Articles

Why Regulatory Reports Fail

What prevents Transaction Reports providing accurate information to regulators

Financial regulators such as the FCA rely on accurate transaction reports to prevent, detect and investigate market abuse. In the UK, there are 5 main categories where reporting errors can occur, and each need to be resolved to allow the regulator to perform their role.

These are:

  • Submitting unnecessary or duplicate reports
  • Not submitting a report
  • Submitting inaccurate reports which fail FCA validation
  • Submitting reports with accurate transaction data which fail FCA validation because of inaccurate reference data
  • Submitting inaccurate reports which pass FCA validation

Submitting unnecessary or duplicate reports

Several Trading Venues are unnecessarily submitting transaction reports on behalf of firms who should be, and often are, submitting reports themselves. TVs should have rules in place to ensure that reports are only submitted on behalf of firms who are not subject to MiFIR transaction reporting requirements. This includes UK branches of third country firms.

Sometimes firms create duplicate reports by

  • incorrectly duplicating the transaction reference number
  • sending a transaction for cancellation when the original transaction cannot be found or where it has already be cancelled.

Not submitting a report - unreported transactions

The FCA monitor reports to identify when transaction reports have not been submitted when they should have been. There are two main reasons for missing reports.

  • Some firms misinterpret the MiFIR reporting obligations and don’t submit transaction reports for instruments which are in scope.
  • Some transactions are sent to the FCA by brokers on behalf of a firm using incorrect LEI data - which means the FCA do not see a transaction report coming from the firm and have to assume it is missing. This often happens when a firm forwards an order to a broker and populates the executing entity with the broker’s LEI rather than own LEI. (NB The Submitting Entity field is where the ARM LEI should be entered).

Submitting inaccurate reports which fail FCA validation

Typical Errors made by Firms which cause the transaction report to fail FCA validation include missing fields. The most common missing fields on transaction reports are :

  • Net amount
  • Country of branch membership
  • Instrument classification
  • Swap transaction underlying
  • Commodity derivative indicator

Submitting reports with accurate transaction data which fail FCA validation because of inaccurate reference data

TVs and SIs are required to submit complete and accurate instrument reference data in a timely manner (RTS 23) and must notify their competent authority if they become aware of any inaccuracies or missing data. If they miss out or send incorrect reference data, this will cause transaction reports to fail validation.

Typical errors include:

  • Instrument reference data - high volumes of reports are rejected where the instrument or underlying instrument cannot be validated. This can be caused by missing or inaccurate instrument reference data or because the report data is inaccurate (eg when the instrument or underlying instrument is not reportable, when the TV MIC is inaccurate or when the underlying instrument is populated in the wrong place).
  • Instrument maturity dates - these should match the date in the instrument’s prospectus. The termination date should be populated if the instrument has expired or matured.
  • Issuer LEI - these are often incorrect or missing and should be checked for accuracy by TV and SIs and firms.

Submitting inaccurate reports which pass FCA validation

Many firms submitting reports to the FCA assume that they are accurate when they are accepted by the FCA after passing the Market Data Processor system’s validation rules and cross checks against instrument reference data. However, some errors and omissions still exist which can only be identified through firms' internal reconciliations, for example between the FO and Transaction Reporting systems. Firms should be performing this reconciliation on a regular basis and cancelling, correcting and resubmitting reports they identify as having errors or omissions. (RTS 22).

Typical errors include:

  • Inaccurate Trading Date Time - the transaction time should be reported in UTC (universal time) but is often misreported - eg when moving between GMT and BST (British Summer Time) or because clocks are incorrectly synchronised.
  • Price - sometimes this is expressed at the wrong level - for example a price can be entered in pence rather than GBP. It is also incorrect to enter a price of 0 or NOAP (used for gifts with no value). In addition, price currency is sometimes inconsistent with the currency value entered.
  • Venue - transactions executed on a TV (trading venue), SI (systematic internaliser) or OTP(organised trading platform) outside the EU should populate the menu with the segment MIC (Market Identifier Code) rather than the operating MIC. This caused many problems prior to Nov 2018 when the FCA enforced this requirement and is likely to cause more problems following Brexit.
  • Party identifiers - buyer and seller identification codes are often incorrect - sometimes because the buyer and seller get entered the wrong way round, other times when the same identifier is used for multiple clients or if dummy identifiers are used. Sometimes the LEI of the broker is used in place of the firm’s id.
  • Unique national identifiers - for clients and for individuals within a firm responsible for the investment decision. Identifiers for individuals are listed in RTS 22 Annex II, but sometimes firms use identifiers which are not in the list or don’t use the first priority identifier (eg using a passport number when that is not on the list, using concatenated codes for British nationals who have a national insurance number etc). Occasionally default values are used, sometimes for multiple individuals.