Market Watch 70
What has happened?
In its Market Watch 70, the FCA outlines some recent observations on the transaction reporting and instrument reference data regimes, which are expected to be of interest to investment firms, credit institutions, trading venues, systematic internalisers, and approved reporting mechanisms.
Transaction reports play a key role in the FCA’s ability to conduct effective market oversight. It uses them to help detect, investigate and prevent market abuse, combat financial crime, support conduct supervision, and examine market events, in combination with other data and intelligence that it gathers, including order book data. Data must be complete, accurate, and reported in a timely manner.
The FCA comments that it has worked closely with firms since MiFID II was implemented in 2018 to improve transaction reporting data quality and that it has been encouraged by the progress made. More firms are demonstrating awareness regarding the importance of arrangements that identify and remediate reporting issues proactively and promptly. These arrangements must include regular reconciliations of transaction reporting data extracts with front-office records.
The FCA table below shows the number of firms accessing the Market Data Processor (MDP) Entity Portal to make a transaction reporting data extract request. Firms not making regular requests are reminded by the FCA that this is a requirement under Article 15(3) of RTS 22 and that the FCA does not expect firms to rely on it, or on MDP validation rules, to identify issues.
Year Firms making data extract request
2018 451
2019 630
2020 677
2021 716
The reconciliations conducted by firms continue to identify data quality issues. The FCA table below shows the number of firms that have submitted a transaction reporting breach notification since 2018.
Year Firms submitting breach notifications
2018 383
2019 428
2020 417
2021 385
While some firms have shown an understanding of their obligation to bring errors and omissions in their transaction reports to the FCA’s attention, data quality alerts suggest that many are not conducting sufficient checks on their data. Reconciliations should not be limited to certain fields, or to data samples that do not adequately reflect the trading scenarios and asset classes traded by a firm.
The FCA has also observed variable levels of information in the breach notifications it receives. Some firms include limited details and unhelpful references to proprietary reporting systems or processes. Notifications should be comprehensive, including adequate background to facilitate a full review of the incident. Best practices include the provision of examples to show how a field was misreported and how this will be corrected going forward.
The FCA reports that confusion has arisen regarding the identification of principal firms, appointed representatives and tied agents in transaction reports. For transaction reporting purposes, it views an AR as its principal firm. This means that when a transaction is executed by an AR providing the investment service of reception and transmission for a principal firm that is subject to transaction reporting obligations, the principal firm should be identified in applicable fields of its transaction report, such as in the executing entity field. The AR should not be identified.
More generally, the FCA has identified concerns with the care taken by some principal firms in overseeing the activity of ARs. In some cases, this has led to the submission of inaccurate transaction reports by principal firms. Principal firms are reminded by the FCA that they are responsible for ensuring that their transaction reports are complete and accurate, and for implementing an adequate systems and controls framework to identify potential data quality issues, including any caused by an AR.
Other transaction reporting issues identified include;
• Trading venues are responsible for the quality of the transaction reports they submit. Some trading venues have sought to place this responsibility on their members. Trading venues should have robust processes in place to ensure the timely receipt of information from members necessary for them to submit complete and accurate transaction reports.
• For transactions executed in financial instruments that are not admitted to trading or traded on a trading venue (such as CFDs), the instruments’ full name reported should contain a clear description of the financial instrument traded (e.g. Vodafone CFD).
How can we help you?
If you’d like to know more about how we can help you with your transaction reporting arrangements, or any other regulatory compliance issues, our specialist team is here to help. Contact us today on 020 7436 0630 – or email info@thistleinitiatives.co.uk.