Compliance officers and reporting analysts at British firms are being urged to check their adherence to their firms' obligations to report transactions, helped by a series of insights about 'MiFIR reporting' from the Financial Conduct Authority.

Although the rules of MiFIR (the European Union's Markets in Financial Instruments Regulation, which is related to its second Markets in Financial Instruments Directive or MiFID II) state that firms ought to submit complete and accurate transaction reports to their regulators within one working day of execution, recent regulatory commentary suggests that many are not performing the important task of monitoring and correcting the accuracy of their reports after they have been submitted.

Regulators now have the means by which to check your data

Among the many regulatory regimes that feature transaction reporting, MiFID may be the most significant. Article 26 of MiFIR outlines firms’ reporting obligations and is unique because it concentrates purely on providing the necessary evidence to allow the FCA to achieve its goals of protecting and improving the integrity of the UK’s financial system. To this end, it has to know about all the transactions that result from a firm fulfilling a client's order or managing its own positions.

As the FCA is the largest regulator in Europe when it comes to transaction volumes, its reporting system is a behemoth. By December last year, its Market Data Processor (MDP) System had already processed more than 16.3 billion transaction reports since 3 January 2018 - more transactions than were processed during the entire course of the previous MiFID I transaction reporting system, ZEN, which was decommissioned on 12 January 2018. As a result of the MiFIR regulation, the regulator can be very prescriptive about the things that it expects from firms.

You must reconcile your reports

A key feature of the MDP system is that it only verifies technical validations, so the regulators expect firms to undertake their own business validations to ensure that records are correct. The watchdog has done some of the heavy lifting through its technical validation process, by which the system sifts data at the point of submission, but firms must correct and resubmit anything that is automatically rejected. The onus is therefore on firms to make sure that they have the right systems and processes in place to make sure that their records are sound.

Insights from the regulator, through its Market Watch publications and events, have made it clear that it expects firms to have appropriate systems and controls in place to monitor the quality of data beyond the submission process. Crucially, firms must be able to spot places where people have introduced mistakes and be clear when they try to convince the regulator that the data has 'reconciled' correctly.

Before, during and after reporting

Firms are bound to uncover problems with data quality after the point of submission. The FCA believes that reporting firms should monitor, investigate and resolve all of these.

As a minimum, the regulator expects firms to take immediate action to stop the inaccuracies from recurring and to correct the erroneous data that they have already submitted.

It has also stated - some time ago, now - that it will take a particularly dim view of instances where a firm has failed to submit either an "errors and omissions notification" form or failed to ask for sample data to find out how such errors have crept in. To obtain sample data, every firm must ask for access to the MDP Entity Portal, where it will have to identify an administrator who will manage users within its walls. It appears that, despite the warnings, only a small number of firms are using the service. At the end of December, the FCA estimated that it had received download requests from some 700 entities. Many more firms that than that are 'executing' in the UK.

You cannot outsource your responsibility

Some firms have opted to employ other firms to help them to meet their obligations to report transactions to the regulators. Recent updates from the FCA show some sympathy with them but, once again, the regulator has been at pains to stress that the delegation of activities does not relieve them of accountability or responsibility for the accuracy, completeness and timeliness of their reporting.

In instances where the creation and/or submission of reports have been outsourced to a third party, it remains the firm’s responsibility to conduct regular checks to verify the accuracy of submissions. Even in instances where third party outsourcers have been employed, firms must be able to show that they have made every attempt to reconcile data.

The most common errors that the FCA sees

Having reviewed the quality of the data that it receives, the regulator has warned companies to be vigilant when looking for errors which are easily overlooked. A prime example is the ‘MiFID Investment Firm’ field. To date, some British firms have been marking that field as ‘FALSE’ when they should not.

Related to this is the capacity for missing or duplicate transaction reports. Duplicates tend to be most common when a trading venue assumes that it is reporting on behalf of a non-MiFID firm, when in reality that firm is subject to the MiFID regime. This can lead to different reports from the two different entities in relation to the same trade, creating headaches for all concerned at a later stage.

Recent communications from the FCA, including its Market Watch newsletter, have clearly shown that some firms in the industry ought to do more to comply with MiFIR. There are some common themes where firms are repeatedly struggling but are fairly straightforward to address.

These include the moment when the clocks change as a result of daylight-saving time, which applies when the UK is one hour ahead of Greenwich Mean Time between March and October, which can have a noticeable effect on the data that relates to trading times. For the sake of clarity, all data should be submitted in GMT.

Other common errors that firms continue to make relate to the use of default trading times (no longer permissible since MiFID II), reporting trades denominated in minor currencies (i.e. pence not pounds), the use of dummy national identifiers and inconsistently populating the Trading Venue Transaction Identification Code.

Firms have also been advised to be careful when using the ‘INTC’ or the client aggregation account. The guidelines specify that this account should be flat at the end of the day and the FCA is finding that this is not the case. The new transaction reporting regime is deliberately linear, the idea being to let the FCA see all market activity and changes in position. Companies ought therefore to refer to the FCA guidelines that tell them when they should report collectively and when they should not.

Now that the reguation has been in operation for two years, the FCA has the means by which to spot firms that are not ensuring that their data is of high quality, as required by the rules. Firms must look hard for problems with their data and then do all they can to rectify them.