Regulators, in recent years, have increased market surveillance by enforcing mandatory disclosures via Trade and Transaction Reporting (as per MIFID II and EMIR). In MarketWatch 70, the FCA highlighted some observations on the deviation from its regulatory
guidance by firms as evidenced in the inaccuracies and shortcomings in their Transaction Reports (TRs) and Instrument Reference Data (IRD). FCA also set out guidance for firms to take corrective actions.
Below outlines the key challenges firms should focus on and suggested actions on how to tackle them.
1. Transaction Reporting
The first main observation that the FCA made was around transaction reporting challenges. In particular, there were two primary issues the FCA highlighted that led to inaccuracies in reporting;
- National Identifiers It was observed that firms often fail to report
National Identifiers owing to a lack of due diligence, especially when offering services electronically to clients. Best practice should be to ensure transactions are not executed until a legitimate identifier is assigned and due diligence is conducted.
And the use of 1st priority national identifiers is recommended for natural persons.
- Identification of Principle Firms (PF) The FCA noted some confusion amongst firms on how to identify a Principle Firm, it’s Appointed Representatives (ARs) and tied agents in TRs. The FCA has directed that it is the responsibility of a Principle
Firm to ensure that the executing entity field should have an identifier for the Principle Firm and not the AR and additionally PFs should also oversee activities of ARs.
2. Instrument Reference Data
The second set of observations that the FCA made was with respect to Instrument Reference Data. Below are the main issues that the FCA highlighted;
- Systems & Controls. A suitable control mechanism seems missing presently for addressing the errors and omissions in reports by Trading Venue and Systematic Internalisers (SI). Here, the FCA suggests a two-step control mechanism;
A.Have a system in place to identify incomplete and inaccurate instrument reference data in submissions and inform the regulator of the same.
B.When the FCA MDP (Market Data Processor) system provides feedback on all the reference data files received, trading venues and SI's should have an arrangement to review the feedback and investigate it further in a time bound manner.
- Incorrect data population or misreporting observed in several fields.
FCA highlighted that multiple reportable fields need further review and checking by the reporting firms as incorrect data is being populated in them. The main ones mentioned in the MarketWatch are - Classification of Financial Instruments (CFI) code, Systematic
Internalisers (SI’s), Termination date, Commodities or emission allowance derivative indicator.
A proficient way to proactively identifying potential issues – and one encouraged by the FCA – is for firms to obtain TR sample data from their MDP and review and reconcile the data with their reports. FCA statistics show that although there has been an
increase in firms requesting data from their MDP, volumes are still relatively low.
In conclusion, firms should proactively look at best practices, put in place periodic due diligence and create a better surveillance framework to identify common issues before they lead to large data reporting issues. Firms can start remediating by prioritising
the heavily impacted areas and gradually reaching an optimum point of compliance. Self-identification of issues, rather than waiting for the FCA to identify, has historically been an approach that has been appreciated by the FCA. Doing so has also been shown
to drastically reduce potential fines should the FCA decide to levy them.