FCA makes data integrity a clear focus for 2018/19

The FCA recently published its business plan for 2018/19.  In this blog, we highlight the areas impacting regulatory reporting and other areas of interest to us and our clients.

MiFID II

As we are now six months into MiFID II, the FCA has signalled its intention to focus on market cleanliness, leveraging the more granular transaction reports that MiFID II requires. Another priority is to look closely at the operation of the primary and secondary markets where transaction reporting data, if it is of high quality, will be useful in its analysis.

In the business plan’s introduction, FCA Chief Executive Andrew Bailey explains how the major changes resulting from MiFID II requirements will improve “market integrity in wholesale markets”. One consequence, he says, is the “strengthening of the transaction reporting…regimes” and that the FCA “will closely monitor how well firms are complying with these new requirements”.

Market integrity

MiFID II’s expanded scope will provide the FCA with more information on transactions. The plan says the FCA will “monitor, detect and investigate potential abuse in these markets and enforce against unlawful behaviour where appropriate.” It will focus “supervision monitoring on the fixed income, commodity and non-standard derivative markets,” and will use “indicators such as market cleanliness data and the number of suspicious transaction and order reports to assess the potential harm from market abuse which damages confidence and participation in the market.”

The FCA goes on to state that:

“MiFID II provides us with better tools to deal with potential harms from algorithmic High-Frequency Trading (HFT) by introducing new obligations and systems and controls for both traders and venues. We will focus supervisory efforts on monitoring compliance with these new rules and increasing our understanding of the use of trading algorithms and other innovations across the wholesale financial markets. We will use existing diagnostic work on HFTs, circuit breakers and mini-flash crashes to inform this work. This will enable us to anticipate and deal with potential harms this kind of technological advancement may create.”

We expect much of the analysis is conducted by using transaction reports as well as using the granular order data from trading venues.

The FCA plans to publish a report in Q4 of 2018/19 detailing its approach to market integrity. However, the business plan points to the active use of transaction reports by the FCA in the coming year.  It would be reasonable to assume that preceding use of the data, the FCA will undertake some assessment of reporting quality and completeness: the types of business rules alluded to by Ana Fernandes in last year’s Transaction Reporting Forum run by the BBA (now UK Finance). Any errors or incomplete reporting will become more visible to the regulators so we should expect activity in this area probably more likely in 2019 once firms have had an adequate amount of time to iron out wrinkles in their reporting systems. 

RegTech developments

The FCA is continuing with its TechSprints and work on the use of advanced analytics. As a RegTech firm, Kaizen is participating in these. An area of obvious interest is its proposals to utilise artificial intelligence/advanced analytics as part of the supervisory process to detection areas of non-compliance. Transaction and EMIR reporting would be obvious candidates for this type of activity as well as:

  • automated detection of unauthorised business activity on the internet through a variety of new technologies
  • testing advanced Natural Language Processing (NLP) technologies and semantic language models in an effort to automate what would otherwise be manual supervisory tasks
  • automated evaluation and detection of misleading advertising.

The FCA will also be following up on its Call for input on Machine Executable Regulatory Reporting.

Monitoring firms’ use of data

The use of data by financial services firms is of obvious interest to the FCA and a potential source of new benefits as well as risks. To address this they will be monitoring the use of machine learning the use of big data pools, algo trading developments and the wider use of artificial intelligence within the regulated community.

Cryptocurrencies

Some of our clients execute transactions in cryptocurrencies.  This has been an area of difficulty as there is no clear or consistent treatment of cryptocurrencies across jurisdictions. The FCA sees cryptocurrencies themselves (i.e. those designed primarily as a means of payment/exchange) as being outside their regulatory perimeter. As a regulator, the FCA is concerned about protecting consumers: Initial Coin Offerings (ICOs) and cryptocurrency derivatives represent risks that potentially fall within its remit so the FCA will participate in a forthcoming Treasury Committee inquiry.

You can read the FCA’s 2018/19 business plan in full on its website