Perfecting transaction reporting: what can you learn from MiFID II?
07 November 2019
30 million. That’s the number of transaction reports the Financial Conduct Authority (FCA) processed on an average working day in 2018, following the introduction of MiFID II. The FCA has invested heavily in its capacity to process and make sense of this volume of data. But to get meaningful insight and an accurate picture of risks building up in financial markets, regulators also need firms to send them good data.
MiFID transaction reporting is now one of FCA’s priorities. It has continued to find shortcomings in firms' approaches to reporting, sanctioning inadequate controls through fines and communicating widely to the market on its expectations. With a wider range of similar reporting obligations coming in, firms can expect continued scrutiny on how they report transactions to regulators and need to be on the front foot in how they respond.
In March 2019, two investment banks were each fined around £30m for failing to provide accurate and timely reporting under MiFID between 2007-2017, prior to MiFID II taking effect. The FCA stressed that not only did the firms fail to provide complete and accurate information, they failed to take ‘reasonable care to organise and control their affairs responsibly and effectively’. Based on the FCA’s ‘Market Watch’ in March and October 2019, which considers firms’ implementation of MiFID II reporting, it appears there’s still room for progress. Inaccurate trade times, incorrect party identifiers, failure to submit instrument reference data - the regulator highlights a number of consistent errors.
Firms must not assume a report was accurate because it was accepted by the Market Data Processor, and must still check for errors. Under MiFID II, when firms have spotted and corrected errors, they must notify the regulator. Investment firms, including banks, brokers and asset managers, need to have arrangements in place to ensure that their transaction reports are complete and accurate. This means, for example, reconciling front office trading records against samples from their reporting data. To make it easier for firms, the FCA directly provides these samples upon demand. In its Market Watch however, it noted many firms did not seem to be aware of this.
These publications are a reminder that firms need to be proactive in their transaction reporting management and verify it on a continuous basis. Reporting should not be treated as a one-off exercise. Robust systems and controls to ensure transaction reports are complete and accurate are key.
And while the FCA is currently focusing its efforts on reporting under MiFID II, these lessons can and should be applied to a much broader range of transaction reports. Reporting under the Securities Financing Transaction Regulation (SFTR) kicks in next year. Banks will lead the way in April 2020, but by January 2021 the whole market, asset managers and non-financial counterparties alike, will need to report their securities financing transactions, sometimes for the very first time. Following revisions to the European Market Infrastructure Regulation (EMIR), financial counterparties will need to report on behalf of any non financial counterparty they transact with. They will not only inherit the reporting obligation, but also the legal liability that comes with it if things go wrong.
Accurate reporting is crucial. Advanced firms are developing reporting solutions that could get them a head start, and allow them to carry out diagnostic testing to check whether their approach aligns with the FCA's expectations. Further down the line, firms should seek to build robust control frameworks to prevent and detect these issues. This will require significant efforts, but if there’s one thing we learnt this year, it’s that the cost of getting it wrong could be much higher.
The FCA’s friendly ‘nudge’ in Market Watch should not be ignored, nor taken lightly. This is a key focus of the FCA, and with the additional weight of SFTR and EMIR reporting to contend with too, firms must act now.