13 July 2017
Reporter: Drew Nicol

MiFID II best execution challenges securities finance

The International Capital Market Association (ICMA) has outlined what it considers to be “ambiguous, disproportionately burdensome” or “simply inappropriate” standards for securities financing transactions in the second Markets in Financial Instruments Directive (MiFID II).

In its latest quarterly report, the association highlighted rules relating to transaction reporting, pre- and post-trade transparency, and best execution reporting, as its main contention points with the framework that comes into force in January 2018.

Best execution rules, which are covered under RTS 27, require quarterly reports that include nine separate templates that apply to each single instrument. ICMA described these as “in many cases highly detailed”.

ICMA has maintained that RTS 27 should not be applied to securities financing transactions, since it would be unnecessarily onerous to comply with the reporting requirements, and the resulting data produced by banks would be meaningless at best, and misleading at worst.

“Until July 2017, there was no official guidance on whether securities financing transactions should be reported under RTS 27, or, in the event that they should, how this could be achieved in a clear, consistent, and meaningful way,” according to ICMA.

A specific exclusion for reporting has been carved out in MiFID II for SFTs that fall under the Securities Financing Transactions Regulation (SFTR) and the European Market Infrastructure Regulation, but trades with central banks in the European system of central banks (ESCB) are notably absent.

“ICMA has advocated that this is unnecessary, and that securities financing transactions with ESCB central banks should also be exempt. The European Securities and Markets Authority and the European Commission did not agree.”

“However, they did agree that MiFID II/R transaction reporting for these securities financing transactions would not be required until SFTR reporting comes into effect (so avoiding the necessity for firms to build separate reporting functionality).”

ICMA also noted that MiFID II/R was ambiguous with respect to the pre- and post-trade reporting of securities financing transactions and advocated that they should not be subject to these transparency obligations.

An amendment to MiFID II was published in the Official Journal on 30 June 2016 that included an exemption for securities financing transactions under Article 1 relating to pre- and post trade transparency obligations.

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