RegTech Intelligence

UK FCA asks MiFIR transaction reporting firms for “granular information” on trade decision makers

by Rachel Wolcott, Regulatory Intelligence

The Financial Conduct Authority (FCA) has asked firms to provide granular information to identify investment and execution decision makers more accurately in Markets in Financial Instruments Regulation (MiFIR) transaction reports. The MiFIR reporting regime went live in 2018. The FCA uses MiFIR transaction reports, in part, to conduct market surveillance for market abuse and insider dealing.

Market Watch 74 

MiFIR requires firms to populate transaction reports with a code to identify the natural person, firm, or algorithm behind the transaction. The argument for introducing this field in the report was to allow regulators to cross reference individual activity at a firm with activity in an individual’s personal trading account.

However, in Market Watch 74 the FCA noted a “range of practices” when populating this field. Some firms identified individual traders, investment manager or portfolio manager while others used head of desk, head of trading another senior manager. The latter approach does not give the regulator the level of granularity required to identify those making the trades.

“Now they’ve made it very clear that they want the person in that box to have more than a “limited practical involvement” in decisions at the transactional level. That brings it down from a head of desk to someone who, if the FCA contacts them, should have some awareness of why that transaction was done and how,” said Matthew Vincent, a managing director at Kaizen Reporting in London.

A lack of guidance and regulatory clarification led to this field being populated differently across the market, Vincent said.

“Getting that level of granularity correct is more likely to allow the FCA to do cross referencing to individuals identified on other firms reports. Whereas if it’s [populated with] the head of equities for one million reports a day from a high-volume house, that is of no use to them whatsoever. Therefore, this is the first clarification or guidance in the Market Watch to get that granularity better,” Vincent said.

Fewer firms report breaches

Market Watch 74 shows more firms made data extract requests from the FCA’s Market Data Processor (MDP) to conduct data quality checks in 2022. The FCA has identified firms that are not using the MDP extracts regularly and contacted them, it said.

Fewer firms submitted breach notifications in 2022 (346) than 2018 (383), however. Some 428 firms submitted breach notifications in 2019, which was the highest number which has dropped off since then.

“That is a surprising statistic because the number of people downloading from MDP increased year on year. On the face of it, that’s unexplainable because from our experience, firms are still picking up mistakes that they should report and remediate,” Vincent said.

Kaizen has found about 1,200 different data quality issues in firms’ MiFIR reports since 2018.

“Our data indicates that the completeness and accuracy of transaction reports has improved since MiFID II was implemented. There is no direct relationship between the number of breach notifications received and data quality, as each breach notification may involve data quality issues with any number of transaction reports,” the FCA said.

Policy options

The FCA did not have any enforcement action related to MiFID II/MiFIR transaction reporting in progress as of March this year. It commissioned no skilled persons reviews (section 166 under the Financial Services and Markets Act 2000) for transaction reporting in 2022. Data quality in these reports is a priority, it said.

It declined to say whether it would publish market-wide data quality metrics to show firms where improvement was required. It publishes its findings from supervisory work in Market Watch to improve data quality to provide firms with information to improve submissions’ quality. It does not highlight all data quality issues, however. Investment firms must ensure their transaction reports are complete and accurate.

“We are also considering policy options for the UK MiFIR transaction reporting regime, alongside other stakeholders. As part of this review, we will consider where additional guidance may be necessary to improve data quality further,” the FCA said.

Data quality initiatives

The United States and Europe have both started policy work required to improve data quality and collection methods to make market oversight and supervision better while reducing compliance costs. Most recently the European Securities and Markets Authority (ESMA) set out an ambitious five-year data strategy to establish itself as an EU hub for regulatory data.

UK regulators, however, have only recently begun this process having published a report on establishing data standards and recommended establishing a formal Data Standards Committee.

“Achieving the aims of high-quality regulatory transparency is only possible when submissions can be validated against common, standard data dictionaries leveraged by open-source code. Better, digital regulatory reporting provides safer, more transparent markets at lower cost but doesn’t come for free. UK regulators would do well to work with politicians to enable the policy reforms which industry have advocated for since RegTech initiatives started here in 2015,” said PJ Di Giammarino, chief executive at JWG IT a regulatory think tank in the UK.

This article was originally published 04-Aug-2023 by Rachel Wolcott, Regulatory Intelligence

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