A recent ACA Compliance Group (ACA) webcast highlighted new analysis that shows that many firms are making the same transaction reporting errors under MiFID II as were common under MiFID I. Whilst the FCA’s priorities appear, for the time being, to be on understanding the nature and scale of reporting data errors and how they are addressed, failings under MiFID I moved it to take several high-profile enforcement actions. It is imperative that firms get to grips with their MiFID II transaction reporting processes and data quality checks as soon as possible.
A recent examination by ACA of past regulatory enforcement actions related to transaction reporting reviewed the kinds of serious errors firms produced under the first iteration of the Markets in Financial Instruments Directive (“MiFID”) I. Additional analysis of a sample of transaction reporting data under the revised MiFID (“MiFID II”) submitted by firms to ACA showed more than a little bit of history repeating itself.
The UK’s Financial Conduct Authority (FCA) continues to express concerns with regards to the quality of the reporting it is receiving. Based on the timeframe between the introduction of MiFID I and the first fine under that regime, it is certainly possible that the FCA’s enforcement machinery could grind into gear later this year and gain momentum in 2020.
Examining MiFID I enforcement
The UK’s Financial Services Authority (FSA) and successor organisation the Financial Conduct Authority (FCA) have fined firms a total of £95 million for MiFID I transaction reporting issues across 14 fines since 2009. The largest fine was £34 million, a penalty levied earlier in 2019 against a firm that amassed more than 200 million MiFID I transaction reporting errors. Another fine of more than £27 million was issued to a firm for some 135 million incorrect transaction reports. The size of the fines reflected the number of transactions impacted by the errors, which spanned almost the entire duration of MiFID I being in force. This underscores the risk of unidentified errors creating a growing and increasingly expensive problem over time.
The vast majority of these 14 enforcement actions – 72% – cited data issues, according to ACA analysis. The most common included having the incorrect trade time, incorrect trading indicators (buy/sell), incorrect price, inaccurate counterparty identifiers and an incorrect venue.
Other categories of errors included those pertaining to ‘monitoring and oversight’, which includes failures to check that submitted data is accurate, and failure to train staff appropriately. Several enforcement actions pointed to systems failures, including how a file is prepared, submitted, and retained, or how change management is implemented. Governance issues were also highlighted, such as a lack of ownership of the transaction reporting process.
Making the same mistakes
The fact that a relatively small number of firms have been fined for failing to get MiFID I transaction reporting right ten years after it was implemented does not, of course, mean that all other firms were reporting correctly. There are almost certainly firms out there who were subjected to private warnings, rather than public sanctions. And the fact remains that the MiFID I transaction reporting regime was relatively simple compared to that under MiFID II which is more complex, requires more data, and compels a wider range of firms to undertake the reporting. Firms have needed to raise their game to meet these new transaction reporting demands but evidence suggests that many firms are struggling.
To try to identify the scale of the problem, ACA asked financial services firms to submit sample transaction reporting data. It then analysed a limited number of fields for some common, basic data errors. The results should give firms pause for thought; 48% of firms in the limited sample examined had reported transmission of order indicator data incorrectly. This field reflects how an order has been executed, either by transmitting to a third party or directly on a venue, which should be consistent with the trading capacity and venue fields. ACA has found this to be a troublesome field in the course of their thematic assurance and consulting work. Further, 14% reported venue data incorrectly, 10% had a trading time error, and 5% had incorrect data for either the quantity or the price.
As it is some 17 months after MiFID II came into force, and more than a decade after MiFID I’s implementation, it’s little surprise that regulators are beginning to clear their throats. The FCA held a transaction reporting forum in the summer of 2018, at which it spoke about fundamental errors such as: getting counterparties the wrong way around; the use of bogus IDs; the use of default times; and, forgetting to adjust for time zone changes. In particular, the FCA noted that it was frustrated by incorrect data that seemed as though it had been inputted just to get the transaction through validation.
In April 2019, the FCA issued MarketWatch 59 and repeated the same concerns about identifiers, timestamps, price data and venue fields, among other data points. It’s clear that the patience of the regulators is now wearing thin.
Firms need to get their MiFID II transaction reporting data right. And the only way a firm can know if it is making errors in its reports is to have monitoring and reconciliations which are both regular and meaningful. In its work for firms, ACA teams have picked up mistakes in data missed by all three lines of defense. ACA has also found that many firms do not understand the scope and limitations of third party technology solutions they may have employed to check data quality. As an initial step, firms should assess the quality of the data they are providing in their transaction reporting before they are asked by regulators to explain it.
How ACA Can 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.
Visit our Trade and Transaction Reporting page to learn more.
For More Information
Please contact Charlotte Longman, Matthew Chapman, Bobby Johal, or call our MiFID II team at +44 (0)20 7042 0560.
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