FCA Market Watch 70: Regulator Sharpens Claws on Inadequate Reporting Arrangements

The FCA has published Market Watch 70, where it reconfirms its commitment to oversight of the MiFIR Transaction Reporting regime while again, taking aim at investment firms’ substandard reporting arrangements. The regulator also highlights shortcomings with instrument reference data submissions, drawing particular attention to the consequences of such inaccuracies.   

The regulator was quick to follow up with the warnings in this latest Market Watch. Just one week after distribution, it fined a leading brokerage company £531,000 for transaction reporting, market abuse, and governance failings. Directors of that firm were also collectively fined amounts totalling over £200,000, with two also subject to prohibition orders. It's clear, the supervisory body is sharpening its claws when it comes to trading abuse, so firms must pay heed to the regulator’s warnings, or they too may feel the weight of enforcements and fines. 

Data reconciliations

The FCA is generally encouraged that “more firms are demonstrating awareness regarding the importance of arrangement that identify and remediate reporting issues proactively and promptly,” focusing here on the use of the Market Data Processor (MDP) to obtain data samples for review and reconciliation. The number of firms requesting data extracts is on the increase year over year, but it is still below what is expected given the number of firms submitting transaction reports, which we previously highlighted following a Freedom of Information Act request to the FCA .  

Similarly, the FCA is keeping track of the number of Firms that are submitting notifications of errors or omissions (“E&O Forms”), noting that some firms understand this obligation but that “data quality alerts suggest many are not conducting sufficient checks on their data”; this is in line with ACA’s own analysis which reports that 97% of firms have data quality issues.  

In respect of the E&O forms received, again the FCA highlights varying levels of quality. It cites  limited details with reference to proprietary systems and processes as not providing enough information, preferring notifications to be comprehensive and including examples to show how fields have been misreported and what the reports will look like after the correction is made. 

Data quality issues 

The FCA has used Market Watch newsletters to highlight items it identifies in transaction reports and to provide clarity and guidance for firms subject to the regime, and this edition is no different.  

National identifiers 

This edition is the third where the FCA highlights that incorrect priority national identifiers are used consistently in transaction reports. It reminds firms that the first priority must be used, i.e. for UK nationals a national insurance number, but significantly, the regulator now goes so far as to suggest that until these are obtained from clients as part of due diligence and onboarding processes, transactions are not executed. 

INTC 

The FCA highlights inaccurate use of the INTC protocol. This is a hypothetical aggregate client account and the ‘INTC’ designation should be used in the seller or buyer fields (as appropriate) and used for linking one or several market executions for multiple clients. The FCA have seen it used outside of these circumstances either for single client orders executed in multiple fills, to identify an internal trading account or where there is a failure to identify both market and client sides of the transactions.

Market Identifier Codes (MIC) 

When transmitting orders to executing brokers, who in turn then transmit the order to a trading venue, the Venue field (#36) should be populated with ‘XOFF”. However, the FCA has identified instances where the MIC code of the ultimate execution is included in the reports. This highlights the importance of firms understanding their part in a chain of execution and only including that in the transaction reports and not looking forward or backward beyond the immediate counterparty or client. 

Instrument descriptions

The FCA highlights that it expects to see clear descriptions of financial instruments traded where it is not admitted to trading or traded on a trading venue. It is possible to infer from this statement that the regulator might see abbreviated instrument descriptions, internal codes or acronyms or otherwise unclear and non-descriptive statements, which hinder its ability to monitor the orderly functioning of the markets.  

Principal firms 

Clarity has been provided by the FCA on the approach that Principal Firms and their Appointed Representatives (ARs) should take when transaction reporting. This is the first time the regulator has addressed how these scenarios are reported. The FCA has always viewed an AR as the same as its Principal firm, and for transaction reporting this is no different. The AR should not be identified in the (i.e.) executing entity field when it is involved in the activity of reception and transmission of orders; this should be the principal firm.  

Instrument Reference Data 

Transaction reporting is reliant on the complete, accurate, and timely submission of instrument reference data (“IRD”) which is the responsibility of trading venues and Systematic Internalisers (“SIs”). Without this information the FCA does not have an accurate picture of what instruments are traded on venues and with SIs; it asserts in this edition that it is therefore unable to validate the transaction reports it receives which in turn limits its ability to conduct effective market oversight. Instrument reference data is published on the FCA’s Financial Instruments Reference Data System (FIRDs). 

Finally, the FCA notes the following actions, relevant to trading venues and SIs that submit IRD: 

• Ensure appropriate systems and controls in place to submit, and correct any IRD 
• Implement procedures for reviewing feedback files, investigating rejected records, and notifying the FCA 
• SIs to only report IRD for those instruments in which they are an SI and not those that are admitted to trading on trading venues or those that are not reportable 
• Use of appropriate CFI codes as issued by the national numbering agency (NNA0) 
• Only populate the issuer or operator of the trading venue field with their own Legal Entity Identifier (LEI) when they create or issue the instrument 
• Termination dates to reflect the data and time the instrument is executed to cease trading 
• Not to populate the commodity or emissions allowance derivative indicator field with ‘TRUE’ where the instrument is not a commodity derivative.  

Our guidance  

The prompt identification of errors can significantly reduce the cost and reputational risk from regulatory scrutiny and enforcement as well as the operational burden of re-reporting. So, we recommend that firms:  

• Implement a robust and sufficiently detailed monitoring framework concerning transaction reporting arrangements, including the static data that feeds into the reports
• Ensure that monitoring processes reflect your business's unique activities and arrangements and remain independent from first line controls 
• Use data samples from the FCA to regularly review the content of their transaction reports, both to ensure accuracy and completeness

How we help 

Complete this form or call +44 (0)20 7042 0500, to speak with our team of market abuse and transaction reporting specialists, who are on hand to help you detect trading misconduct and identify failings in the completeness, accuracy, and timeliness of your trade and transaction reports.  

Our services include: 

• A free transaction reporting review to help identify problems in your regulatory reporting before the regulator does. Click here to book.
  
  This is conducted over ACA Regulatory Reporting Monitoring & Assurance (ARRMA), a unique service offered by no other firm, blending technology and consulting to identify transaction reporting errors and provide practical advice/support to resolve them. Our ARRMA findings reveal that 97% of reports under MIFIR/EMIR contain inaccuracies, and on average each report has 30 separate error types. For more information, visit our ARRMA and transaction reporting webpages. 
• Market abuse surveillance, employee compliance, and control room tools, designed to identify non-compliant trading and investment activity, and to monitor behaviours and the flow of sensitive information, all offered over our award-winning ComplianceAlpha™ regulatory technology solution.  
• Scheduled and customised training courses to help you and your firm understand the regulatory framework and apply compliance.