FCA’s latest reporting fine highlights importance of robust testing and controls

The £34.5 million fine issued this week by the FCA is the first enforcement action for failing to comply with Article 9 of EMIR and highlights the increasing importance the regulator is placing on data quality.

It was generally accepted that the regulator would eventually take enforcement action against a firm for EMIR breaches and there would have to be a firm first in line.  In this case it was Merrill Lynch International, however it could probably have been one of many firms that have struggled to deal with the EMIR reporting requirements. 

The FCA understands that reporting won’t be 100% all the time however its final notice highlights insufficient testing to ensure the accuracy and completeness of reports as well as weaknesses in oversight arrangements that would have contributed to the under reporting of 68 million exchange-traded-derivatives over a two year period. 

Poor quality data is industry wide 

While these are serious failures, we would argue that they are not unique to Merrill Lynch.  Poor quality data is a widespread industry problem, something that the regulator and we here at Kaizen have been highlighting for some time. 

Just last week Ana Fernandes, of the FCA’s Markets Reporting team, focused on the issue of data quality at an industry conference we attended.  She highlighted the importance of  having comprehensive in-depth testing and reconciliations in place at a frequency appropriate to trading volumes.  Firms must test for the accuracy and completeness of their transaction reports and have the appropriate oversight arrangements to detect and remedy systemic problems.  Ana said there were ‘high expectations’ come 3 January 2018 when MiFID II goes live that they would see better data and this is as essential for EMIR, as it is for MiFID and MIFID II.

Just the tip of the iceberg

Last year we published our analysis of FCA MiFID I reporting fines which shows how easy it is to get reporting wrong.  More often than not, firms continue to get false confidence from the validations provided by ARMs and Trade Repositories without testing whether the data at source is correct.  Ana in her speech last week focused on just that, “Don’t think that because the file has gone to the ARM and the FCA that it is done” she said. 

The final notice clearly demonstrates the FCA’s expectations for robust and comprehensive testing of reporting.  This requirement is more clearly articulated for MiFID II, where testing for accuracy and completeness is mandatory under RTS 22, Article 15 and these controls should be in place at go-live.  Similarly, from 1 November (next week!) when EMIR Level 3 goes live, a lot of reporting requirements currently in the EMIR Q&As become part of the Regulatory Technical Standards and therefore become more easily enforceable by the national competent authorities.

The FCA says the fine, the largest so far for transaction reporting, ‘reflects the importance’ it puts on this type of reporting and the important role it plays in ensuring a transparent market. The action also shows that the regulator will fine you more if you’ve got it wrong previously and that it is applying the same approach to EMIR as it does with MiFID in terms of fining on a per record basis. 

Expect more fines as regimes mature

As the G20 reporting regimes mature, we are seeing a general trend of increased enforcement activity.  The CFTC has been active recently re DFA, and we also saw the recent ASIC fine by the Australian regulator so I expect further fines to follow.

Improving firms’ reporting data quality is the reason we at Kaizen exist.  We have several clients that report over 100k trades per day to a trade repository.  With these types of volumes, it’s very easy to end up facing an eye watering fine which is why we have designed our services to protect both the firm and the individuals with reporting oversight responsibility under the senior management regime. 

Please don’t hesitate to contact us if you would like to discuss your transaction reporting data quality or any of the issues raised in this piece.