Firms face a daunting array of complex regulatory requirements, but one of the most fiendishly difficult to comply with appears to be transaction reporting. The recent substantial fines levied by the UK Financial Conduct Authority (FCA) showed that even tier-one firms have difficulty meeting the transaction reporting requirements. Considering that these breaches relate to the previous Markets in Financial Instruments Directive (MiFID) reporting regime, firms are becoming increasingly perplexed about how to meet the far more complex Markets in Financial Instruments Regulation (MIFIR) transaction reporting regime. While regulators continue to stress the importance of complete and accurate transaction reporting, the following 10-point path can lead firms closer to transaction reporting nirvana:
1. Do not be in denial about the costs of doing business
Budgets are tight everywhere, but investment firms need adequate resources to meet the regulatory requirements, and transaction reporting is one of the most important of these.
2. Do not under-estimate the costs of remediation
Being fined by the FCA is never pleasant, but despite recent evidence, fines are likely to remain an exceptional outcome. The regulator is, however, likely to make firms correct and back-report everything they have got wrong. The cost of this remediation will probably far outweigh that of establishing systems and controls to help avoid mistakes and in some cases may even cost more that the fine itself. In addition, if the FCA feels a firm has insufficient controls in place then it can impose a costly skilled persons review under s166 of the Financial Services and Markets Act 2000.
This is probably the quickest and cheapest win. In our experience, many of the mistakes firms make with their reporting stem from a basic misunderstanding of the requirements. They are not simple and one mistake resulting from inadequate training can lead to millions of incorrect transaction reports.
4. Valid does not necessarily mean correct
This is why we here at Kaizen exist. The regulators apply an extensive validation check on all the reports they receive. There is, therefore, a natural inclination for firms to believe that if a report passes the validation then it must be correct. This is not the case. Our accuracy testing finds that around 70% of reports which passed the validation checks contain at least one error.
5. Quality assurance checks are essential
Not least because it is the law: one of the requirements of the “methods and arrangements” for reporting set out in Article 15 of the Regulatory Technical Standards (RTS) 22. It is also one of the main requirements necessary for firms to be confident that their reports are accurate and ensure they do not perpetuate errors.
6. Firms must not mark their own homework
Using an independent quality assurance service to test every submitted transaction report will provide a thorough, impartial analysis giving absolute certainty about the state of the firm’s reporting.
7. Reconcile trades from front-office systems to records received by the regulator
This is a hard and fast requirement clearly stated in RTS 22. Some firms mistakenly believe this simply involves checking that the number of trades concluded matches the number of reports received by the regulator. This is simply not good enough. The reconciliation must include checking “the accuracy and completeness of the individual data fields and their compliance with the standards and formats specified in Table 2 of Annex I.” The FCA actively monitors whether firms have requested data from it to complete this check, and so any firm failing to perform this end-to-end reconciliation will be on the regulator’s radar.
8. Heed the words of the regulator
The FCA does not really want to sanction firms; it would much prefer that firms’ reports were complete and accurate so that it could do its job of monitoring for market abuse. The regulator sends a consistent and strong message to firms about what they need to do to achieve this goal, which firms must heed. The core message is that firms need adequate systems and controls for transaction reporting. This starts with a solid governance framework, supported by reconciliation and a data accuracy checking. The FCA also publishes information about many of the significant failings it sees, and its latest Market Watch 59 identifies the following errors:
- Incorrect time (especially after the transition to British Summer Time).
- Price not reported in the major currency.
- Re-use of identifiers for multiple clients.
- Incorrect client type code.
- Inconsistency between trading capacity and buyer/seller IDs
- Transposition of the “buyer” and “seller” identifiers.
9. Get market identifier codes right
It might sound innocuous, but the correct venue field is very important due to the associated validation and data accuracy checks. One of the most common mistakes is using an “operating level” market identifier code (MIC) rather than the correct segment-level MIC. This can result in the firm’s report eventually being rejected by the regulator because the instrument identifier is associated with the segment MIC rather than operational-level MIC. It can also affect how the firm populates other fields such as “country of branch membership”.
10. Do not be afraid to submit an “errors and omissions” form
The regulatory sky will not fall in if a firm submits an errors and omissions form. The FCA has reported that it has so far received around 1,300 errors and omissions forms from more than 390 firms, so those firms which do decide to report will not be alone. Failure to submit this form at the right time can, however, land firms in a lot more trouble: the FCA noted in Market Watch 59 that it is unhappy about firms making corrections without first submitting the form.
MiFIR transaction reporting is a very complex requirement which firms almost universally find difficult to meet (whisper it quietly, but some competent authorities have had their own difficulties too). Failure to make complete and accurate reports will result in costly remediation issues and can prove risky for the senior manager in charge of transaction reporting. Taking due note of the 10 points above will help firms reach their transaction reporting nirvana.
For more information on any of the points above, please get in touch for a conversation with one of our regulatory experts.
This article was first published by Thomson Reuters Regulatory Intelligence on 7 June 2019.