MiFIR transaction reporting – a happy 1st birthday?

MiFIR transaction reporting – a happy first birthday WEBSITE

January 3, 2019 marks the first anniversary of MiFIR transaction reporting and what a joy it has proved to be!  The changes introduced last year were truly transformational with new asset classes being brought into scope, new reference data standards to contend with and a massive increase in the number of the fields to be reported. Many operations and compliance staff will still have unhappy memories of last year’s struggle to implement the changes over the festive period to be ready for go-live. Despite the magnitude of the task, most participants will look back in relief that it wasn’t quite the fiasco many had feared. However, even one year on, there are a number of outstanding issues to keep us all awake at night…

Reference data

Perhaps the most difficult part of transaction reporting is knowing exactly what instruments are reportable. Many have assumed this is simple as ESMA’s Financial Instruments Reference Data System (FIRDS) contains all the reportable instruments. Unfortunately, this is not quite true! For a start, FIRDS does not provide details of index constituents or the underlyings to third country derivatives and depository receipts – the onus is on firms to work this out for themselves. Perhaps more importantly, the quality of FIRDS, whilst much improved since go-live, is still not good enough. We still have the FCA’s warning in MarketWatch 54: “Please note that ESMA states that it cannot take responsibility for this information being complete, accurate or up to date”. This is frustrating for firms because if they send a report with an instrument identifier that is not contained in this database within seven days of receipt of the report, it will be rejected and sent back to the reporting firm. This is almost a catch-22 situation for firms as it is now a breach to over-report or to under-report, but they still face the possibility of having their reports rejected even if they are correct because of the FIRDS limitations. Whilst the regulators demand “complete and accurate” transaction reports from firms they cannot ensure the quality of the essential reference data firms need to meet this obligation.

Legal Entity Identifiers (LEIs)

Many firms were concerned that they couldn’t get LEIs for all their counterparties they traded with ahead of go-live. This was particularly concerning as ESMA’s validation specified that “the initial registration date of the LEI shall be equal to or before the trading date” so firms couldn’t implement a fix if they had made a reportable trade against a counterparty without an LEI. However, an early Christmas present from the regulators postponed this validation until 3 July 2018 and firms have been largely successful in persuading these entities to get LEIs or in getting LEIs on their behalf so that they can continue to trade with them.

Transaction Reporting Guidelines

Most participants are grateful for ESMA’s extensive transaction reporting guidelines  and there is no doubt that they helped firms’ preparations enormously (compare and contrast with the EMIR Q&A!). However, nobody can say that they are an easy read or that they cover every trading scenario. This is only to be expected as MiFIR is a very complex reporting regime and regulators cannot envisage all possible trading scenarios across all member states. A number of firms have been frustrated by their local NCA’s inability to respond to every question, but this is a feature of harmonised regulation – it naturally prevents NCAs from offering definitive advice or interpretations outside the ESMA texts. This could present additional risks for firms making their interpretations from the available text.

Complete and accurate reporting

This is the simple demand from the regulators, but it is far from simple for firms to meet it. With the scale of the changes, nobody could justifiably expect implementation to be perfect. The industry was grateful for reassuring words from the FCA ahead of go-live that they could continue to work with the regulator to fully meet the requirements, provided that they could demonstrate that they had prepared well for implementation. However, there are now signs that the FCA might be less accommodating.

In its mid-year industry forums, the FCA fired a warning shot that firms could expect a less tolerant attitude. They’d had six months to ensure their systems and controls were adequate to ensure complete and accurate reporting. We also see a danger in firms assuming that a reduced number rejected reports is an indication that their reporting is up to standard. Unfortunately, the validations only capture the tip of the iceberg of incorrect reports – there are a large number of valid but wrong reports submitted by firms.

Data quality – round 2

Basic validation can only capture basic errors and firms should be aware that all the NCAs are now starting to employ more intelligent ‘business rules’ to uncover reports that have passed validation, but are still incorrect. There is a temptation for firms to believe that it is “job done” for MiFIR transaction reporting now a year has passed by, but it is increasingly important that firms test the accuracy of their reports to the regulators and we are increasingly seeing evidence of this as the FCA has begun sending letters to firms pointing out errors.

Regulators will also want to see evidence of reconciliation of their transaction reports. Firms need to be aware that this isn’t simply checking that their competent authority has received all the reports they have sent.  The requirement is clear; firms must ensure the details of the reportable trades they have made match exactly with those in the reports they have sent to the competent authority and that reports have been made for all the reportable trades.

But…help is at hand

Ensuring reports are complete and accurate is an extremely difficult task, not least because the rules and guidelines have become so extensive and so complex. Unfortunately, “difficulty” is not an adequate excuse for firms failing to meet the regulators’ demands and firms need to remember that the FCA has a strong track record of using sanctions, including fines, to encourage firms to submit complete and accurate transaction reports.

At Kaizen, we provide quality assurance testing of all reportable data to identify incorrect transactions. We can also reconcile all trades in your books and records with data received by the regulator, identifying under and over reporting with matching on specific fields. Additionally, we deliver training on the reporting requirements and provide a control framework tailored to your business. Find out more about our ReportShield assurance service or contact us to find out how we can give you peace of mind in your regulatory reporting quality.