Last week’s announcement of the formation of APARMA, a Trade Association (TA) for Approved Reporting Mechanisms (ARMs) and Approved Publication Arrangement (APA) providers, is long overdue. The implementation of MiFID II brought with it a significant increase in the rules and regulations covering ARMs and APAs (which took over from Trade Data Monitors (TDMs), under MiFID I) and with it a lot more risk and the potential to be penalised for breaching their obligations.
Collectively known as Data Reporting Services Providers (DRSPs), ARMs and APAs facilitate the effective supervision and transparency of financial markets allowing regulators and investors to receive timely and comprehensive trading information.
The other category of DRSP is Consolidated Tape Providers (CTPs) which collect trade reports from APAs and Trading Venues. Forthcoming changes to regulations in the UK and EU could mean that it’s just a matter of time before this new trade body brings CTPs into the fold but likewise there is huge debate about the need and effectiveness of such a requirement. That debate will surely continue…
The rules governing Data Reporting Services Providers are substantial and are defined in the FCA’s Regulatory Framework, which comprises:
- The Data Reporting Services Regulations 2017/699
- UK MiFIR
- UK MiFID Org Regulation (Commission Delegated Regulation 2017/565)
- UK MiFIR Delegated Regulation (Commission Delegated Regulation 2017/567)
- MAR 9 of the Handbook
MiFIR also outlines in Regulatory Technical Standard (RTS) 13 the obligations covering the authorisation, organisational requirements and the publication of transactions for DRSPs. The most significant aspects are in Articles 10 and 11, which set out the rules governing how ARMs, APAs and CTPs should manage incomplete or potentially erroneous information.
The European Securities and Markets Authority (ESMA), recently published Draft RTS setting out criteria for the sound and prudent management of DRSPs as well as for their operational effectiveness under MiFIR. Many reasons have contributed to the reduction in the number of ARMs and APAs over time, including additional regulations, data and rule complexities, operational risks, Brexit and reduced margins to name a few.
However, the formation of APARMA will give members renewed purpose, momentum and a unified, louder voice when speaking with regulators and clients alike.
Following yesterday’s ‘Dear CEO’ Letter from the FCA, we are seeing the regulator outline their approach to supervision:
“This letter outlines our view of the key risks of harm in the DRSP portfolio and communicates what we expect DRSPs to do to minimise potential risks to consumers and market integrity from failures to meet regulatory requirements”.
The FCA will also expect the DRSPs to evidence the actions they have taken in response to this letter.
Along with this, the FCA have reiterated that enforcement, reviews and assessments will be applied “with real and meaningful consequences for firms who do not follow the rules” and highlighted their take on the key risk of harm:
- The Market is concentrated among a small number of DRSPs, limiting the opportunity for clients to change provider and may lead to lower incentives to provide high quality services
- DRSPs may have inadequate systems and controls to identify incomplete and potentially erroneous trade or transaction reporting data
- Insufficient operational resilience may lead to disruption for market participants, consumers and Regulators, or the loss, compromise, or lack of availability of data
This is a clear indication that competition is essential and encouraged to create higher levels of reporting services, along with complete and accurate data, that has been clearly defined over many years, since pre-MiFID II inception. APARMA lobbying will be key to this evidencing of operational resilience but the FCA have stated their expectation of an “Open and co-operative relationship”, which I’m sure will be tested from both sides.
From Kaizen’s perspective, we have been checking the accuracy and completeness of trade and transaction reporting across multiple regimes for a nearly a decade now, identifying potentially erroneous reporting. The FCA’s guidance is clear and firm but the new trade association for APAs & ARMs is perfectly timed to build their point of view around the complexities of MiFID II. Hopefully, all parties can work together to create an improved and innovative framework in a post-Brexit regulatory environment.
- For a conversation with one of our regulatory specialists about the topics mentioned above, please contact us.