Cooperative Mifid II Compliance

What is SmartStream RDU’s role in helping firms comply with the revised Markets in Financial Instruments Directive (Mifid II)?

SmartStream RDU has come a long way in a year, having released its relevant products in time for the January 3 Mifid II deadline. Our financial data utility offers a fully integrated reference dataset to support pre-trade price transparency, post-trade reporting and transaction reporting, and—in collaboration with approved publication arrangements (APAs)—we have also launched a Systematic Internaliser Register. 

Since going live, we have supported a number of customers using the Mifid II reference data to help provide the APA service and fulfill the systematic internalizer (SI) role, and we are continuing to talk to a range of organizations considering adopting the service.

What market events are driving interest in Mifid II services at the moment? 

We’re seeing as much activity now as we were seeing this time last year, and Mifid II is still a key driver. Since SIs are not mandated to take on the SI role until September 1, some have chosen to wait until that date. The largest firms typically decided to opt in from January, but the response was mixed for large domestic or regional players—some opted in and others decided to wait. 

In addition to seeing interest from firms yet to adopt SI status, we are also talking to firms that made the change in January but are now looking for more robust processes and increased automation.

What makes partnership with APAs stand out?

SmartStream RDU has worked with Deutsche Börse on Mifid II readiness, and has been speaking to APAs about the difficulty in identifying who is an SI for which instruments. The fundamental problem is that you need to understand whether a counterparty is an SI or not when you report a trade, which is impossible unless it is published. We provide a mechanism for SIs to publish the instruments for which they are an SI and then compile a “listing”
for all instruments and SIs, which is made available to the market.

How did SmartStream RDU set up the Systematic Internaliser Register?

SmartStream RDU has put together a service where each APA collects instrument coverage from its SI customers and then passes that data to us. We then consolidate the data and offer the complete “listing” back to the market to help users determine which APA is an SI in which instrument.

Since the APA role includes managing trade reporting on behalf of the market, APAs need this data to accurately trade-report. In fact, they cannot do their job without access to the data, and it was recognized there was a gap in the existing mechanisms. APAs worked together to help solve this problem in advance of the Mifid II start date. If the market needs to collaborate to make the regulation work, market participants are good at making that happen, which this example demonstrates.

How does SmartStream RDU validate the data in the Systematic Internaliser Register?

We provide a template to SIs to collect the data and then make a series of validations to ensure it is accurate. This includes ensuring we receive valid International Securities Identification Numbers and legal entity identifiers, and correct asset types, for example. Given the importance of this data for accurate trade reporting, it is essential to ensure it is correct.

What is next for SmartStream RDU?

SmartStream RDU is progressing its core initiative, which is to create an industry-wide security master. Last year, we completed the derivatives content for that build-out, sourcing reference data from more than 100 exchanges. We then added nearly twice as much content to the data from the exchange feeds to define product and contract dynamics, blending in additional data from vendors. We have now sold the derivatives data to a number of firms, and those firms are seeing exceptional success in terms of improved data quality.

SmartStream RDU is currently building out equity coverage, which will launch in Q3 of this year. For equities, we are mainly focused on vendor coverage, offering customers a blended selection of feeds where tradeable products can be uniquely and unambiguously identified and corporate actions are reliably applied before the start of the trading day. Equity coverage will add the second substantial component of the coverage we need for a full security master, and we’ll then start modeling fixed income.

This is the broader journey SmartStream RDU is on, but Mifid II was a significant market challenge that could not be ignored.

 

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