Why data quality is key to regulatory reporting compliance

Kaizen iceberg

The FCA has used its latest MarketWatch newsletter to remind firms of their transaction reporting obligations, the persistent poor quality of their reporting, and that the FCA have mechanisms in place to detect errors which may result in stringent actions such as fines.

While this message isn’t new, the FCA has also published a table showing approximately 650,000 data quality breaches across the industry over a one-week period where the FCA’s Transaction Monitoring Unit (TMU) tested only four of the transaction reportable fields. It will be a disappointment to the FCA that in each instance the errors are ones previously made by firms sanctioned for incorrect transaction reporting as well as errors highlighted in previous Market Watch newsletters. These include things such as late reporting of transactions, incorrect MIC codes, wrong execution times, wrong quantity or missing unit price.

Just the tip of the iceberg

The one-week snapshot by the FCA does not reveal the true size of the problem.  We took a closer look and analysed in detail the findings of the publicly available fines issued to firms for incorrect transaction reporting since 2009.  Our findings are displayed in the graphic above.

  1. Tip of the iceberg: Maybe not the perfect analogy, but for those firms fined and where information is publicly available, we found only 35% of the firm’s reportable transactions were reported accurately and completely. That is to say, passed ARM validation and the data was correct.
  2. Base of the iceberg: That leaves 65% of the firms’ reportable transactions being reported incorrectly or not at all. In all cases, firms did not have appropriate controls in place to identify and test the correctness of their reports. In short, they were unaware that the majority of their reports were incorrect.

Only 7% of the transactions were not attempted to be reported or were duplicates.  All of the remainder were breaches where the report passed validation but the data was incorrect. In other words, they were ‘valid but wrong’.

Transaction reports must be tested at source

What this tells us is that firms need testing at source not just ARM validation. Even after eight years of MiFID transaction reporting, numerous warnings and increasing fines from the FCA, significant numbers of transactions are being reported incorrectly with firms unaware of their inaccuracies. In addition, firms are deriving false confidence from passing the validations provided by ARMs and the FCA.

Importance of getting reporting right

In Market Watch 50, the FCA TMU makes it clear that they see failure to produce current MiFID reports of good quality as an indication on how well a firm can meet its future and more complex obligations under MiFID II/R and in part, compliance with the recently introduced Senior Managers Regime.

It says: “The ability of firms to submit accurate and complete transaction reports is essential if they are to be in a strong position to meet the more complex requirements of MiFIDII/R.” It also reminds firms: “If we continue to find firms that fail to identify or mitigate risks associated with market abuse then we will take stringent action against those firms. These actions could include penalties such as fines.”

This echoes the warnings raised by the FCA in all of the public fines for transaction reporting. The obligation to make complete and accurate reporting is also unambiguously clear through the FCA Handbook (SUP 17) and the Transaction Reporting User Pack (TRUP 3.1).

Detecting market abuse

In Market Watch 50, the FCA also reminds the industry of how important a tool transaction reporting is to allow them to detect market abuse.  Poor quality data directly affects the ability of the FCA, European competent authorities and other regulatory bodies such as the Bank of England to detect market abuse or carry out their supervisory responsibilities.

Where to from here?

The picture illustrated by the fines for transaction reporting is one where a large majority of reported transactions have passed high levels of validation but the data is still inaccurate. Failure by firms to report correctly is a major industry problem. Firms need to change their approach to protect themselves under the current MiFID regime and the upcoming MiFID II/R in 2018.

Kaizen’s ReportShieldaccuracy testing checks transaction reporting data at source and identifies transactions successfully submitted to ARMs and the FCA but still wrong.  An independent, managed service, ReportShield is already being used by a number of firms to provide reporting assurance and deliver confidence to management and the regulator. The service significantly reduces risk to firms, offers protection to managers who have SMR responsibilities, and is delivered at a significantly lower cost than testing in-house.