MiFID II Transaction Reporting: where are we now?
It has been more than six months since the go-live of MiFID II and for most executing firms transaction reporting has become part and parcel of their operational workflows.
For those working on transaction reporting, 2018 will have been a mixture of successes and frustrations. In the first half of this year the market data processor (MDP) has reported the ingestion of 3.5 billion transactions in the UK alone! The MDP receives data from 23 entities comprising of the seven registered ARMs (Approved Reporting Mechanisms), ten trading venues and six investment firms which represent approximately 3,150 executing firms.
It is therefore no surprise that the FCAs Markets Reporting Team (MRT) have highlighted a number of key recurring reporting issues that should be addressed by the submitting parties in future.
Beyond the EU Borders
Third country firms are to be reported in the field ‘Investment firm covered by directive’. The directive (through SUP 17A.1.2) makes it clear that any investment firm with branches in Europe are subject to the regulation and will need to answer this field with TRUE.
Firms with no physical European presence will not be obliged to report transactions. However, such firms will still be indirectly impacted whenever the firm transacts or trades instruments with European firms as the counterparties will demand additional detailed information for their own MiFIR reporting. Given the global nature of the asset manager’s business in this example, it is advisable that they conform to the minimum requirement and register for a Legal Entity Identifier (LEI).
In addition, the MiFID II status of index constituents are proving problematic as index providers are not obliged to make these public making it difficult for firms to identify and report where appropriate.
ESMA confirmed (and the FCA reiterated) that in the absence of a price at the time of execution the Price (or Price Type if you are using UnaVista) field must be populated with the Price Pending code, PNDG. However, this is an interim measure and firms will need to publish an update once the price has become available.
Eligibility, Validations and Identifiers
On reporting eligibility, misunderstandings persist with the concept of Traded on a Trading Venue (TOTV) despite the ESMA’s opinion published on the 17th May, which sought to clarify this topic. The Derivatives Service Bureau (DSB) continues to experience issues with issuing of ISINs for derivatives and its connectivity with the Financial Instruments Reference Data system, FIRDs. Therefore, the consistency and accuracy of instrument classifications and ISINs directly affect eligibility checking of transactions. While the FCA has advised that FIRDs should not be seen as the golden source, the complexity arises when the MDP references FIRDs to validate reported transactions. This issue is highlighted by the fact that they are the top two reasons for rejected transactions (see below).
Transactions are often reported using the counterparty’s Legal Entity Identifier (LEI) rather than that of the Market Identifier Code (MIC). Further, MRT has also highlighted that LEIs reported are either invalid or incorrect. Where invalid, firms are urged to ensure accuracy by referring to the GLEIF database and that the right country identifier has been used.
The Markets Reporting Team have stressed that is essential that reporting firms use Universal Coordinated Time (UTC) for all transaction and cease the use of default timestamps. Firms should also provide accurate and granular timestamps as defined by the clock synchronisation rules under Article 50.
While issues continue to cause concern for ARMs and reporting firms alike, the FCA have listed the top reasons for rejecting transactions they receive. While it is hardly surprising that not all of the 500 million transactions reported to the FCA each month would pass through the MiFIR process without errors, some of the reasons for rejections indicate that more control is required prior to transaction reporting. Ranging from simple validations to duplicate checking, the rejections highlight that not all firms have resolved teething issues, and some may still be relying on tactical solutions for their transaction reporting.
The rejections are categorised as follows:
CON-412 – Instrument is not valid in reference data on transaction date
CON-472 – Underlying instrument is not valid in reference data on transaction date
Given the well documented issues with the accuracy and timeliness of FIRDs, it is hardly surprising that validation of instruments is causing rejections.
CON-370 – Country of branch membership is missing
CON-640 – Commodity derivative indicator is missing
CON-430 – Instrument classification identifier is incorrect
CON-473 – No underlying reported for swap transaction
CON-351 – Net amount is missing
The reporting requirements are complex and pose many interdependencies between the 65 fields. Debates continue on how the report needs to be populated for all the different instrument types and scenarios. It is therefore a positive sign that only five fields have been highlighted by the MRT.
CON-023 – Transaction report with the same transaction reference number has already been sent for the firm and not cancelled
CON-024 – Transaction for cancellation cannot be found
CON-025 – Transaction has already been cancelled
Virtually all of the duplication errors can be traced back to the consistency of derivative ISIN’s in FIRDs.
Not all of the reasons for rejections lie with the investment firms. Some of the validations show inconsistencies, while others are actively being questioned for their accuracy in application.
For many firms the main focus of 2017 was to have their transaction reports ready for the 3rd of January 2018. In the rush to consolidate the various pieces of information to populate the required 65 fields, some will have sacrificed quality and accuracy of their data to ensure readiness. This is evidenced by the volume and nature of some of the rejections seen since January. The regulator has been clear in its communications leading up to go live that, unlike MiFID I the new regime would be looking for firms to have robust internal controls in place to ensure accurate transaction reporting.
Finally, the need for a three-way reconciliation between the investment firm, the respective ARM and the FCA is required under RTS 22 article 15. While reconciliation of the three elements in the transaction reporting process is not required on a daily basis. The FCA recently announced probes and in the current climate, it is highly likely that nonconforming investment firms are going to be fined.