Transaction Reporting: Seven More to Study

It sounds as though the FCA might be losing patience. Following on from Market Watch 59 (published in April 2019) the regulator has just published Market Watch 62 where yet again it is taking aim at the numerous data quality issues seen in MiFIR transaction reports.

Whereas Market Watch 59 focused on 6 Common Failings the FCA had observed, and which were relatively basic, the issues raised in Market Watch 62 are generally less straightforward. Some indeed point to the inherent complexity of the transaction reporting requirements and the associated need for firms to understand not only the regulations and accompanying validation rules but also their own data, systems and trading processes in order to get their reporting right. The FCA has highlighted many of these issues before, and as we approach the two-year anniversary of the requirements, ‘complexity’ is no longer holding much, if any, water as an excuse for incorrect reporting. The FCA’s persistent focus on the topic and the fact that many firms do not appear to be taking on board their observations make it increasingly likely that the FCA’s patience might be wearing thin. Until firms start submitting reports in a timely, complete and accurate fashion, transaction reporting is likely to remain high on the regulator’s agenda.

Price

The FCA has once again reminded firms that prices must be reported in the major currency and not the minor currency (i.e., pounds rather than pence) when expressed as a monetary amount. In Market Watch 62 the regulator has also pointed out errors in the completion of the price currency field; in particular, inconsistencies between that field and how the price is expressed. FCA has also identified problems in respect of the price multiplier which is often not corresponding to the way in which quantity or price values have been expressed when firms are seeking to denote the number of units of the underlying instrument represented by a single derivative. Misrepresentation of the value of an investment is fundamental risk to the efficacy of the FCA’s market abuse surveillance. Anomalies here are likely to be flagged as potentially abusive transactions, which are then ripe for further investigation and attention by the regulator.

National Identifiers

Errors are still being made with regard to natural person identifiers, both in respect of those making the execution or investment decision and client identifiers. Many reporting firms are using inappropriate values such as the default for all other countries (i.e. passport number or the CONCAT) or those not designated as the first priority in Annex 1 Table 2 of RTS 22. These fields are fundamental for market abuse detection; without them those involved in a potentially abusive transaction remain anonymous.

Buyer and Seller Decision Maker

The FCA has reminded firms that buyer and seller decision maker fields should only be populated in certain circumstances, namely when an investment firm operates under a discretionary mandate or where the buyer or seller respectively has granted a power of representation to a third party. In these circumstances the identifier of the decision maker should be present, either by virtue of a legal entity identifier (LEI) of an investment firm, or a natural identifier of the individual (being granted the power of representation). Aside from in rare circumstances, an investment firm or representative would only be the decision maker for one side of the trade (i.e. either the decision to buy or the decision to sell) so firms submitting transaction reports should remember to only populate the relevant side of the trade dependent on the direction their particular client is trading in.

Executing entity identification code

Surely one of the simplest fields to populate - this field designates the entity that executed (within the meaning of RTS 22 Article 3) the transaction. Put plainly – the Firm’s own LEI! This field gives the FCA the ability to ascertain when transaction reports have not been submitted and the regulator highlights specifically that it has been unable to identify transaction reports from a number of market participants due to incorrect population of this field as only one side of the report is submitted and so the complete chain of events cannot be reconstructed. Instead of using its own LEI, some firms have populated this field with the LEI of the broker to whom the order was transmitted.

Another common error the FCA has highlighted is that firms are populating field 6, the submitting entity identifier field, with their own LEI. The FCA remind firms that where an approved reporting mechanism (“ARM”) is used for submitting reports to the FCA, this field should be populated with the LEI of that ARM.

Aggregate client account reporting

The ESMA Guidelines on Transaction Reporting, order record keeping and clock synchronization under MiFID II (“the Guidelines”) permit, at section 5.23, the designation ‘INTC’ (Internal client) to be used for aggregating, or grouping orders. The Guidelines are clear that “It should not be used for reporting an order for one client executed in a single execution or for an order for one client executed in multiple executions.” Instead, the appropriate use is in respect of a single execution for multiple clients, or multiple executions for multiple clients, as long as there is a corresponding transfer into and out of the aggregate client account on the same business day. The Guidelines emphasis that the movement through INTC is a convention only and “does not indicate that such an internal client account exists in reality or that the ownership of the instrument actually passes through the Investment Firm’s books”.

The FCA has seen INTC used in circumstances clearly prohibited by the Guidelines – in particular where multiple fills or executions have been obtained for one client. It has also identified where the transfers in and out of the INTC account do not end up flat at the end of the business date. Firms should review their use of INTC without delay as these are clear and readily identifiable indicators to the FCA of a Firm’s transaction reporting being incorrect or incomplete, respectively.

Indicator fields

Fields 61-65 are the final chapter in the transaction reporting story. Not all fields are relevant in all circumstances; for example the commodity derivative indicator is only required to be completed for instruments of that nature. The FCA has seen investment firms populate a hardcoded value of ‘false’ in this field for all reports, even those that do not pertain to transactions in this instrument class. Similarly, the short selling indicator has been populated with a default value of ‘UNDI’ (information not available) even where the instruments are not covered by the Short Selling Regulation (“SSR”). The FCA is at pains to remind firms that not all fields are mandatory in all circumstances, and appropriate population (or leaving the field blank) is paramount to ensuring complete and accurate transaction reports.

Errors and Omissions

The FCA has been proactively contacting firms about some of the items identified above. However, firms should not rely on the FCA nor their contracted ARMs or any third party service providers for data quality and report accuracy. The FCA reminds firms to obtain data samples and conduct independent reviews using their own data for reconciliations to satisfy themselves of the completeness and accuracy of the transaction reports and not to rely on data samples from, for example, ARMs.

Where these reviews identify transaction reports that are not complete and accurate, this fact should be notified to the FCA without delay using the FCA’s Errors & Omissions form. The FCA emphasises that these notification are required even when transaction reporting is outsourced to a third party.

It’s clear from their continued publications that the FCA is still far from happy with the quality of transaction reports being submitted by investment firms. With it now stepping up proactive outreach to inform firms about certain errors in their reporting it is clear that the FCA’s monitoring of reports and assessment of data quality is becoming more sophisticated and direct action is being taken. We know from the dozens of previous enforcement actions in this area that the FCA is unforgiving of firms which do not react effectively to issues which it has communicated to them, so time may be running out for those which have not yet implemented a regular end to end reconciliation process.

On-demand webcast, Transaction Reporting: Expectations vs. Reality:

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How We Help

ACA has a range of solutions to review your firm’s reporting frameworks and help you deliver complete, accurate and timely reporting which can reduce the cost and reputational risk that arises from regulatory scrutiny and enforcement. These include:

• A thematic review of your transaction reporting, EMIR trade reporting, and post-trade transparency – a deep-dive assessment to make sure you have the appropriate monitoring, oversight and governance in place. These are available as a combination of reporting regimes or each as a standalone service.
• ACA Regulatory Reporting Monitoring & Assurance Support (ARRMA) - field-level monitoring and reconciliation of your firm’s transaction, post-trade transparency and EMIR trade reporting on an ongoing basis to help you ensure that it remains complete, accurate and timely and that any errors arising from changes to systems, data or activities are promptly identified.

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About the Author

Charlotte Longman is a Director focused on UK Compliance. She is responsible for developing a mixed portfolio of clients, with a focus on capital markets firms that provide brokerage and investment trading services across equities, fixed income and FX markets. Within the projects team, Charlotte specialized in the development of our MiFID II services.

Prior to the acquisition by ACA, Charlotte was Senior Consultant at Cordium, where she had undertaken two external secondments acting as Compliance Manager whilst simultaneously enhancing the firm's market abuse compliance monitoring programme. 

Before this, she was Deputy Head of Compliance at a leading FX Broker where she provided day-to-day support for the Global Head of Compliance. Before that, she was the Compliance Officer at a mid-size CFD and Spread Betting provider, holding the CF10 controlled function for three years.

Charlotte obtained her LLB Law from the University of Hertfordshire.