Recent changes in transaction reporting requirements following the UK's exit from the EU may increase pressure on institutional transaction reporting capabilities.
Regulators in the UK and EU have been adopting an increasingly tough stance on firms' transaction reporting deficiencies since the 2008 global financial crisis. In the early 2000s, many banks had viewed transaction reporting as an administrative overhead rather than a key regulatory requirement, despite increasing pressure from the Financial Services Authority (FSA). Modest fines levied on several firms including HSBC, UBS and Merrill Lynch did little to change this view.
The FSA ramped up its focus on transaction reporting in the wake of the financial crisis, with firms incurring more substantial fines, including Barclays (£2.45 million), Credit Suisse (£1.75 million) and Societe Generale (£1.575 million) between 2009 and 2010. Pan-EU transaction reporting requirements codified in MiFID (implemented in 2007) and the FSA's role as the designated National Competent Authority (NCA) no doubt increased the incentive for the UK regulator to come down hard on firms who failed to address reporting shortcomings.
Regulatory reporting remained a priority after the Financial Conduct Authority (FCA) superseded the FSA in April 2013. More comprehensive and onerous reporting requirements introduced within the European Market Infrastructure Regulation (EMIR), the second Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) pushed some firms beyond the capabilities of their reporting infrastructure. The FCA imposed transaction reporting fines totalling £85.4 million on RBS, Deutsche Bank, Merrill Lynch, UBS and Goldman Sachs between July 2013 and March 2019.
Now firms are facing additional complications following the end of the Brexit transition period on 31 December 2020. From this date the UK is no longer part of the EU transaction reporting mechanism. The European Securities & Markets Authority (ESMA) has terminated the UK's access to EU transaction reporting systems and databases, including the reference data sources ESMA FIRDS and ESMA FITRS which have been replaced by the FCA's own versions.
Existing reporting rules defined in EMIR, MiFID II and MiFIR legislation have been 'onshored' into legislation through a mechanism of statutory instruments and Binding Technical Standards. Unfortunately, these are not simple plug and play changes since the status of UK and EU firms, trading venues, CCPs and trade repositories also changed at the end of the transition period.
The UK has established a temporary permission regime (TPR) to allow EEA-based firms to continue to operate in the UK under the passporting regime. ESMA has granted temporary third-country recognition to three UK CCPs including LCH and one CSD but has not created a reciprocal transitional arrangement for UK-based institutions previously passporting into the EEA. UK regulators have been given temporary transitional power (TTP) to grant transitional relief for up to two years after the end of the transition period. However, TTP won't provide relief for onshored transaction reporting requirements under MiFID II, EMIR and SFTR.
Changes in the status of trading venues, infrastructure providers and market participants and applicable regulations will create complexity. In recognition of this, the FCA has stated that it doesn’t intend to take enforcement action against firms that have taken reasonable steps to prepare for the new transaction obligations by 31 December 2020.
Firms will need to assess their transaction reporting systems and controls in detail and provide a comprehensive programme of work to remediate any gaps within a reasonable timeframe. Early identification of issues and the appropriate focus from senior management are likely to mitigate the risk of regulatory sanctions and fines.
