Trading after 3 January without an LEI would be a breach of the MiFID II rules, and could lead to fines.

The European Union's securities watchdog has urged financial firms not to delay applying for a mandatory unique identification code required under a new directive from January, designed to inject transparency into trades and reform reporting standards. 

The European Securities and Markets Authority (ESMA) had said the legal entity identifier, or LEI – a 20-digit code assigned to each market participant – was compulsory under MiFID II, the second iteration of the Markets in Financial Instruments Directive. 

The LEI will make it easier for regulators to identify who is behind transactions, while the updated directive will place intensified scrutiny on trades made by a wider range of industry players, including wealth and asset managers and fund houses. 

Trading after 3 January without an LEI would be a breach of the MiFID II rules, and could lead to fines. 

“Based on its previous experience with EMIR [European Market Infrastructure Regulation] reporting, ESMA urges reporting entities not to delay in addressing this important matter, as advance preparation will help in avoiding backlogs and ensuring that all market participants are ready for the new regime,” ESMA said in a statement.

Complying with MiFID II is estimated to cost money managers more than $1.1 billion, according to data from IHS Markit and Expand, the Boston Consulting Group-owned firm. Over half of this figure will be spent on enhanced reporting and mainlining more transparency into the sector, the data suggests. 

Notably, the directive places onus on money managers with European operations to monitor and record a far wider range of communications than ever before, including video conferences, online messaging, web chats, emails and all telephone calls. In preparation, firms are crafting monitoring programmes proportionate to the size, nature and complexity of their business. 

But developing such systems organically will unlikely be an easy task, especially for smaller money managers. 

“To design a solution that provides both the level of control and reporting standards for MiFID II compliance, firms must analyse and map a detailed sequencing of events and processing steps,” said Jeremy Taylor, head of capital markets business consulting at EPAM UK, a software provider to the industry. “Given the existing complexity of many firms’ current system architecture, this will be a complex challenge.”

He continued: “Since reporting is, by definition, downstream from many of the pre-trade and execution processes, firms need to ensure that the technology components built to comply with MiFID II are designed to provide a front-to-back service that is normalised across instrument type, order type, counterparty type, and venue. Such diversity and complexity requires firms to install business-rules engines to build the necessary workflow logic. Firms will also need flexibility to make changes without expensive system adjustments.”

What is also pressing for money managers is their obligation to, for the first time, separate the costs of investment research from trading and management fees under MiFID II – a process referred to as “unbundling”. 

Some firms are still weighing whether to foot these research bills themselves or pass costs onto clients, although the general consensus is that the industry will take most of the hit. 

Amundi, BNP Paribas and Carmignac, however, are among the small number of firms that have said they will let their clients pick up the bill once MiFID II takes effect.