Market conduct and transaction reporting issues
The UK’s Financial Conduct Authority (FCA) recently published their latest Market Watch 74. This particular newsletter describes the regulators recent supervisory observations regarding investment firms’ transaction reports. More specifically, this edition covers Regulatory Technical standards (RTS) 22 and 23.
- RTS 22 refers to the Regulatory Technical Standards for the reporting of transactions to competent authorities (the FCA in this instance)
- RTS 23 refers to the supply of financial instruments reference data - trading venues have to provide competent authorities with this financial instruments reference data for the purpose of transaction reporting.
Transaction reports are critical in enabling the FCA to conduct effective market oversight. Within this Market Watch edition, the FCA recognises persisting issues relating to the completion of accurate and timely reports on the part of some firms.
Reconciliations and breach notifications
The FCA is concerned that of the ~3,600 investment firms authorised under MiFID, only 745 accessed the FCA’s Market Data Processor (MDP) Entity Portal in 2022 and even fewer (345) submitted Error and Omission (E&O) forms. The FCA found that some firms were not aware of the MDP Entity Portal altogether, while others were relying on data extracts provided by approved reporting mechanisms (ARMs) to conduct their reconciliations. Firms are required to reconcile front-office records with data samples provided by the FCA under Article 15(3) of RTS 22.
In the case of E&Os, Article 26(7) of UK MiFIR requires the reporting firm to void any incorrect reports and provide a corrected one. The FCA also reminds firms of Validation Rule 269 which automatically rejects transaction reports submitted over 5 years after the date of the trade. However, E&Os must still include details of when the issue first occurred and the number of affected transaction reports, even if this extends beyond 5 years.
Identification of Investment and Execution Decision Makers
Article 8(2) and Article 9(4) of RTS 22 require firms to assign primary responsibility for investment or execution decision making to a particular individual, especially in cases where multiple people and/or algorithms are involved.
The FCAs primary concern relates to firms’ which choose to delegate a member of senior management as the responsible party for executing decisions. Firms are encouraged to reconsider whether it is appropriate to assign responsibility to senior management who often have very limited practical involvement in investment or execution decisions at a transactional level.
Data quality issues
Complex trades
The FCA have identified instances in which firms have submitted transaction reports for spread trades which do not conform to the ESMA transaction reporting guidelines as a complex trade.
“Example 117 in the guidelines shows that a single price must be populated in field 33 for a complex trade, and that individual transaction reports submitted for each leg of the complex trade should be linked by the same complex trade component ID in field 40.”
Such misreporting can hinder the FCA’s ability to effectively monitor for market abuse, and competent authorities are often particularly unforgiving if firms are found to be submitting incomplete or inaccurate information.[1] The FCA makes clear its expectations for market participants to continue to apply ESMA guidelines and recommendations where relevant.
Inconsistent price and quantity notations
The FCA has identified inconsistencies in the price and quantity notations for some traded instruments.
- Price notations - The currency in which the price is expressed. If, in the case of a bond or other form of securitised debt, the price is expressed as a percentage, that percentage shall be included
- Quantity notation - An indication as to whether the quantity is the number of units of financial instruments, the nominal value of bonds, or the number of derivative contracts.
The FCA have highlighted some cases in which the same transaction is being reported using different price or quantity notifications by counterparty firms - for example, one side using a monetary price and the other using a basis point price. Firms are urged to follow Market Conventions - the consensus view of the market as to current accepted practices - when determining which notations to use.
Timely reporting
Instrument reference data must be submitted by 21.00 CET on each day they are open for trading for all financial instruments admitted to trading or that are traded on their platforms before 18.00 CET on that day (Article 2, RTS 23). The FCA expects trading venues to have adequate systems and controls in place to detect late reporting to ensure they promptly submit instrument reference data errors and omissions notifications.
Transmission agreements
Under UK MiFIR Article 26(4) and RTS 22 Article 4(1)(c), a transmitting firm can be exempt from submitting a transaction report if specific conditions, including an agreement between the transmitting and receiving firms, are met.
The FCA have identified instances of miscommunication between transmitting and receiving firms, leading to some investment firms not submitting transaction reports. Some firms responded to FCA enquiries stating they were transmitting firms and that reporting was handled by receiving firms, however upon contacting the receiving firm, the FCA were made aware that no transmission agreement was in place. Transmitting and receiving firms are encouraged to review existing transmission arrangements to ensure all relevant conditions outlined in Article 4 of RTS 22 are being met and the agreements can be evidenced.
What’s next?
The FCA have made clear their intentions to conduct follow-up research in the areas covered in this latest Market Watch - and all editions for that matter. The regulator intends to ensure appropriate remedial actions are undertaken and encourages firms to continue to submit errors and omissions notifications for any issues of which they become aware.
[1] https://www.fca.org.uk/markets/transaction-reporting/transaction-reporting-fines
