MiFIR Transaction Reporting: Key issues highlighted by the FCA

Aug 16, 2018

Topics: MiFIR |

Six months into the new Markets in Financial Instruments Regulation (MiFIR) transaction reporting regime, the FCA’s Markets Reporting Team (MRT) held a Transaction Reporting Forum to share key issues found since implementation. With a significant increase to the number of reports ingested (monthly averages now upwards of half a billion – an increase of over 55% since the first half of 2017) and the uptick in number of firms submitting data, the FCA has been able to build a clearer picture of the behaviours of firms’ and their clients. However, the regulator is stressing the importance of reporting data quality, accuracy and completeness, with a particular focus on the following issues:

Identifiers – Some transaction reports received by the FCA that passed Approved Reporting Mechanism (ARM) validation have contained both invalid Legal Entity Identifiers (LEIs) and inaccurate national identifiers. The MRT highlighted the use of “LEINOTAVAILABLE45678” and “GB19000101DUMMYDATA#”; whilst the format of these respective identifiers is correct, the characters used to create these identifiers indicate that the data is erroneous. This disregard of the rules is obvious to the regulator and firms submitting transaction reports with these identifiers should expect to be contacted by the FCA.

Investment firm covered by directive – This field indicates whether investment firms are subject to MiFIR or not. The FCA (through SUP 17A.1.2) requires third country investment firms to comply with the transaction reporting requirements as though it is a MiFID investment firm, and therefore requires UK branches of third country investment firms set this field to ‘true.’

Timestamps –The previous transaction reporting regime required reporting to be in UK time and  permitted the use of default timestamps (i.e. 00:01:00) and default seconds (to ‘00’) when the transaction time was not captured or was unavailable. The MRT stressed that all timestamps must now be in Universal Coordinated Time (‘UTC’) and default timestamps are no longer permissible. The time of a transaction must be captured in accordance with the clock synchronisation rules under Article 50. Firms should check the timestamp data and ensure it is reporting accurately and to the correct level of time granularity.

The use of PNDG – The code ‘PNDG’ is used to indicate that a price is pending. The European Supervisory Markets Authority (ESMA) expects, and the FCA reiterated, that this indicator will only be used as an interim measure and that the firm will update the price when it becomes available[1]. Firms need to implement measures to report correct prices, which should involve cancellations and resubmissions.

Rejected transactions – The MRT also noted the following as the top ten reasons for transaction reporting rejections. They split them into three categories:

1. Instrument validation
The FCA compares transactions against ESMA’s daily file of all instruments that are ‘in scope,’ which is comprised of instrument reference data (IRD) submitted by trading venues and Systematic Internalisers (SIs). If the instrument is not present in the instrument reference data, the transaction report will stay pending for seven days. If the IRD file is not updated to include the instrument, the report will ultimately be rejected by the FCA. If a firm believes the instrument is ‘in scope’ despite this rejection code, it should continue to attempt to submit the transaction report beyond the seven day pending window. If necessary, the firm should contact the FCA to highlight issues in the instrument reference data[2].

For transaction reporting to work correctly, the IRD submitted by the venues must be accurate.  However, both ESMA and the FCA have stated that the Financial Instrument Reference Data System (FIRDS) is far from perfect and should not be relied upon as the ‘golden source’ of what is reportable or not.

2. Content validation
There are five common types of rejections occurring in this area:
a.  Country of branch membership is missing: for SIs, this should be set as the country code of the home National Competent Authority (NCA) of the SI.
b.  Commodity derivative indicator is missing: this should be populated as ‘true’ or ‘false’ to designate if the transaction reduces risk in an objectively measureable way in accordance with the MiFID II commodity derivative rules.
c.  Instrument classification identifier is incorrect: a valid Classification of Financial Instrument (CFI) code should be used.
d.  No underlying field reported for a swap transaction: when the instrument classification identifier CFI code starts with an ‘S,’ the underlying field must be populated.
e.  The net amount is missing: this is for instruments with CFI code “DB****” only.

3. Duplication
Transaction reports are being filed with the same transaction reference number already used by the firm and was not cancelled; or the firm was unable to locate the transaction for cancellation; or, the transaction had already been cancelled.

Duplication is an area that firms clearly need to pay more attention to. Firms should implement their own systems and controls to ensure their submission and cancellation protocols allowed the FCA to receive a clear picture of change of ownership of a financial instrument at any given time.

Key Takeaways

The FCA wants firms to understand what it receives, and to confirm the information’s completeness and accuracy. Therefore, it offers the facility for firms to obtain sample data from the Market Data Process (MDP). The MRT highlighted that the number of entities making sample data requests has increased over the first half of this year. But with under 200 requests, the number of requesting firms is in stark contrast to those executing transactions. This indicates that a significant proportion of submitting firms are not complying with the requirement under Regulatory Technical Standard (RTS) 22 to use sample data in reconciliations (where it is made available by the NCA).

The MRT acknowledged that the XML format (and associated XSD schema) is a challenge for some firms, and that the data’s usefulness is somewhat limited due to the lack of a submission date on the output — but these are challenges that firms are expected to overcome. They also encouraged users to obtain the data on a ‘submission date’ basis to ensure that ‘cancelled’ transactions are included in the extract (as ‘cancelled’ transactions are omitted from the ‘trade date’ extract). Firms that have not yet registered with the MDP and obtained a sample for reconciliation purposes should do so as soon as is practical.

Lastly, the MRT spoke about the obligation for firms to contact the FCA if it discovers systemic issues in their transaction reporting infrastructure, including errors and omissions. There is a designated form for this purpose which allows the submitter to give the FCA as much information as possible about the event they are reporting. However, it should be noted that this form should not be used for reporting rejections to the FCA.

The purpose of the transaction reporting regime is to ensure the integrity of the markets. Firms who have not yet reviewed their transaction reporting arrangements should do so at the earliest opportunity to ensure they are not making the same mistakes as those highlighted by the FCA. If such mistakes are identified (and on a systemic basis), the firm should use the notification form to report to the FCA accordingly and embark on a project to correct the erroneously submitted reports.

Contact us if you would like a review of your transaction reporting arrangements, or to learn more about how we can help you meet your MiFID II obligations.

[1] ESMA Market Data Q&A (ESMA70-1861941480-56); Chapter 16 Answer 9(f)

[2] Investment Association Circular 290-18