The FCA published revised transaction reporting guidance in TRUP 3.1 on 6th February 2015. The key changes come into effect six months after publication on 6 August 2015 whilst other changes which are considered to be for clarification purposes have immediate effect.
The changes impact the following areas:
- Trading capacity field
- Reporting the unit price for bonds
- Venue field clarifications
- Strategy trades
- Self-hitting trades
- Firms’ systems and controls over transaction reporting activities
Capturing changes in the firm’s and clients’ positions
TRUP 3.1 states that “Firms must ensure that the trading capacity field is populated in transaction reports so as to accurately reflect the changes in positions of the firm and its client(s) at the time of the transaction(s).”
FCA are looking to capture under its rules and guidance what is reportable in terms of changes in position. There are some scenarios where firms’ current use of the trading capacity field results in a change in position of a client or a firm to not be reflected in the transaction reports. This requirement could be interpreted more broadly to require the reporting of all changes in client and firm positions and I don’t think that is the intention. This would introduce full lifecycle event reporting. Lifecycle events are post transaction events which results in changes to existing contracts such as increases in notional or a change of counterparty or beneficiary. Lifecycle event reporting is not being introduced in TRUP 3.1 rather MiFID II sets out the requirements in respect of lifecycle events. The current MiFID II consultation excludes derivative novations, assignments and compressions from reporting which would not enable these changes in position to be captured.
Trading capacity changes
Whilst on the surface the change appears straightforward, it masks a great deal of complexity. The cause is the fact that the legal agreements between a firm and its clients and counterparties determines how this field is to be populated.
In general this can work quite well. Many firms operate in a principal capacity and populate accordingly. Where firms operate in both a principal and an agency capacity, the complexity begins. Where a firm provides a fill from its own book but is acting as agent for its client it is operating in both a principal and agency capacity. The new TRUP guidance requires that both capacities are to be reported. This is achieved by using the “internal” to denote transfers in and out of an internal account. It is expected that positions would always clear from the internal account. The same process will be applied to trades where the firm fills an agency order by trading in a principal capacity against a counterparty or on venue.
This means firms will have to have reporting processes in place to capture booking scenarios where there is a transfer from a principal book to an agency book/client account. Recoding of systems to put this into effect is likely to be non-trivial exercise particularly where an actual internal account or washbook is not used.
The TRUP includes brief examples which I would recommend are closely reviewed.
These changes are to be implemented by 6th August 2015.
Unit price for bonds and bond futures
The price to be reported for Bonds has always been the clean percentage price where the percentage is based on the par value of the bond. There has however, been open questions around instruments that are bond like but are traded in a similar way to equities. This would include securitised instruments that pay a coupon. TRUP 3.1 clarifies that such instruments should be reported with the traded price. So if it is traded as based on a percentage of par, the percentage is reported whilst if it has a price in monetary terms that value should be reported (in the major currency).
As trading conventions for bonds are not uniform, we are still left with the problem of converting prices from the market convention to a percentage. So problematic bond instruments such as French convertibles which are usually traded with a dirty price based on units and Belgian OLOs which are trading with prices agreed in the form of a yield, will now have to be reported in percentage terms. The Belgian OLOs are especially problematic as firms are required to report trading in these instruments to the Belgian FSMA with the price in a yield format which is contradictory to MiFID and FCA requirements.
Reporting the venue
Reporting the venue on which a trade is executed remains a problem field for firms and we see many instances where errors have been introduced when capturing the venue identifier. Whilst there are no new obligations emerging from the TRUP changes, the revised text goes some way to clarify how to populate this field however there are still further elements that firms need to consider.
Sup 17 and TRUP 3.1 require the use of a MIC code when trading under the rules of a “trading venue”. MiFID I provides the applicable definition of trading venue able:
“(8) ‘trading venue’ means a regulated market, MTF or systematic internaliser acting in its capacity as such, and, where appropriate, a system outside the Community with similar functions to a regulated market or MTF;”
There are numerous venues within the EU which have been allocated a MIC code. By definition, as they are within the EU they cannot be considered to be a regulated market or MTF (Multilateral Trading Facility). Similarly, there are venues or platforms outside of the Community which have been allocated MIC codes, many of which cannot be considered to be of similar functions to a regulated market or MTF.
As such it is not sufficient to establish that there is a valid MIC code for the platform upon which the trade was undertaken. An assessment needs to be made as to whether the platform has similar functions to that of a regulated market or MTF.
MIC segment codes
MIC codes are now split between an operator code and the segment code. The venue field should reflect the market identifier code (MIC code) of the market segment where the trade is agreed to be under the rules of the trading venue unless the trade is an OTC derivative trade. OTC derivatives are always reported as “XXXX” in the venue field.
Happily, the FCA has introduced some latitude in those circumstances where the segment traded is unknown or uncertain whereupon the Market Operator MIC code can be reported. This scenario arises when trading on Xetra where exchange fill data does not identify the segment the instrument was traded on and therefore the operating MIC (XFRA) may be utilised.
Strategy trades are trades where a derivative and its associated underlying are traded at the same time. For strategy trades executed on Aii markets, the underlying, which often has an ISIN identifier, cannot be reported using the Aii market’s MIC code as an Aii identifier is expected by the ARMs and FCA’s ZEN system. The guidance clarifies that in such instances “XOFF” should be reported in the venue field and the ISIN of the underlying in the instrument identifier field.
Where a firm trades on exchange, particularly if they are trading in significant volumes, they may hit an order on the order-book which has been placed by another desk, algo or DMA client submitting orders for the same firm. The guidance clarifies that such trades are to be considered transactions and are therefore reportable irrespective of subsequent clearing activities which are likely to net out the two trades to zero. Where the trade is immediately cancelled prior to a trade report being published, then an execution is deemed not to have taken place and a transaction report is not required.
Firms are expected to have implemented reporting in compliance with the above by 6th August 2015.
Transaction reporting arrangements within firms
As in previous versions of the TRUP there is guidance on the FCA’s expectations in respect of reporting firms’ controls over the accuracy, completeness and timeliness of their reporting. TRUP 3.1 is more explicit than previously and sets out expectations in respect of the training that those involved in transaction reporting are expected to have (including elements of the training content) and the expectation that firms will conduct front to back reconciliations between front office systems and the reported transactions.
Whilst many firms will already have controls in place, a review of the controls and whether they satisfy all the areas outlined in the TRUP is recommended.
Kaizen Reporting Services
Kaizen offers a suite of services which meet all the requirements of the TRUP 3.1 including execution of front to back reconciliations, reconciliations to FCA data, report testing services as well as comprehensive training on the reporting obligations and reporting health checks.
If you have concerns or questions about EMIR or Transaction Reporting then please contact us. We would be happy to provide an initial review of your transaction reports at no cost allowing you to try out our report testing service.