Newsletter on market conduct and transaction reporting issues.
About this edition
Transaction reports continue to play a key role in our ability to conduct effective market oversight. There has been a trend of improved data quality since 2018. But issues persist, and some firms are not paying sufficient attention to our warnings on the importance of reporting transactions to us in a complete, accurate and timely manner.
In this Market Watch, we describe some of our recent supervisory observations, covering RTS 22 transaction reporting and the submission of financial instrument reference data under RTS 23. These will be of interest to investment firms, credit institutions, trading venues, systematic internalisers (SIs), and approved reporting mechanisms (ARMs).
Reconciliations and breach notifications
Table 1 shows the number of firms accessing our Market Data Processor (MDP) Entity Portal to make a transaction reporting data extract request since 2018.
|Year||Firms making data extract requests|
We recently identified and contacted certain firms who have not been making regular data extract requests. Some were not aware of the MDP Entity Portal, while others responded that they were relying on data extracts provided by ARMs to conduct their reconciliations. Firms are required to reconcile front-office records with data samples provided by the FCA under Article 15(3) of RTS 22.
Table 2 shows the number of firms that submitted a transaction reporting breach notification to us each year since 2018. These notifications are required by Article 15(2) of RTS 22 and SUP 15.3.11R.
|Year||Firms submitting breach notifications|
Under Article 26(7) of UK MiFIR, where errors or omissions are identified in transaction reports, the firm reporting the transaction must cancel the report and submit a new corrected report to us. Firms should be aware of validation rule 269, which rejects transaction reports submitted more than 5 years after the trade date and consider this when planning back reporting exercises. Errors and omissions notifications should still contain details of when an issue first occurred and the number of transaction reports affected, even if this extends beyond 5 years. We do not expect firms to cancel transaction reports which have a trade date 5 years older than the submission date.
Identification of Investment and Execution Decision Makers
Where more than one person or algorithm is involved in an investment or execution decision, the person or algorithm taking primary responsibility for the decision should be identified in the transaction report. Article 8(2) and Article 9(4) of RTS 22 require firms to establish pre-determined criteria for determining who is primarily responsible for making investment and execution decisions.
We have identified a range of practices from firms where a natural person is assigned responsibility for an investment or execution decision. Some identify the individual trader, investment manager or portfolio manager making the investment or execution decision at a transaction level. Others have identified a head of desk, head of trading, or other senior manager overseeing a team responsible for making investment and execution decisions.
Our market monitoring capabilities are best supported by granular information on individuals or algorithms making specific investment or execution decisions. We recognise that in some scenarios, judgement may be needed to determine primary responsibility. However, we challenge firms to consider whether it is appropriate to assign primary responsibility to senior management within the firm who oversee investment or execution decisions but have limited practical involvement in those decisions at a transaction level.
We have identified transaction reports submitted for spread trades which do not conform to the ESMA transaction reporting guidelines as a complex trade, involving a simultaneous buy and sell of 2 (or more) instruments quoted at a single price, typically a spread between the yield of the 2 instruments in basis points.
Example 117 in the guidelines shows that a single price must be populated in field 33 for a complex trade, and that individual transaction reports submitted for each leg of the complex trade should be linked by the same complex trade component ID in field 40. We have seen complex trades misreported with individual prices in each constituent transaction report. This approach is inconsistent with the guidelines. We expect firms and market participants to continue to apply ESMA guidelines and recommendations to the extent that they remain relevant.
Under Article 26(4) of UK MiFIR and Article 4(1)(c) of RTS 22, where certain predefined conditions are met, including an agreement between the ‘transmitting firm’ and the ‘receiving firm’, the transmitting firm is relieved of the requirement to submit a transaction report. This is because the report submitted by the receiving firm contains all necessary information on the transaction. This information includes the client of the transmitting firm being identified as the buyer or seller, the receiving firm identified as the executing entity, and the transmitting firm identified in the transmitting identification code for the buyer or seller fields.
We recently contacted some investment firms who had failed to submit transaction reports to us. Some responded to our enquiries claiming they were a transmitting firm and that reporting was being undertaken by a receiving firm. We contacted those receiving firms, some of which advised that no transmission agreement was in place. We encourage all transmitting and receiving firms to review the transmission arrangements they have in place to ensure all relevant conditions outlined in Article 4 of RTS 22 are being met and the agreements can be evidenced.
Inconsistent price and quantity notations
We have identified inconsistencies in the notations reported by investment firms for the price and quantity fields. In cases other than where a specific price or quantity type is required for the instrument traded (for example, credit default swaps (CDS) - price in basis points; equity - quantity in units), firms may determine the most appropriate notations to report. We urge firms to follow market convention when determining which notation to use. Where possible, firms should ensure that the notations selected are consistent with those reported by their counterparties. We have identified cases of the same transaction being reported using different price or quantity notations by firms facing one another. For example, one side using a monetary price and the other using a basis point price.
Transactions executed under the rules of a trading venue
We have received queries on how to populate the venue (field 36) and trading venue transaction identification code (TVTIC) when reporting transactions negotiated off-exchange and brought under the rules of a trading venue. In such cases, both parties are expected to report the market identifier code (MIC) of the trading venue. This is covered in section 5.4 Part I of the ESMA Guidelines on transaction reporting. The TVTIC (field 3) is optional for these transactions.
Looking through the chain
We do not expect firms to look through a chain of intermediaries in scenarios other than the transmission of orders meeting the conditions of Article 4 of RTS 22. Some firms have misidentified funds as the buyer or seller in transaction reports when dealing with a fund manager. Similarly, where a firm executes a transaction with an intragroup subsidiary, the firm should not identify the subsidiary’s client as the buyer or seller, even where those details are known to the firm. This is important to ensure consistency in transaction reporting and the identification of all relevant parties within a chain.
Reporting instrument details
For transactions in financial instruments where instrument details must be populated in fields 42-56, we have seen variable data quality issues. Some of the issues are:
- Price multipliers which do not reflect an accurate number of underlying instruments for the derivative transaction, most often for contract for differences (CFDs).
- Unreported expiry dates, default expiry dates, and expiry dates which precede the trade date of the transaction.
- Classification of financial instrument (CFI) codes which are inconsistent with the instrument name or other instrument details.
Firms must make sure these fields are complete and accurate as we rely on them to identify the nature and attributes of the instrument traded.
Instrument reference data
Under Article 2 of RTS 23, trading venues and SIs must submit instrument reference data to us by 21.00 CET on each day they are open for trading for all financial instruments admitted to trading or that are traded on their platforms before 18.00 CET on that day.
Some trading venues and SIs are not successfully submitting data within this timeframe. This impacts the ability of investment firms to submit transaction reports executed on trading venues or with Sis. In the case of late reporting by trading venues, it can prevent investment firms from completing an accurate assessment on the reportability of the financial instrument. Trading venues and SIs should have adequate systems and controls in place to detect late reporting. And in such cases, they should promptly submit an instrument reference data errors and omissions notification to [email protected].
Spot FX instruments
We have identified trading venues submitting instrument reference data for spot FX instruments. Spot FX is not a financial instrument under the UK MiFID framework. The submission of reference data for spot FX instruments can therefore mislead investment firms as to the scope of their reporting obligations. This includes where they are traded as part of a complex trade or strategy. Trading venues should ensure reference data is not submitted to us for instruments that are not MiFID financial instruments.
Cancelled instrument reference data
When instrument reference data is submitted to us in error, it should be cancelled by the submitting entity. This includes where instrument reference data is submitted for spot FX instruments. When an instrument reference data record is cancelled, it will remain in the FCA Financial Instrument Reference Data System (FCA FIRDS) but display as a blank record, except for the instrument identification code, trading venue and publication dates. Investment firms should disregard these products when seeking to determine the reportability of an instrument.
We may conduct further work on the areas covered in our Market Watch articles to ensure appropriate remedial actions are undertaken by firms. Firms should continue to submit errors and omissions notifications for any issues of which they become aware.
Additional information is available on our transaction reporting page.
Queries regarding transaction reporting and instrument reference data can be directed to [email protected].