Why you need a robust control framework for your regulatory reporting

Data quality issues could end up costing your firm if they fail to meet regulators’ expected standards. But there are some common errors that you can avoid and some outliers to watch out for.

Why you need a robust control framework for your regulatory reporting

Data quality issues could end up costing your firm if they fail to meet regulators’ expected standards. But there are some common errors that you can avoid and some outliers to watch out for.

Data quality should be front and centre for firms when it comes to their transaction reporting obligations under MiFIR, as it could mean more than just having to resubmit trades to the regulator.

In addition to having a responsibility for identifying errors in transaction reports, regulated firms need mechanisms to avoid duplicate reports and have arrangements in place to ensure they are complete and accurate.

However, many reports are still being rejected for avoidable reasons and could be costing regulated firms time, resource, and even their reputations.

In September 2020, the UK’s Financial Conduct Authority reminded firms in its Market Watch newsletter that firms can’t assume a transaction report is accurate simply because it was accepted by the regulator. The FCA said that its validation rules are not intended to identify all potential errors and omissions.

Under Article 15 of RTS 22, firms are required to have systems and mechanisms in place for identifying errors and omissions within transaction reports. The onus is on firms to ensure their transaction reports are complete and accurate, and this should include testing of reporting processes and regular data reconciliation. Therefore, compliance officers and regulatory reporting officials will likely be held responsible for inaccurate and rejected reports.

ESMA recently launched a consultation paper on simplifying transaction reporting and enhancing the quality of data for greater consistency. However, firms that fail to act on data quality now could find that it costs them more to fix these issues in the future and are at risk of receiving regulatory censure.  

Nevertheless, there are some simple ways to make sure that issues over data quality are avoided.

Make your filings fail-proof

Ultimately, regulated firms can’t afford to take their eyes off the ball when it comes to transaction reporting. This is particularly important given that national regulators are increasingly working together to share information to make sure that you have filed your transactions correctly, as the Dutch regulatory AFM suggest. This is why it’s important to put in place an effective control framework that helps to ensure reporting accuracy and quality.

Reporting infrastructure and business models can and do change, so a clean report today may become a misreport tomorrow. Quality assurance should be key in any process model. One way that firms can protect the quality of data is by using systems that automate processes and detect errors and accuracy issues. Through advanced analytics, firms can not only gain a greater understanding of their data, but these systems can also send alerts when errors and accuracy issues arise.

According to insights from AFM, even small changes to the file format or wording can be the difference between a correct and an incorrect report. A different name or even a different character could result in a rejected report. Therefore, ensuring that your reports are completed out accurately will also make your report less likely to be rejected.

Issues such as using the wrong LEI identifiers in counterparty trades, incorrect ISIN and MIC codes, and incorrect or missing TVTICs – particularly after the recent change in format – will be picked up by regulators and could cause you problems.

Another issue that might arise, the AFM suggests, is that gaps can appear because of key person risk – when somebody is ill or on holiday – or if their automated systems fail to work properly. However, if you fail to notify the regulator of a reporting issue it could end up costing you with AFM having handed out several penalties for transaction report gaps. 

Pre-empt regulatory scrutiny

A robust control framework can not only improve your data quality, but it can also prevent you from falling foul of regulators. This framework can include double-checking specific details with your counterparty or with your trading venue, as well as other automated processes that could help you spot errors, especially when large volumes of transactions are involved. Trade times are another common mistake made by firms, sometimes with the time misreported by the trading venue and sometimes by the trading firm using the wrong standard time. But these too are being monitored by regulators.

While concatenated names to identify clients are permissible by some national regulators, there is little justification where ID cards or passports are available as identifiers. If you are using concatenated names for a significant portion of your client base, regulators may start to take a closer look and wonder whether you are collecting the client information that you are supposed to, according to insights from the AFM.

Resolving issues with your in-house processes quickly could help you avoid having to back report your transactions or, in some cases, receiving a fine. 

Get it right the first time

Whatever measures you take to try to prevent mistakes in your data, some may inevitably creep through. However, it is how you deal with the mistakes that will matter most to your regulator.

There is an obligation for firms to correct rejected transactions and regulators will be looking at rejected transactions to see if they have been corrected. And if they are not, some firms could face significant consequences. Along with potential fines from regulatory authorities, firms could also face non-financial penalties, including reputational damage.

Making sure there are no gaps in your transaction reporting should be one of the most important things that you do given firms’ obligations under MiFIR. But they can still happen, and regulators are starting to take a closer look.

As such, MiFIR is about much more than submitting your transaction reports to the regulators. Firms that are not focused on data accuracy and quality before submitting their reports are exposing themselves to multiple risks that are unnecessary and easily avoided. Complying with MiFIR is about putting in place robust controls, maintaining higher standards, and ensuring systems and processes are tested frequently so that your reporting is of a consistently high quality.