Firms subject to transaction reporting are typically in scope of multiple regulatory reporting regimes, including MiFID II, EMIR, Dodd Frank and ASIC. Although firms are aware of their obligations, often they are not doing enough to satisfy the regulatory requirements. This, combined with the complexity of transaction reporting, means it is a key area of risk and many mistakes are made. A meticulous approach, thorough reporting and due diligence checks may seem simple but effective measures, but the complexities associated with reporting mean that errors are commonplace.
As regulations evolve, being aware of changes and common discrepancies can be the deciding factor between your institution meeting compliance or falling foul of regulations. This article will explore the most common transaction reporting mistakes regulators look out for, and the actions you should take to avoid being penalised.
Why is transaction reporting so important for regulators?
Regulators, such as the FCA, ESMA and CFTC, use transaction reporting to ‘detect and investigate market abuse’. By protecting investors, and reducing the risk of financial crime, transaction reporting acts as the preventative measure that protects the financial market from threats.
Your financial institution needs to invest in robust reporting systems that can establish stringent controls to stay ahead of the curve and remain compliant. Proactivity in identifying and reporting data correctly is the key component that knits together the compliance requirements you should adhere to.
Three common transaction reporting mistakes
Knowledge and understanding of common transaction reporting mistakes are fundamental for implementing appropriate measures to reduce the potential of errors. There are three core issues that firms often fail to address in relation to transaction reporting.
Misinterpretation of regulatory requirements
Firms can be guilty of misunderstanding the data sets that regulators want to see. Gaps in compliance knowledge and expertise often contribute to transaction reporting errors. These can lead to missing or incorrect information reported, such as incorrect reporting conventions. The FCA urges firms to follow market conventions for notations when detailing price and quantity fields, ensuring consistency with those reported by counterparts.
To solve this, you need to ensure all required data fields are complete and accurate, with regular data validation and reconciliation processes that can help identify and correct errors.
Reporting solutions not working correctly
Often an institution may understand the requirements, but the chosen solution for reporting does not working sufficiently. This can include labeling a derivative trade as a spot transaction, or incorrect mapping of products and static data (e.g. counterparty IDs). Data taken from the incorrect place is hugely common, for example, reporting data as a trade date, but the data taken is actually taken from a determination date is a common example.
Reviewing trade classifications is essential to avoid errors and ensure accuracy. Mapping data and testing the coding is absolutely essential to rectify any issues.
Incorrect static data
Another issue relates to static data being recorded incorrectly. Whilst your interpretation of the regulation and mapping is correct, missing data can mean this counts for very little. Generally, this is an issue with missing or incorrect counterparty information. It occurs when essential information about one or more parties involved in a financial transaction isn’t included in your report. The regulator will then be unable to monitor market activity accurately and map compliance with the regime requirements.
Validating your counterparty information through data quality controls can alleviate the potential for incorrect static data. Checks for missing or inaccurate counterparty data should be alerted to your reporting team.
Consequences of transaction reporting errors
As demonstrated by the data compiled by the FCA, providing quality and accurate market data is of paramount importance - regulation is stringent, compliance is essential. Failure to meet these requirements can result in the following consequences being imposed on your institution:
Regulatory transaction reporting fines
Increased regulatory scrutiny
Reputational damage for your firm
Costly legal proceedings
The Financial Conduct Authority (FCA) has made it abundantly clear that transaction reporting is a key priority. It is also the area where fines are most commonly levied against firms. The FCA can impose fines or penalties against firms that fail to carry out transaction reporting correctly.
Market Watch 74 released by the FCA in July 2023 details the continued emphasis on the transaction reporting, and the issues that the FCA have highlighted. The report states that 745 transaction reporting data extract requests were recorded in 2022. Equally, a total of 346 transaction reporting breach notifications were submitted under the Regulatory Technical Standards 22. This legislates that you are required to ensure records align with the data samples that you submit.
The FCA is not alone in their focus. In September 2023 the CFTC levied fines totalling over $50m to three Tier 1 banks after they failed to comply with the transaction reporting requirements of Dodd Frank. The banks did not have adequate control frameworks to detect and resolve reporting errors, leading to incorrect submissions of millions of trades.
Avoid transaction reporting mistakes with the Novatus TRA platform
Our team of transaction reporting experts can provide tailored support across the entire process ensuring your transaction reporting is carried out effectively for all reporting regimes.
The market-leading Novatus Transaction Reporting Assurance Platform (TRA) is a technological solution delivers complete, accurate and timely reporting, whilst also offering:
Significant reduction in operating costs
Complete coverage of all reporting regimes
Rapid results to quickly identify any errors for remediation
Automated data eradicating human error for seamless implementation and improved accuracy
For further insight on the subject of transaction reporting, check out our other helpful resources below.