FCA MarketWatch 74 and Supervisory flexibility on transaction reporting
FCA released the MarketWatch 74 newsletter on market conduct and transaction reporting issues on 25th July. Subsequently FCA released a statement “Supervisory flexibility on transaction reporting” which included updates on a few fields which are going to create a possible divergence with the EU in future. We will only focus on RTS22 updates from Market Watch and the field updates from supervisory statements as part of this blog as both subjects are linked and should not be addressed separately. Insights from this blog will benefit all market participants including but not limited to investment firms, credit institutions, trading venues, SIs, and ARMs.
Market Watch 74 provides excellent supervisory observations on transaction reporting (MiFIR RTS 22) and financial instrument data submission (MiFIR RTS 23). Key message from regulator is “Data quality has improved since 2018, but challenges remain as some firms ignore reporting warnings”.
Highlighted by regulator are:
- Reconciliations and breach notifications: There are over 3600 MiFID Investment Firms*, but only 745 accessed MDP for data requests in 2022, and just 346 submitted Error and Omission forms. Recent FCA findings reveal inconsistencies in data extract requests, with some firms unaware of the MDP Entity Portal and relying on ARMs for reconciliations. Firms must reconcile front-office records (RTS 22, Article 15(3)). UK MiFIR (Article 26(7)) requires action on errors or omissions in transaction reports, including canceling and submitting corrected reports to the FCA. Validation rule 269 rejects reports submitted over 5 years after the trade date. Notifications on errors and omissions should contain relevant details, but trade dates older than 5 years need not be canceled. More efforts are needed to improve compliance. Reg-X has a comprehensive but simple RegAssure completeness reconciliation solution which you can use for this
- Identification of Investment and Execution Decision Makers: Identifying the primary responsible party or algorithm in transaction reports (RTS 22, Article 8(2) and Article 9(4)) is crucial for investment decisions. FCA found varied practices among firms, urging a more accurate representation of responsibility, not just assigning it to senior management with limited involvement.
- Complex trades: The regulatory body detected non-compliant transaction reports for spread trades, involving simultaneous buying and selling. ESMA guidelines (Example 117) require a single price in field 33 and linking reports with the same complex trade component ID in field 40. However, misreported instances show individual prices for each transaction. Firms and market participants are urged to adhere diligently to ESMA guidelines for accurate and consistent reporting of complex trades.
- Transmission agreements: Exemption for transmitting firms in transaction reporting (Article 26(4) of UK MiFIR, Article 4(1)(c) of RTS 22) requires agreements with receiving firms. Some investment firms failed to comply, reporting by receiving firms without proper agreements. Regulatory body urges firms to review and ensure compliance, providing evidence of agreements in place.
- Inconsistent price and quantity notations: The regulatory body has found inconsistencies in price and quantity fields reported by investment firms. While specific instruments may require mandated price or quantity types, firms are generally allowed to choose suitable notations for reporting. However, the regulatory body advises adhering to market conventions and aligning with counterparties’ notations to maintain consistency. Instances have been observed where the same transaction was reported using different price or quantity notations, such as monetary price on one side and basis point price on the other.
- Transactions executed under the rules of a trading venue: The FCA has received inquiries about reporting off-exchange transactions under trading venue rules. Both parties should fill in the market identifier code (MIC) and trading venue transaction identification code (TVTIC) in field 36. This guidance is from section 5.4 Part I of the ESMA Guidelines on transaction reporting, and it’s important to remember that the TVTIC (field 3) is optional for these transactions.
On 27th July 2023, FCA announced additional flexibility on transaction reporting. In January 2022, temporary measures were implemented for the short selling indicator in UK RTS 22 reporting. No action was taken against firms failing to meet the field requirements until its future was determined.
Additional temporary measures now apply to certain other fields in transaction reports: Waiver indicator (field 61), OTC post-trade indicator (field 63), Commodity derivative indicator (field 64), and Securities financing transaction indicator (field 65). No action will be taken against firms failing to populate these fields according to requirements during their review. No need to notify issues affecting these fields using errors and omissions forms.
Validation rules CON-610 and CON-640 will be disabled from September 2023 to avoid rejections due to inaccuracies in these fields. So clearly this shows that divergence is emerging between UK and EU as errors are disabled and schema will be updated. UK MiFIR transaction reporting schema will be updated to allow alphanumeric values in waiver and OTC post-trade indicator fields, enabling reporting of new trade reporting flags introduced in PS23/4. No action will be taken against firms choosing not to report these new flags.
Details of the new schema’s implementation will be communicated to MDP submitting entities before the new rules’ implementation date introduced in PS23/4.
MarketWatch Link – https://www.fca.org.uk/publications/newsletters/market-watch-74