There is more to regulatory reporting than just reporting

Wider-reporting requirements put more firms in line for tough sanctions if they fail to support the systems and controls needed for transaction reporting. The existing rules are stringent but the forthcoming Markets in Financial Instruments Regulation (MiFIR) will create considerable risks for the unprepared.

Q: If your transaction reports are right, is there anything else to worry about?

Reporting is not just about reporting; each firm needs the policies and procedures in place to monitor its own reporting environment. That means putting the controls in place to recognise when it is under or over reporting, or when there is a problem with reporting content. It then needs to have the procedures to spot wrong reports, correct them and resubmit them.  

Q: How would the regulators know?

The regulators are not only looking at the reporting content. They get more worried when they do not see the overall systems and procedures. A report may pass validation checks and appear to be both correct and consistent with other reports, but robust controls may reveal errors due to operational inadequacies, which have impacted multiple reports.

Q: What are the current rules?

Within the UK there is a legal framework via the FCA Handbook and official guidance in the Transaction Reporting User Pack (TRUP - last updated in February 2015), which determines the suggested framework around systems and controls. Firms must have appropriate systems and controls over transaction reporting in place to satisfy SYSC 2 &3 (senior management arrangements, systems and controls) and Principles for Business (‘P3’ – management and control). Amongst the controls detailed in the TRUP are end-to-end testing for all reporting mechanisms, clear delineation of responsibility, appropriate management information enable proper oversight of transaction reporting and appropriate reviews of reporting. 

Q: Are there obligations or just ‘encouragement’? 

TRUP 3.1 really stepped up on reconciliations, detailing the set-up and maintenance of static data along with regular validation. End-to-end reconciliation can be considered an obligation - it is something that can be arranged by checking data sent from the front office systems to the ARM and then the data received by the FCA. The firms can request data direct from the FCA, so they really should or the FCA could consider that they have fallen short on their systems and controls. 

MIFIR will create challenges across front, middle and back office systems and databases. It is expected an important increase in data requirements for the front office function.  National client identifiers for natural persons will be used in transaction reports, such as ‘UK National Insurance number’ for UK nationals or ‘Codice fiscale’ for Italian individual. In addition, the buyer/seller decision maker fields will have to be populated with certain sensitive data/codes used to identify the person who makes the decision to acquire the financial instruments (i.e. name, surname, passport number). Firms will be using LEIs. You can refer to the LEI team/webpage (previously referenced in other articles).

Firms will need to carry out detailed field-by-field diligence, determine appropriate data sources and to document specific rules, logical interdependencies with the view to define the reportability of their own MIFIR transactions. 

Q: What should regulated firms use as a benchmark for compliance?

While the MiFID 1 TRUP outlines specific activities its list is not exhaustive and it should only be considered a starting point. Things to avoid include making sure buy/sell figures are not transposed, that the time is correct and local UK time, and that the price is in the major currency not the minor currency. Of course, if a firm is not doing anything of those points that have been explicitly mentioned, then it will not have a leg to stand on with the regulator.

The TRUP also comments on systems and controls on the topic of responsibility. Providing comprehensive training for staff in transaction reporting duties and with roles impacting the accuracy or completeness of a firm's transaction report has become more important. For example client on-boarding staff should be aware if a client has a BIC or FRN and make sure that is kept in the system; if they do not have one initially and later get one, the on-boarding team should ensure that is added to the system. 

MIFIR Investment Firms should use the RTS 22 and RTS 13 of MIFID II/MIFIR provisions as a benchmark for compliance with the reporting obligation. The execution transparency will be assured by enhanced trade data economics.

Q: How will MiFIR change the requirements?

MIFIR goes a step further on reference data, product data and reportability. If a firm reports any instruments that are not reportable it is a sign of poor systems and controls; MiFIR says that firms need mechanisms to identify transactions that are reportable and those that are not. It makes that requirement and the associated requirement for reference data from a highly respected provider crucial. 

The ‘learning from MIFID I experience’ element will play a great role in putting the first brick of the new MIFIR foundation era. MIFIR has announced more complex developments and strengthened governance. Companies will have to change their operational model to cover management of transaction reporting life cycle events post go live. Businesses will need to rethink data ownership models, record keeping policies, data quality reviews, transparency policies and staff training strategies. Staff will need to have the appropriate level of transaction reporting knowledge, change management skills and enhanced IT capabilities. 

The transaction reporting requirements will become more robust. The migration from 26 to 65 reportable fields put in the spotlight additional key players (i..e. fields such as ‘Natural Person Identifier, Execution Decision Maker) and additional elements of a trade (i.e. Algorithm Identification Code). 

Q: So what are the big risks?

One of the most important functions of having controls in place to make sure rejections are resubmitted. An Approved Reporting Mechanism (ARM) rejects trade reports that fail basic validation. If firms ignore those rejections and let them build up and the FCA finds out, the firm will be in trouble reflecting the scale of the rejection pile. Fining seems to be the ultimate sanction but it is not. The FCA has hinted that it could hold personally responsible people in a significant influencing function. It has asked some compliance officers to attest to the quality of their transaction reports. That could mean not only fines but potentially taking authorisation away.

MiFIR impacts so many more instruments that firms are unlikely to have the same level of reference data they currently have got for equity and debt; for all the other asset classes such as FX, commodities and interest rate derivatives. Finding out what is reportable is more difficult as it includes all derivatives where the underlying is admitted to trading on any EEA Regulated Market, MTF or OTF, which means you need data to tell you that a particular derivative from Chicago has an actual underlying on the German regulated market, for example. 

The regulation comes into effect on 3 January 2018 but this cannot all be suddenly switched on that day. Firms should start looking at the new data requirements right now; all of the personal information – including information like national identifiers and passport numbers – needs to be there as part of the client on-boarding process. LEIs registration should not be left until November or December 2017 as there might be a bottleneck similar to the run in to EMIR reporting.

Wider-reporting requirements put more firms in line for tough sanctions if they fail to support the systems and controls needed for transaction reporting. The existing rules are stringent but the forthcoming Markets in Financial Instruments Regulation (MiFIR) will create considerable risks for the unprepared.

MIFIR Investment Firms should use the RTS 22 and RTS 13 of MIFID II/MIFIR provisions as a benchmark for compliance with the reporting obligation. The execution transparency will be assured by enhanced trade data economics.