Committee no longer responsible for the investment decision
Monday, 31 October 2016 05:41

 

MiFID II reporting rules force the functions of risk committees to be reconsidered.

 

 


 

 

Committee no longer responsible for the investment decision? How did you come to that, some may say. And what about the corporate group risk committees, for example? Are they useless?

 

The issue needs to be set precisely, then.

 

 

Commission Delegated Regulation (EU) of 28.7.2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the reporting of transactions to competent authorities, C(2016) 4733 final

 

Article 8(1)(2)


Identification of person or computer algorithm responsible for the investment decision

 

1. Where a person or computer algorithm within an investment firm makes the investment decision to acquire or dispose of a specific financial instrument, that person or computer algorithm shall be identified as specified in field 57 of Table 2 of Annex I. The investment firm shall only identify such a person or computer algorithm where that investment decision is made either on behalf of the investment firm itself, or on behalf of a client in accordance with a discretionary mandate given to it by the client.

 

2. Where more than one person within the investment firm takes the investment decision, the investment firm shall determine the person taking the primary responsibility for that decision. The person taking primary responsibility for the investment decision shall be determined in accordance with pre-determined criteria established by the investment firm.

 

The precise information is that the formal committees, like the risk committee for example, can still be the bodies taking, within firms and corporate groups, real investment decisions, but under the MiFID II transactions reporting scheme this collective decision-taking will not be visible to regulators.

 

Why? Because the regulators want investment firms to determine the person taking the "primary" responsibility for the investment decision - even where the decision has been taken as a result of elaborate procedures with almost each corporate group's department taking its part.

 

Moreover, according to the new rules, the pre-determined criteria will have to be established by the investment firms for the MiFID II transaction reporting purposes, to easily identify such persons within the firm's structure.

 

The legal base for the said requirements is Article 8(1)(2) of the Commission Delegated Regulation (EU) of 28.7.2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the reporting of transactions to competent authorities.

 

Furthermore, Recital 9 of the said Regulation explains that where investment decisions are made by a person other than the client or by a computer algorithm, the person or algorithm should be identified in the transaction report using unique, robust and consistent identifiers.

 

And here we come to the point - the provisions at issue stipulate that where more than one person in an investment firm makes the investment decision, the person taking the primary responsibility for the decision should be identified in the report.

 

This is in order to ensure effective market surveillance, since "persons or computer algorithms which make investment decisions may be responsible for market abuse".

 

Interestingly, the conception for the need to designate - even within the committees established by the corporate decision-taking procedures and politics - persons taking the "primary" responsibility for the investment decision, appeared only in the latest stages of the legislative procedure for the MiFID II transactions reporting format.

 

 

RTS 32: Draft regulatory technical standards on reporting obligations under Article 26 of MiFIR (ESMA Consultation Paper – Annex B Regulatory technical standards on MiFID II/MiFIR of 19 December 2014 (ESMA/2014/1570), p.406-463)

 

Article 7(1)-(3)

Designation to identify the person within the investment firm

 

1. Where a person within the reporting firm makes the decision to acquire or dispose of a reportable financial instrument or to modify an existing contract in a reportable financial instrument, that person shall be identified in fields 68-70 of Table 1 Annex I of this Regulation following the same approach as defined in Article 6 (2) of this Regulation.

 

2. For formal committees making decisions the committee shall be identified using a code (pre-fixed with "COM") which is assigned to that committee and is unique, consistent and persistent. Investment firms shall keep adequate records of the composition of the committee and provide those to the competent authority upon request. A change in the composition of the committee shall not change the code assigned to that committee.

 

3. Informal committees and committees established on an ad-hoc basis, where no records according to paragraph 2 are kept, shall instead be identified by the person taking the primary responsibility for that investment decision..

 

It substituted in that regard previous, alternative, and, presumably, more close to real life, model.

 

It is noteworthy, Article 7 and Table 1 of the Annex I in the RTS 32 Draft regulatory technical standards on reporting obligations under Article 26 of MiFIR (ESMA Consultation Paper – Annex B Regulatory technical standards on MiFID II/MiFIR of 19 December 2014 (ESMA/2014/1570), p.439) provided for the entirely different solution for the problem of proper identification - in the context of MiFID II reporting - of persons taking collective investment decisions.

 

The description of the respective Field 69 of the said Table 1 reads:

 

"Trader identification code (investment decision)

 

Code used to identify the person or the committee within the reporting firm who is responsible for the investment decision

 

If the investment decision was made by a formal committee within the investment firm, this field shall be populated with a unique code starting with the prefix "COM" as defined in Article 7(2) of this Regulation."

 

It clearly follows that according to the ESMA's proposition the was no need to designate persons taking primary responsibility - within committees - for the investment decisions, and the committee itself was allowed to be designated in this role.

 

In the ESMA's draft MiFID II transactions reporting rules there were also detailed provisions on assigning unique reporting codes for particular committees.

 

ESMA's Consultation Paper, MiFID II/MiFIR of 19 December 2014 (ESMA/2014/1570) in that regard reads (p. 583, 584):

 

"Investment decision

 

105. Where a trader within the reporting firm makes the decision to acquire, dispose of or modify the reportable financial instrument that is the subject of the transaction report, that trader should be identified in the 'Trader identification code (investment decision)' field.

 

106. For committee decisions, ESMA proposes that investment firms should assign a separate trader ID designation for each committee, which starts with the prefix 'COM', for example 'COM1234'. This will enable NCAs to distinguish between investment decisions made by a particular committee and decisions made by an individual trader. In addition, investment firms should not use a generic committee designation to identify all committee decisions. This means that individual committees should be separately identified (e.g. 'COM1234' and 'COM5678') and should not be simply classified broadly as being a committee decision under a general code (e.g. 'COMMITTEE').

 

107. A change in the composition of the committee (e.g. individual committee members joining or leaving) should not cause a change in the committee's trader ID designation.

 

108. Investment firms will have responsibility for assigning the committee code and will be required to comply with the same key principles in line with assigning individual trader IDs and algorithm identifiers, meaning that the designation for each committee must be unique, consistent and persistent. While investment firms will have flexibility in how they assign the committee trader ID designations, they must keep adequate records regarding changes to the composition of the committee.

 

109. Informal committees or ones formed ad-hoc should not be considered as established committees where the investment firm would be able to deliver records of the composition on request by a NCA. Such informal or ad-hoc formed groups should be reported with the trader id for the trader taking the primary responsibility for that investment decision. If such a person cannot be defined the one sending the instructions for that trade should be considered as the person responsible for the investment decision."

 

 


 

 

 

Table 2 in the Annex I of the aforementioned Commission Delegated Regulation of 28.7.2016 mandates the following content to be reported in the corresponding Field 57:

 

"Field 57 Investment decision within firm

 

Code used to identify the person or algorithm within the investment firm who is responsible for the investment decision.

 

For natural persons, the identifier specified in Article 6 shall be used

 

If the investment decision was made by an algorithm, the field shall be populated as set out in Article 8.

 

Field only applies for investment decision within the firm.

 

Where the transaction is for a transmitted order that has met the conditions for transmission set out in Article 4, this field shall be populated by the receiving firm within the receiving firm's report using the information received from the transmitting firm."

 

As can be observed, in the final MiFID II Level 2 Regulation there is no reference to investment decisions made by formal committees within investment firms as well as any prefixes "COM" attached to reporting codes - envisioned by ESMA in the previous draft versions of the reporting rules.

 

Does it mean that the European Commission doesn't like any collective decisions, in particular, taken by formal committees?

 

I don't know the reasons behind such a U-turn that occurred in the lawmaking process.

 

Assuming that:

 

- individual committees were separately identified,

 

- designation for each committee was unique, consistent and persistent,

 

- investment firms kept adequate records regarding changes to the composition of the committee,

 

there seems to be little reasons why the model for formal committees being designated as the bodies taking "primary responsibility" for the investment decision shouldn't be accepted for MiFID II reporting purposes.

 

Even the ESMA's analysis of feedback from stakeholders, as referred to in the ESMA's Final Report Draft Regulatory and Implementing Technical Standards MiFID II/MiFIR, 28 September 2015, ESMA/2015/1464 (p. 361-378), does not contain a mention indicating that ESMA intends to withdraw from the conception of committees as bodies responsible for investment decisions in the MiFID II reporting framework.

 

It needs to be reserved, however, for the time being and given the circumstances described above, the designation of the type, for example, "COM1234" for the reporting of the trader identification code, seems to be banned under MiFID II in the light of the said Commission Delegated Regulation of 28.7.2016.

 

 

 

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