A recent FCA fine of a boutique UK investment bank is a good example of how the UK regulator is using transaction reporting data to detect market abuse and financial crime.
In the final notice released last week, the FCA referenced that their investigation was (in part) based on their analysis of transaction reporting data and material received from the firm, which was fined £178,000 for “failings which led to the risk of facilitating fraudulent trading and money laundering.”
At Kaizen we are often asked “what does the regulator do with all of this transaction reporting data?”. It is often a criticism levelled at regulators – do they actually do anything with the data?
The answer is – yes they do. By having an audit trail of trading activity reported under the MiFIR Transaction Reporting regime the authorities were able to piece together trading patterns that highlighted “sophisticated and organised criminal activity”.
Being a former regulator myself, I know first-hand that regulators are looking at the data and continually assessing, monitoring and considering a long list of offences, many of them not related to market abuse.
ESMA’s recent review in relation to MiFID transaction and reference data reporting shows that they intend to use transaction reports to monitor other parts of the rulebook, including suitability and compliance with the buy-back programme safe harbour under the Market Abuse Regulation.
Long gone are the days when regulators monitored firms by relying on visits and the review of prudential related returns. Given the sheer scale of trading activity and the fast pace in which markets evolve, having a database of transactions showing data elements that include traders, decision makers and who is buying and selling when and where, is extremely powerful.
What’s crucial is that the reporting regime keeps up with market developments. Although the key proposals following ESMA’s recent review look sensible, there are a number of missed opportunities with a key one being in relation to cryptocurrencies where the level 1 text needs updating.
The final notice also highlighted the need for firms to have effective systems and controls to monitor their own trading and payment activity. Having accurate and complete transaction reporting not only allows the regulator to meet its own objectives but should allow firms to detect unscrupulous activity as a first line of defence.
Having confidence in UK and global markets is of paramount importance and given that the competition created by MiFID has led to a fragmented marketplace and trading environment, the need for regulators to have a holistic cross-market view through accurate and complete transaction reporting has never been greater.