction reports. On the harmonisation of client/counterparty identifiers, CESR rightly recognises the difficulties in implementing an EU wide solution which will enable single and meaningful identifiers to be used. The use of Bank Identifier Codes (BIC) to identify counterparties, and, to a lesser extent, clients, makes sense. Competent authorities may have their own codes for market participants and some clients and these may also provide meaningful identifiers, at least at a national level. We believe that these codes (including BICs) should be used where they have been assigned. Where BICs or other competent authority codes have not been assigned (which will be the case in particular for client IDs) there is a larger issue. Market surveillance and the detection of market abuse would clearly benefit from the implementation of an EU-wide standard for identifying clients and we agree with CESR s view that a code type as universal as possible and beyond the level of the investment firm would enable competent authorities to operate more efficiently. However, CESR accepts that this may be difficult to achieve due to legal, data protection and cost issues. 28 May 2010 Page 3 of 5

4 Similarly, a national level identifier would also offer significant benefits to competent authorities. However, again, there would be issues with the implementation of this, including agreeing what national code should be used, potential reluctance of clients (particularly private individual clients) to provide the required information and additional costs to investment firms in collecting the data. There is, however, still value in using client identifiers at investment firm level. These would need to be used consistently by firms across trading venues and asset classes for each client. The use of mapping tables would enable competent authorities to create a profile of clients trading patterns and behaviour across the investment firms that they use. We would urge CESR to take a pragmatic approach to the harmonising the use and collection of client/counterparty identifiers and believe that requiring such codes, where no BIC or CA codes have been assigned, should be provided at investment firm level. Question 15: Do you agree with CESR s proposal on the extension of reporting obligations? If so, which of the two alternatives would you prefer? Article 25 (5) of the Directive widely followed in the majority of the Member States provides for the provision of transaction reports to competent authorities to enable them to monitor the activities of investment firms and outlines the obligation to transmit to the competent authorities the relevant data relating to all transactions in financial instruments which investment firms have carried out, whether on regulated markets, MTFs or OTC. The obligation to provide data to the competent authority is the responsibility of investment firms who have the choice to elect the reporting channel used to transmit reports to the competent authority. Where investment firms choose a transaction reporting system offered by a market operator, they benefit from the waiver to report directly to the competent authority. The Directive does not oblige market operators to provide this service. Indeed the reporting requirements upon the market operators of the regulated markets are set out in article 43 (2) of the directive and such requirements are limited to significant breaches of the market rules or disorderly trading conditions or conduct that may involve market abuse. However, in some Member States (e.g. Italy) Article 25 (5) of the directive has been interpreted in the sense of obliging market operators to transmit to the competent authority periodical reports containing the full data set related to the market allowing a full general waiver for members of a regulated markets of the transaction reporting requirement for transactions on financial instruments admitted on domestic regulated markets. CESR s proposal on the extension of reporting obligations to those persons that are members of a regulated market or MTF falling under the Article 2 (1) (d) exemption, should bring clarity on the scope of Article 25 (5) of the 28 May 2010 Page 4 of 5

5 directive, confirming the obligation of investment firms to report, not market operators. Non-Authorised Firms In a multi-venue world it is important that competent authorities have oversight of the whole market. The exclusion of non-authorised firms trading must mean that there is an extent to which cross-market supervision could be considered to be incomplete. Although trading by such firms is captured by trade reporting regimes and there is no additional information to be provided that is not contained in the original trade report (as there is no underlying client information), we believe that business executed by such firms should be transaction reported to the competent authority. We believe that the transaction reporting obligation should be on the nonauthorised firm. However, this should recognise that such firms may use (or be required to use) third parties (such as settlement and clearing agents) to provide clearing, settlement and reporting services. Venues might be prepared to provide commercial services to submit transaction reports, but this should not be mandatory or affect the legal and regulatory responsibility and liability of the firm to submit transaction reports. 28 May 2010 Page 5 of 5