Newsletter on market conduct and transaction reporting issues.
About this edition
In this Market Watch, we outline our recent findings on the quality of service provided by Approved Publication Arrangements (APAs) and Approved Reporting Mechanisms (ARMs), collectively known as Data Reporting Services Providers (DRSPs), to clients who use a DRSP to meet their MiFID II regulatory reporting obligations. These findings, outlined below, will be of interest to DRSPs, as well as the investment firms, credit institutions and trading venues that are the client base of DRSPs.
Data Reporting Services Providers – Quality of service
DRSPs play an important role in the functioning of wholesale markets, facilitating market transparency and promoting market integrity. ARMs report details of transactions to the FCA on behalf of investment firms. APAs publish post-trade transparency reports on behalf of investment firms. These services improve market transparency and our effective supervision of financial markets, enabling both the FCA and investors to get accurate and comprehensive trading data.
In May 2022, we published our DRSP portfolio letter. This outlined our view on the key risks of harm in the portfolio, the action we expect firms to take and what we will be doing to reduce the level of harm in the sector. One of the key risks of harm we identified was the concentration of the DRSP market among a small number of DRSPs. This could limit clients’ opportunity to switch provider and may weaken incentives to provide high quality services.
To assess the quality of service DRSPs provide, we sent a survey to all DRSPs and a representative sample of DRSPs’ clients – investment firms who use DRSPs to send transaction reports to the FCA and publish trade reports. This work to assess the quality of service provided by DRSPs is separate from our wholesale trade data review following our Feedback Statement on access and use of wholesale data, when we issued information requests to a sample of trade data suppliers and users.
Overall, feedback from clients on their DRSP customer experience was positive. However, we saw some common themes in the responses. This Market Watch summarises these responses and our observations on the quality of service DRSPs provide to their clients. We have grouped these observations into 6 topics: connectivity, data quality, fees, unregulated services, barriers to switching and overall customer experience.
Where we say DRSPs, we are referring to observations common to both ARMs and APAs. Otherwise, we specifically refer to ARMs or APAs.
DRSPs typically offer at least 2 ways of connecting to their service which are common across all providers. For APAs for example, clients can connect to any APA via Graphical User Interface (GUI) or Application Programming Interface (API). Surveyed clients did not indicate that the different connection types offered by DRSPs were an inherent barrier to switching. DRSP clients surveyed also rarely reported problems when connecting to their DRSP. However, for respondents who had experienced connectivity issues, some had difficulties in accessing the right support at DRSPs to identify and resolve the issue promptly.
In line with onshored RTS 13, DRSPs are required to have robust systems and facilities to ensure continuity and regularity of the services they provide. DRSPs should keep clients affected by connectivity issues appropriately informed throughout the identification and remediation process. Where clients had connectivity issues, we saw good practice where DRSPs were easily contactable through multiple media, with clearly signposted and available support staff with the right knowledge and technical expertise to promptly investigate and resolve issues.
DRSPs are required to have systems and controls in place to prevent errors or omissions being introduced by the DRSP itself. The majority of DRSP clients surveyed stated they had not experienced systematic data quality-related issues from their chosen DRSP.
With specific reference to APAs, under Article 10(5) of onshored RTS 13 APAs are required to have arrangements to identify trade reports that are incomplete or contain information that is likely to be erroneous. We have observed differences in how APAs have interpreted a trade report ‘that is likely to be erroneous’.
With specific reference to ARMs, we observed that the ARMs have typically implemented either the FCA or ESMA transaction reporting validation rules. As stressed in Market Watch 59, these validation rules are not intended to identify all errors and omissions in transaction reports.
We note that Article 10(5) of onshored RTS 13 has a list of some of the factors APAs should consider when identifying information that is likely to be erroneous. However, this is not a complete list. We found several instances of good practice where APAs have other checks for report content that is likely to be erroneous. For example, we saw checks on whether a trade report is populated with a currency code in the ISO 4217 list, format checks on International Securities Identification Numbers (ISINs), and checks on whether an ISIN relates to an instrument that can be traded on a UK trading venue. We observed good practice to be where APAs tailor price and volume validations by instrument type and/or asset class. We also found good practice where APAs regularly review and re-calibrate their controls over time, based on their experience and client feedback.
With specific reference to ARMs, Article 11(1) of onshored RTS 13 requires ARMs to have arrangements to identify transaction reports that are incomplete or contain obvious errors caused by clients. As per the FCA’s transaction reporting webpage, ARMs are encouraged to implement other checks and validations beyond those set out in our validation rules where they have assessed this will improve the data quality of their submissions. We observed good practice where ARMs conduct retrospective checks on submissions and/or thematic reviews to identify data quality issues.
Over three quarters of DRSP clients surveyed rated the value for money that they receive for their fees as 3/5 or above (we asked DRSP clients to rate the value for money they receive between 1 (poor value for money) and 5 (excellent value for money)). Clients who rated value for money less favourably were predominantly firms with infrequent reporting obligations.
In line with the DRSP portfolio letter, we expect DRSPs to set fees to ensure clients are getting good value for money. Based on the feedback we received, we have found good practice to be where DRSPs have an active and ongoing dialogue with all client types to get feedback on value for money and fee levels, for example through an active client user group. While we note that DRSP fees are not required to be public, DRSP clients are encouraged to request fee models from other DRSPs should they wish to compare these with the fees they pay.
Many DRSP clients make use of unregulated services which are ancillary to the Data Reporting Services offered by their DRSP to help them meet their trade and transaction reporting obligations.
We found several instances where it was not always clear to clients that they were also using unregulated ancillary services offered by their DRSP or its wider corporate group. For example, where clients had reported experiencing data quality issues in their trade and transaction reports, these issues were often related to unregulated ancillary DRSP services.
Where clients use unregulated services that are ancillary to the DRSP, these services are not covered by systems and controls requirements under the DRSP regulatory framework. These include, for example, requirements on DRSPs to have arrangements to prevent errors or omissions introduced by the DRSP itself. As such, DRSP clients are exposed to the regulatory risk of and bear responsibility for any errors or omissions introduced by these unregulated services. DRSP clients should perform due diligence on unregulated services their DRSP offers to ensure their own compliance with accuracy and completeness requirements for their MiFID II post-trade regulatory reporting.
Where DRSPs or their wider group offer unregulated ancillary services, DRSPs should distinguish these services clearly to clients. We also saw good practice where DRSPs either publish or make it clear to clients the fees they pay for both core versus ancillary DRSP services.
Where DRSPs offer unregulated services to their clients, accuracy and completeness obligations are the responsibility of the client using these services. In these cases, we observed good practice where DRSPs have taken steps to prevent these unregulated services affecting the data quality of trade and transaction reports, for example by introducing checks and controls on the quality of reference data upon which these unregulated services rely.
Barriers to switching
Surveyed clients consistently cited the cost of implementing a project to onboard with a new provider as the main barrier to switching DRSP. We also observed that client onboarding timeframes can vary significantly. Timeframes ranging from 48 hours to 4 months were cited. This is largely driven by differences in testing timelines depending on the complexity of client systems and expected reporting volumes.
The use of wider DRSP group services was another commonly cited barrier to switching. Clients surveyed explained that the ‘one-stop-shop’ arrangements offered by DRSPs that form part of wider groups are both an incentive to stay and therefore a potential barrier to switching DRSP.
Responses from clients surveyed on projects to switch DRSP primarily focused on technical infrastructure and complex interactions between IT systems as being the primary barrier to switching. To make switching DRSP more accessible, we would encourage DRSPs to review onboarding and offboarding procedures to ensure they do not cause any unnecessary friction. In the interest of promoting transparency, we would also encourage DRSPs to disclose information about their onboarding and offboarding procedures, such as the overall process, timelines and any costs.
Overall customer experience
Most clients surveyed were happy with the customer support they receive, although some highlighted that their DRSP could do more to help them prepare for upcoming regulatory changes. In terms of good practice, for example, some respondents highlighted the benefits of webinars hosted by their DRSP on upcoming regulatory changes. A minority of clients surveyed had had a poor customer experience, suggesting that high quality customer support may not be completely consistent across clients. Formal complaints are rare, but where clients raise issues, they are not always resolved in a timely way.
Where clients raise issues, DRSPs should resolve these as soon as possible, keeping clients informed throughout the remediation process. Overall, we expect DRSPs to have the right staff, systems, policies, and procedures to ensure they provide high quality Data Reporting Services to all clients.
You can send questions about this Market Watch, or DRSPs more generally, to the Market Data Infrastructure Supervision team at [email protected].