Another day another Market Watch newsletter. Without a commute out to Stratford, the FCA’s Markets Reporting Team (MRT) has been busy during lockdown using that additional time to look at the quality of some of the transaction reports they’ve been receiving. They’ve issued some further reminders on areas where they are seeing reporting issues, and what control arrangements firms are required to have in place.
Systems and controls
In its commentary, the MRT point out that firms need to have access to a deep understanding of the reporting requirements that is sufficient to identify errors that may not be highlighted by a reconciliation. In my experience, most reconciliations being performed only scratch the surface and fail to reconcile back to source; which will be the trade table in each Order Management System. Even the full reconciliations we conduct at Kaizen will not identify all issues. Where a value in the source system is dutifully carried through to the transaction report, it does not prove it is correct. Timestamps, incorrect reference data, price and price type, these are all areas where accuracy testing is required.
Further, as we get deeper into MiFID, both EU regulators and the FCA will expect deeper accuracy testing where all issues can be tested for. Only by performing deep testing can management and the FCA alike take comfort that the test results provide a true picture of reporting quality. Lighter touch testing, whilst a cheap and easy fix, will not satisfy this obligation.
Cessation of ARM services
As a reminder, the FCA notes that where a data reporting service provider has indicated it will cease provision of its services, it is up the affected firms to make the necessary arrangements to ensure their reporting continues unimpeded.
Firms that currently use NEX Regulatory Reporting will by now know they need to put alternative arrangements in place. If you need any assistance, either in selection of an alternative provider, or in the implementation and quality control testing that would be required, we can help.
Specific reporting issues commented upon in Market Watch 65
Unreported transactions: it seems the FCA believes some firms are not assessing reportability properly. This can be a problematic area and firms must be very careful when making their assessments. Fortunately, we re-perform all reportability assessments which helps ensure completeness of reporting but also captures changes in reportability due to late changes to FIRDS.
Late reports: this is an interesting one because despite the best efforts of firms, there will always be some instances where transaction reports will be submitted late after the T+1 deadline has passed. What the FCA is most concerned with, is where the systems and controls to enable timely reporting are not in place.
Country of branch for the buyer/seller: MRT reiterates that these fields are to be populated only for clients and with the branch or head office country code that received the order or generated an order under a discretionary mandate.
We often see issues with this field but it is a relatively easy one to fix and will help greatly improve reporting quality.
Trading Venue Transaction Identification Codes (TVTICs)
Firms are failing to report the right code consistently. This can be caused by processing issues or a failure to convert the values received in FIX messages in line with the specific trading venue’s instructions. If you are not sure on the requirements here, please get in touch.
Again, MRT is at pains to remind firms that they should be evaluating reportability of a derivative instrument based on the “immediate underlier” where the derivative itself is not found on FIRDS.
This problem arises where a derivative has a derivative underlier i.e. there is a chain of derivatives. In such cases the immediate underlier will be a derivative. For example, where a CFD is traded on an equity option, the underlier is the option, NOT the equity shares. This principle will extend to assessing the instrument’s reportability and to filling in the supporting instrument fields 42-56: they should reflect the values for the immediate underlier.
Dealing with errors and omissions
The FCA has a standard form that must be completed. Whilst being quite scary for those named on the form it does assist the FCA in its general monitoring efforts and they have asked that firms submit these promptly and not to wait until after an issue has been fully resolved.
They also remind firms that errors and omissions will need to be remediated with back reports/replays of the impacted activity.
If you want to know more or need assistance on any of the above please contact us and we’d be happy to help.