Novatus Global




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Are Regulators looking at firms’ transaction reporting?

The introduction of transaction reporting regimes such as MiFID II, EMIR and ASIC, has meant firms must spend significant proportions of their compliance budget on the initial implementation and extensive ongoing costs of technological solutions and remediation programmes. Ensuring that reporting is accurate, complete, and timely has led to the creation of large regulatory reporting teams and has placed onerous oversight responsibilities upon senior stakeholders. 

Firms often wonder how much regulators truly scrutinise the data quality of their submissions. Whilst regulators certainly indicate that transaction reporting guidelines are a critical component of their oversight framework to detect market abuse or monitor market exposure, their actions now demonstrate an ever-increasing focus on data quality as the transaction reporting landscape matures.

Novatus has performed a review of regulators’ actions across three major regimes and outlined some of the key highlights below.

MiFID II – Critical for the FCA’s objectives

The FCA continually state that its work on identifying and preventing market abuse is a key priority, and indicate more resource focus to maintain ‘intensive scrutiny’. MiFID II is a key component of this, as transaction reporting is the only way regulators have access to market data to perform reviews.

The repository of all UK MiFID II transaction reporting, the FCA’s Market Data Processor (MDP), analyses over 100 million daily transaction reports and utilises dedicated software to interrogate the torrents of data provided by firms. This data informs enforcement actions, such as the investigation into a UK-based Investment Bank in May 2021. The authority based their findings partially on the analysis on the company’s transaction reporting data which revealed numerous breaches in AML compliance.

Performing complete and accurate reporting is critical, with deficiencies being identified and potentially punished by the FCA in the form of considerable fines. In 2019, a Tier 1 Bank was hit with a £34,344,700 fine for failing to provide accurate reports relating to 220.2 million transaction reports over a ten-year period. Fines are not the only concern to firms however, as enforcement action from regulators often results in a more detailed review of the firm and can ultimately led to a section 166 review.

As the FCA continue to leverage transaction reporting data to support investigations there will be an increased focus on data quality and potential for further fines and enforcement action. Firms must keep abreast of changes to transaction reporting regimes following the United Kingdom’s exit from the European Union. For MiFID II and SFTR, the FCA has already diverged from ESMA’s approach in some instances and this gap is only likely to widen, complicating compliance for many global firms.

EMIR – A established regulation with active regulator engagement

Given EMIR is more established than MiFID II, the increased regulator scrutiny on data quality is not a surprise. Although there is growing regulatory divergence between the EU and the UK, enforcement approaches are similarly stringent, and we see regulators across the market taking action.

The CSSF (Commission de Surveillance du Secteur Financier), Luxembourg’s regulator, has explicitly outlined expectations for all market participants to have processes, systems, and controls in place to ensure completeness, accuracy, and timeliness of reported information. Where reporting of new transactions, or subsequent modifications, is not performed, firms are deemed to be in breach of the reporting obligation. The CSSF is proactively reaching out to firms to query data issues and requesting robust remediation plans where expectations are not being met. Where firms are unable to demonstrate a strong understanding of their existing errors or a robust control environment, a heightened level of regulator scrutiny will follow and further enforcement action is a possibility.

Other EU regulators, such as the Central Bank of Ireland (CBI), are engaging with counterparties to query data accuracy. Reporting fields which are particularly relevant to the goals of EMIR (to support regulators in monitoring market exposure) are under scrutiny. For example, firms have been actively engaged by regulators in relation to collateralisation status, valuation timestamp, and notional value fields to ensure these are accurately populated and reported. However, this is just the start, and all 123 fields are expected to be reported accurately.

A recent example of regulators’ low tolerance for transaction reporting breaches is ESMA’s €238,500 fine of a Trade Repository platform for eight breaches of the European Market Infrastructure Regulation (EMIR). It was found that failed to ensure data integrity due to various data processing incidents and failed to provide regulators direct and immediate access to trade data.

These actions highlight a wide-ranging review being performed by regulators on reporting quality. Therefore, firms should identify where their issues exist and resolve them appropriately as this focus on reporting is only going to increase over time. In the 2022 Annual Work Programme, ESMA indicated it will further focus on the enhancement of the data quality and supervisory convergence with an objective to facilitate data-driven supervision at European level, leading to an increase in data quality exercises performed by NCAs.


ASIC – A Global Supervisory Trend

The trend for an increasingly rigorous supervisory approach towards transaction reporting extends beyond UK and EU regulators, with ASIC also actively engaging market participants to query data quality and control frameworks for regulatory reporting.

Oversight activity has led to enforcement action where firms are deemed to be materially in breach of the regulation, for example where a Pension firm was fined $275,500 and $250,500 respectively. Infringement notices served detailed breaches relating to missed transaction reports, incorrect collateral information, and lack of oversight over delegated reporting leading to inaccurate and incomplete data.

This clear supervisory trend towards increased enforcement action and prioritisation of transaction reporting as a key regulatory focus could present a significant challenge for firms with reporting obligations across multiple jurisdictions.

So, what do you need to do?

With transaction reporting data quality under the spotlight more than ever before, it is critical you are taking steps to review data accuracy and remediate issues where appropriate. An elevated level of regulatory engagement is now commonplace in transaction reporting and proactive communication is critical. Three immediate actions you should take:

Review your transaction reporting accuracy

Have a clear understanding of their current transaction reporting performance. You must undertake reviews to identify reporting issues, stay aware of regulatory changes and where necessary, mobilise a remediation programme.

Ensure you have a robust control framework

Implement a robust control framework to provide oversight of reporting and reduce the number of errors. Should engagement with the regulator be required, being able to demonstrate a well-structured reporting function is essential.

Be proactive with your communication

Communicating any reporting issues identified is critical. Provide senior management with the knowledge that issues are understood and a remediation plan is in place. Ultimately, you must ensure the regulator is made aware of any issues in reporting prior to them notifying you.

The Novatus team have supported many firms with their transaction reporting requirements. If you would like to discuss this further please contact Francis Stroudley.