EU regulatory focus – MiFID II reporting data quality
Everywhere you look, someone somewhere is talking about the tech revolution and data. Data is now an integral and unavoidable part of our lives, from the number of steps we make to the number of stocks traded each day. It therefore goes without saying that the data we consume and use as the basis for important decisions must be accurate. This ethos is being echoed by financial regulators throughout Europe who are turning their focus to improved data quality for 2022.
The Autorité des Marchés Financiers’ (AMF) recently published its supervisory priorities for the financial services industry, highlighting the importance of accurate data and high quality regulatory reporting from investment firms and trading venues. Accurate reporting data is of paramount importance to the oversight of trading activity and the detection of market abuse and manipulation.
ESMA MiFID II guidelines
It is quite revealing that ‘data quality’ in the various reporting regimes introduced by MiFID II is one of only two themes flagged by ESMA, that national competent authorities (NCAs) should take into account, in their supervisory activities in 2022. The other theme relates to costs and fees invoiced by asset managers.
The focus on data quality is partly a by-product of asset managers only having to transaction report under MiFID since 2018, whereas the sell-side have been reporting under MiFID I since 2007. This is another example of data driven policy making by regulators that are understandably becoming more data led.
Becoming more data driven removes the need for regulators to allocate their limited resources based on risk where the focus is primarily on larger firms, e.g. through supervisory visits and correspondence, with smaller firms being overseen using event based supervision or thematic reviews. Clever use of the data they receive using data analytics tools allows more routine and closer scrutiny of potentially all activity by authorised firms covered by the data. They will no longer be constrained to reviewing samples of activity, the computing power now available allows all the data to be subjected to scrutiny.
The prevention of market abuse within the asset management sector was also one of the AMF’s thematic supervisory priorities for 2021. Whilst prevention is better than cure, we know that European regulators are also using transaction reports submitted by buy-side and sell-side firms alike to monitor insider dealing and market manipulation as well as to look for market abnormalities.
However, there has long been a gap in the surveillance net when it comes to Alternative Investment Fund Managers and UCITS management companies that provide MiFID services to third parties. ESMA is therefore taking further action and proposing that these firms will start to transaction report under MiFID for the first time as a result of their review last year.
ESMA is also proposing to introduce a MiFID ‘client categorisation flag’ which is an example of where regulators will use transaction reports to not just monitor ‘markets’ but to also monitor ‘investment firms’ specifically. The MiFID client categorisation flag will allow European regulators to assess on a large scale and, in an automated way, whether unsuitable or risky products are being sold to retail clients.
The FCA, a data-led regulator
Jessica Rusu, the FCA’s Chief Data, Information & Intelligence Officer, stated at the FCA’s RegTech Forum on 10 February 2022 that a data driven industry needs a data-led regulator. The FCA is prioritising the usage of data science, digital technologies and intelligence capabilities to keep pace with changes in financial services.
Their Data, Technology and Innovation division is looking to build a digital revolution through data science projects and building a Digital Unified Intelligence Environment to reassess how FCA collects and analyses data. The recruitment of data scientists is at the forefront of the FCA’s data strategy and will allow the regulator to be more innovative and flexible in the way it reacts to changes in the industry.
CSSF on MiFID II data quality
The Commission de Surveillance du Secteur Financier (CSSF), the Luxembourg regulator, recently issued a press release regarding the poor quality of transaction reports it receives under MiFIR. The CSSF’s continued focus on data quality has identified a number of errors repeatedly being made by firms. However, the regulator acknowledges that their findings will not represent the universe of issues firms are facing nor potentially the most egregious.
The Luxembourg regulator emphasised that high quality transaction reports are essential if they are to detect potential market abuse. Furthermore, they stated that poor data quality can trigger false positives and may constitute a serious breach, particularly if reporting errors lead to the concealment of potential market abuse cases. The CSSF is, therefore, recalling Article 47 which determines the sanctions, measures and penalties that may be imposed against investment firms for misreporting under Article 26 of MiFIR.
Essentially, the honeymoon period is over for firms as it’s now over four years since MiFID II went live. So, just as we demand and want accurate data in our everyday lives, regulators need and expect better quality data from investment firms and trading venues.
It wouldn’t be surprising if we start to see some MiFID II enforcement activity over the next 12 months in relation to transaction reporting failures, particularly in Europe, where ESMA has been encouraging NCAs to be more proactive with their enforcement powers.
- Kaizen Reporting can help firms not only detect quality issues in their regulatory reporting, but also help them understand the reporting obligations and corrective measures.
- For a conversation with Simon or one of our regulatory specialists, please contact us.
