With 3 January 2018 fast approaching, the shots have been fired by the FCA!
Last month, Merrill Lynch was fined £34.5m for failing to report transactions. The bank failed to report 68.5 million exchange traded derivative transactions from February 2014 onwards, in contravention with the European Markets Infrastructure Regulation (EMIR).
A strong link to MiFID II transaction reporting, and one that cannot not be ignored. We all know that the FCA have fined many firms for reporting, and systems and controls, failures over recent years.
What speaks volumes is what Mark Steward, Director of Enforcement and Market Oversight at the FCA had to say in response to the Merrill Lynch fine:
"Effective market oversight depends on accurate and timely reporting of transactions. The obligations under EMIR, as with MiFID, are key aspects of such oversight.”
“It is vital that reporting firms ensure that their transaction reporting systems are tested and deemed fit for purpose, adequately resourced and perform properly. There needs to be a line in the sand. We will continue to take appropriate action against any firm that fails to meet requirements.”
These remarks came only a month after Mark Steward’s speech at the AFME European Compliance and Legal Conference 2017. The most significant headline was that the number of investigations undertaken by the FCA over the past year have increased by approximately 75%. Actions indeed speak louder than words!
Looking specifically at MiFID II, the salient points to note from Mark Steward were:
a) The FCA do recognise the size, complexity and magnitude of changes that firms need to put in place for MiFID II; and
b) Firms will be in a good place if they can evidence that they have taken sufficient steps to meet MiFID II requirements.
The flip side will be a very different disposition from the FCA, if a firm is not ready to meet their MiFID II transaction reporting obligations in the New Year. Hence, that line in the sand will be firmly in place from 3 January 2018 onwards.
Transaction reporting is not new
Let’s not forget that transaction reporting is not new, and firms have had an extra year to get ready for the additional data fields that are required to be reported under MiFID II.
The trend from regulators is that leniency is a thing of the past, and yet just over 2 years ago the FCA used their Market Watch newsletter to remind and highlight again to firms what their existing transaction reporting obligations were under SUP 17 in conjunction with the Transaction Reporting User Pack (TRUP). The FCA also highlighted the poor quality of data that they continued to receive under the existing MiFID I regime.
The Market Watch newsletter contained data on errors collated by the FCA’s Transaction Monitoring Unit (TMU) - the TMU tested a sample of submissions across the third week of September 2015, and across this one week period the TMU found just shy of 700,000 errors. The top 5 errors listed were:
a) Late reporting of transactions;
b) Incorrect market identifier code being used;
c) Default time instead of trade time being used;
d) Incorrect volumes; and
e) Missing unit prices.
In a nutshell, the FCA were highlighting poor data quality in respect of MiFID I, and moreover, that reliance was being placed by firms on their Approved Reporting Mechanism (ARM), rather than firms ensuring data quality and integrity prior to submission to their ARM. The additional data fields and added complexity of MiFID II makes the transaction reporting challenge even greater.
Data Management - your responsibility
Old news you may say, but firms would do well to remember that the responsibility for transaction reporting rests with the firm and not their ARM. That may seem like an obvious statement, but to put it another way, the reports provided by the ARM to the FCA are only as good as the data that the ARM receives from the firm.
How do you manage your data
Firms that have robust data management solutions in place, are the fortunate ones – they have the necessary transparency of data, good governance and audit trail to meet MiFID II transaction reporting obligations head on. These firms are now in a position where they can amalgamate and consolidate data from multiple systems to populate the additional data fields; these firms have the ability to scrutinise the integrity and validity of their own data before passing it to their ARM who in turn perform external market data validations. These firms are able to mitigate against the risk of over and under reporting, by recognising and resolving errors and issues quickly and efficiently.
In contrast, manual processing, spreadsheets, macros and databases used for existing transaction reporting, will by now have been stretched, manipulated and potentially even have self-destructed in the attempt to embrace MIFID II reporting requirements. Perhaps an exaggeration with respect to self-destruction, but the overriding message is that the FCA want to understand in much greater depth the markets that they supervise and be able to detect serious misconduct much earlier. Therefore, the FCA have to have confidence and be able to rely on the transaction data that they receive.
Submitting transaction reporting is not quite the end of the journey. Never heard of three-way reconciliations before? You are not alone. However, that is not a good place to be, as firms should be performing a post reporting three-way reconciliation, as stipulated in the existing TRUP.
Looking ahead, RTS 22 Transaction Reporting also calls for a post reporting three-way reconciliation between the reporting entity, their ARM and the regulator. The European and Securities Markets Authority (ESMA) has indicated that the periodic frequency of this reconciliation should be frequent but not necessarily every day. However, in the interest of transparency and auditability, best practice would be to perform this reconciliation on as frequently as you can.
Creating the three-way reconciliation process is going to be straight forward if a robust control solution is already in place. Trying to overlay the reconciliation to an already manual environment, will inevitably lead to a non-maintainable process.
Are you ready?
To conclude, are you ready for MiFID II transaction reporting? If not, why not? If you cannot answer that question internally, how are going to be able to explain your situation to the FCA? To meet the FCA’s expectations your solution mantra should by now echo the words of Mark Steward – evidence, accurate and timely, fit for purpose, adequate resourcing and performing properly.