ESMA final report recommends expansion of transaction reporting regime to AIFMS and UCITS Management Companies

ESMA has published a final report assessing the functioning of the Transaction Reporting regime under Article 26 of the Markets in Financial Instruments Regulation (“MiFIR”). Among a number of proposed changes perhaps the most impactful is the recommendation that UCITS management companies and AIFMs that are providing one or more MiFID services (i.e., Collective Portfolio Management or ‘CPMI’ firms) should be subject to transaction reporting.  

ESMA argues that the proposal to extend the universe of firms in scope of the reporting ensures there is a “level playing field” for firms that provide the same services, as well as providing regulators with a full and complete data set for fulfilling their market monitoring obligations. Only 3 member states have so far covered this regulatory gap, with Czech Republic, Romania, and Italy having introduced specific local requirements for CPMI firms. 

Under the current requirements, which only require MiFID investment firms to submit transaction reports, the only insight into potentially abusive transactions undertaken by UCITS management companies and AIFMs are via reports submitted by other market participants and trading venues used by those entities to execute transactions. Of concern to ESMA is that those reports do not identify the UCITS management company/AIFM decision-maker who may have based their decision on inside information. ESMA therefore contends that there is a need to receive transaction reports from these entities as “the details of the entity that is making the decision to acquire/sell a given financial instrument is essential for the purposes of market abuse surveillance.”

The proposal has limitations, however, as it only seeks to bring into scope of reporting the execution of transactions that occur when CPMI firms are providing MiFID services; the suggestion does not extend to transactions that result from other activities that UCITS management companies and AIFMs perform, in particular managing funds. This limitation adds a layer of complexity to the practical implementation of the requirements, because it will require CPMI firms to ‘split’ their business. Namely, only reporting transactions that arise as a result of portfolio management services provided to separately managed accounts and not reporting executions that arise from discretionary decisions for the funds they manage. Appreciating that this is likely to be a logistical challenge for firms ESMA has clarified that any non-MiFID related transactions reported by ‘mistake’ and thus constituting over-reporting (which has historically been deemed to be sinful as under-reporting) will not be a supervisory priority if and when the changes take effect, such that punitive regulatory sanction for such over-reporting would be unlikely.

Whilst at this stage, this is just a recommendation that ESMA is making to the European Commission, if enacted it will only affect those UCITS management companies and AIFMs based in Europe. Given Brexit, there is currently no direct impact on FCA authorized firms anticipated as a result of the proposals, however we are aware that the FCA is actively looking at and seeking to consult on some aspects of MiFID II’s implementation (including RTS 27 and 10% depreciation reporting). It is therefore entirely feasible that the FCA is also intending to look at the application of the transaction reporting regime, as like a number of its European counterparts, it too may have concerns about the regulatory gap whereby AIFM and UCITS company transactions are beyond their market abuse surveillance purview. Of particular concern to some European regulators is where firms have moved from operating under MiFID based licenses to AIFMD or UCITS based permission profiles precisely to avoid the reporting obligations, and the FCA could share that concern. 

What path the FCA takes remains to be seen; however in our view there are three possible outcomes;

1. Do nothing: The FCA could elect to make no changes to the current requirements and maintains the status quo, with AIFMs and UCITS management companies remaining out of scope of the transaction reporting obligation.
2. Follow suit: The FCA could consult on changes that replicate the proposals outlined in ESMA’s final report, namely to bring UCITS management companies and AIFMs into scope of transaction reporting but only for their MiFID activities. This would ensure that the transaction reporting regime in the UK remains equivalent to that in the EU.
3. Goldplate: The FCA could consult on changes which go further than the recommendations made by ESMA in the final report and seek to bring all (or at least more) activities conducted by UCITS management companies and AIFMs into scope of the regime. This would hark back to the position under the original MiFID where (setting aside the portfolio management exemption) collective investment undertakings were in scope of the reporting requirements. The then FSA extended the obligations to these firms because the type of activity being undertaken was very similar to the type of activity being undertaken by MiFID portfolio managers. They were described by the FSA at the time as being brought within scope to avoid gaps in market abuse monitoring; and this argument could still be valid today.

Regardless of what approach the FCA takes, what is clear is that the significance of ensuring firms submit complete, accurate and timely reports has never been more important. 

How we can help

Contact us or call +44 (0)20 7042 0500 to learn more about how we can help you address these regulatory reporting requirements.

In addition to our ARRMA offering, we have a range of trade and transaction reporting solutions. These range from one-off logic specification reviews and assessments of systems and controls around your reporting framework, to regular, cost-effective analysis of your MiFIR (and EMIR) reports to identify issues relating to the accuracy, completeness, and timeliness of reports. Our service includes the provision of a wide range of management information relating to the quality of reporting as well as industry benchmarking to assist senior managers with their ongoing oversight.