What the FCA look for in your MiFIR data
The FCA expects firms to have appropriate systems and controls in place to monitor the quality of data throughout the submission process
Compliance officers and reporting analysts at UK firms are being urged to check adherence to their firm’s transaction reporting obligations, following a series of insights on MiFIR reporting shared by the UK’s Financial Conduct Authority.
While MiFIR rules state that firms need to submit complete and accurate transaction reports to the regulator within one working day of execution, recent regulatory commentary suggests that many are not performing the important task of monitoring and correcting the accuracy of their reports after they have been submitted.
Regulators now have the means by which to check your data
Among the multiple regulatory regimes that feature transaction reporting, MiFID may be the most significant. Article 26 of MiFIR, outlines firms’ reporting obligations and is unique because it is focused purely on providing the necessary evidence to allow the FCA to achieve its goals of protecting and enhancing the integrity of the UK’s financial system. In order to do this, the regulator needs complete visibility of the transactions that result from a firm filling a client order or managing its own positions.
With the FCA being the largest regulator in Europe when it comes to transaction volumes, its reporting system is a behemoth. As at December 2019, the FCA’s Market Data Processor (MDP) System had already processed more than 16.3 billion transaction reports since 3 January 2018. That’s more transactions than were processed during the entire life of the previous MiFID I transaction reporting system, ZEN, which was decommissioned on 12 January 2018. As a result of the MiFIR regulation the regulator can be very prescriptive in what it expects from firms.
FCA says you must reconcile your reports
A key feature of the MDP system is that it only verifies technical validations, so firms are expected to undertake their own business validations to ensure records are correct. The watchdog has done some of the heavy lifting through its technical validation process, where the system sifts data at the point of submission. However, anything that is automatically rejected must be corrected and resubmitted. Therefore, the onus is on firms to make sure they have the right systems and processes in place to ensure their records are sound.
Insights from the regulator, through its Market Watch publications and events, have made it clear that the FCA expects firms to have appropriate systems and controls in place to monitor the quality of data beyond the submission process. Crucially, firms must be able to identify where mistakes have been introduced and clearly show that data reconciles correctly.
Before, during and after reporting
Inevitably, firms may sometimes discover data quality issues after the point of submission. The FCA has been clear that reporting firms should monitor, investigate and resolve all of these.
As a minimum, the regulator expects firms to take immediate action to stop the inaccuracies recurring in future and to correct the erroneous data that has already been submitted.
It has previously stated that it will take a particularly dim view of instances where firms have failed to submit either an errors & omissions notification form, or failed to request sample data to identify how such errors have crept in.
To obtain sample data, firms must request access to the MDP Entity Portal, where each company will need to identify an administrator who will manage users within that firm. And it appears that, despite the warnings, a worryingly small number of firms are using the service. As at the end of December 2019, the FCA estimated that it had received download requests from some 700 entities. With many more firms that than that executing in the UK, it is clear that many firms have yet to use the portal.
You can’t outsource your responsibility
Some firms have opted to employ third parties to assist them in managing their transaction reporting obligations. Recent updates from the regulator acknowledge the technical nature of MiFIR and understand why some market participants have sought additional assistance. But once again, the FCA has stressed that the delegation of activities does not relieve firms of accountability or responsibility for the accuracy, completeness and timeliness of their reporting.
In instances where the creation and/or submission of reports have been outsourced to a third party, it remains the firm’s responsibility to conduct regular checks to verify the accuracy of submissions. Even in instances where third party outsourcers have been employed, firms must be able to show that they have made every attempt to reconcile data.
The most common errors the FCA see
When reviewing data quality, the regulator has warned companies to be vigilant of errors which are easily overlooked. A prime example is the ‘MiFID Investment Firm’ field. To date, some UK firms have been marking that field as ‘FALSE’ when they should not.
Related to this, is the capacity for missing or duplicate transaction reports. Duplicates tend to be most common when trading venues assume that they are reporting on behalf of non-MiFID firms, when in reality, the firm falls under the MiFID regime. This can lead to different reports from the two different entities in relation to the same trade, creating headaches for all involved at a later stage.
Recent FCA communications, including its Market Watch newsletter, have clearly shown that some firms in the industry need to do more to be compliant with MiFIR. There are some common themes where firms are repeatedly struggling but are fairly straightforward to address.
These include when the clocks change as a result of daylight-saving time in March and October, which can significantly impact the data relating to trading times. For the sake of clarity, all data should be submitted in UTC time.
Other common errors that firms continue to make relate to the use of default trading times (no longer permissible since MiFID II), reporting trades denominated in minor currencies (i.e. pence not pounds), the use of dummy national identifiers and inconsistently populating the Trading Venue Transaction Identification Code.
Firms have also been advised to be careful when using the ‘INTC’, client aggregation account, the guidelines specify that the INTC account should be flat at the end of the day and FCA is finding that this isn’t the case. The new transaction reporting framework is deliberately linear to give the FCA full visibility of market activity and change in position, so companies are advised to refer to the FCA guidance on when they should report collectively, and when they should not.
What is clear, is that now two years down the line the FCA have the means by which to identify firms that are not adhering to the stringent quality requirements. Firms must be proactive in identifying where the issues in their data lie and do all they can to do rectify.