The Australian Securities and Investment Commission (ASIC) has issued its first penalty notice for alleged breaches of the derivative reporting rules, which require counterparties to report derivative transaction and position information to derivative trade repositories.
The notice was issued to Australian bank Westpac together with a fine for AU$127, 250 (about £75,000) for incorrect transaction reporting. The bank failed to ‘report information about 112,556 reportable transactions,’ between October 2013 to 30 April 2015.
Flaw in system caused reporting failure
ASIC said a flaw in Westpac’s reporting system caused the failure, which the bank was made aware of in July 2014, however it wasn’t aware that the flaw was causing the transactions not to be reported.
Westpac decided not to further investigate the flaw and put off the investigation to a later date as it thought only a small number of transactions would be affected.
The bank only discovered that it was a ‘material number’ of transactions in March 2015. It reported the unreported transactions to DTCC in January 2016, but they were reported ‘with the counterparty buyer/seller information inadvertently reversed’.
Firms must have testing in place to identify issues
This example demonstrates once again how important it is for financial firms to understand their transaction reporting obligations and – just as crucially – to have testing in place to identify issues quickly.
Not only that, but when seeking to address an issue through replays, appropriate testing is needed to ensure that the replays do not introduce new errors as is the case here. Firms would do well to note the two main ‘banana skins’ that have contributed to the notice, notably Westpac’s failure to:
- Have testing in place to identify at an early stage any reporting quality issues (both accuracy and completeness testing), and
- Implement assurance on the replays they were submitting.
These failures left them exposed to regulatory censure which means not only a fine but also reputational damage, both of which could easily have been avoided with the right controls in place.
Reporting risk levels have increased
As a first penalty notice under the derivatives reporting regime, the scale of the fine and the quantum per erroneous trade report should be noted as this sets the level of reporting risk that firms are facing from a fining perspective: around AU$1 per incorrect or missing report.
If you consider that reporting volumes are significantly higher for most firms, reporting risk levels just increased.
No matter what the regulation, Kaizen can help protect you from regulatory fines and penalties. Please contact us for a chat about your regulatory reporting challenges.