Identifying the weaknesses in firms’ transaction reporting governance and control frameworks

Following the introduction of the Markets in Financial Instruments Regulation (“MiFIR”) in 2014, in-scope firms have been required to submit transaction reports to the Financial Conduct Authority (“FCA”) after the execution of a transaction in a reportable instrument on a T+1 basis (the day after a trade is executed). Despite this requirement being bestowed upon firms for several years and during this time there have been improvements in the quality of the transaction reports submitted by firms, the FCA continues to identify incomplete and inaccurate transaction reports. The FCA has used Market Watch 81 to highlight the root causes for these ongoing issues, which can be summarised into five key weaknesses.

1. Change management

The FCA recognises that change within organisations can affect systems and processes designed for transaction reporting purposes.

Observations

• Lack of formalised business requirements documentation pre-implementation, meaning that when data issues/discrepancies are identified, remediating them can prove extremely complex.
• Failing to maintain adequate oversight of third parties (whether this is due to a lack of internal technical expertise or that there is no formalised Management Information (‘MI’) provided to a firms’ senior management team).
• The FCA identified that staff turnover and absences can also affect data quality, given the technical expertise required to perform and understand transaction reporting related matters.

2. Reporting process and logic design

The FCA reiterated that whilst firms can have effective transaction reporting systems and controls in place, these should be supported by clear reporting processes and logic design documents.

Observations

• Firms have interpreted regulatory requirements and developed reporting logic independently from their business context. This has resulted in misreporting (e.g. populating RTS 22 field 36 (venue) with a trading venue market identifier code when reporting as a Direct Electronic Access (“DEA”) user.) The likelihood of errors arising from this and going undetected may increase, where input from the first and second lines of defence are limited in the design process.
• A lack of clarity in implementing the transaction reporting process may result in ad-hoc resource assignment and unclear deliverables. This can result in manual processes that lead to late reporting, a backlog in exception management and difficulties when transaction reports need to be cancelled and amended.  

3. Data governance

To enable firms to submit accurate transaction reports in alignment with the relevant regulatory requirements, firms will typically need to pull data from multiple internal sources and external feeds. Failure to ensure that there is alignment between data management and regulatory reporting can result in the submission of inaccurate transaction reports.

Observations

• Gathering data from various sources can result in fragmented data owners, access, maintenance and storage, subsequently impacting the likelihood of errors and creating procedural inefficiencies (e.g. incorrect data being used, due to inaccurate mapping and incorrect legal entity identifiers, as the data is being pulled from a static table and does not align with details contained within the order confirmation).
• Failing to identify source data which adversely affect the effectiveness of the reconciliations conducted by a firm.
• Poor record keeping arrangements which impairs a firm’s ability to audit its records or correct historic transactions where errors have been identified.

4. Control framework

To facilitate the timely and accurate submission of transaction reports, firms are required to implement a robust control framework, a component of which should enable the firm to undertake a three-way reconciliation (front office data vs data submitted to a trade repository vs data submitted to the FCA), as required by MiFIR Article 15 (3 and 4).

Observations

• Firms have implemented poorly designed reconciliation processes that hinder firms from identifying data quality issues.
• Some firms only conducted reconciliations on specific fields, or on an irregular basis, subsequently impairing a firm’s ability to determine the accuracy of transaction reports submitted in their entirety and take swift remedial action where necessary.
• Some firms are not incorporating services or data provided by third parties into their control and reconciliation framework, which can create gaps in monitoring and prevent firms from identifying issues originating externally.

5. Governance, oversight and resourcing

Implementing an effective and appropriate governance framework plays a crucial role in upholding operational integrity of the transaction reporting process, managing risks, and maintaining trust through accountability. If a firm’s management team maintains oversight of transaction reporting related matters, it enables the timely identification of process and data related issues through monitoring.

Observations

• Firms should ensure that there is an appropriate balance when considering financial and non-financial risk. Failure to consider transaction reporting in a risk management framework can result in operational, compliance and reputational risk.
• Insufficient or inconsistent transaction reporting MI can prohibit a governing body from understanding existing and emerging transaction reporting risks, which can impede decision making.
• Having overly complicated or unclear organisational structures may result in ineffective oversight of transaction reporting risks and reporting issues.
• Some firms lack the requisite knowledge/subject matter expertise on transaction reporting matters, which will impact a firm’s ability to identify issues with and enhance its transaction reporting control framework.

Key takeaways

Transaction reporting remains a top priority for the FCA and firms should ensure that they have a robust framework in place to facilitate the timely and accurate submission of transaction reports (including performing three way reconciliations).

As a first step, firms should consider the FCA’s observations across the five weaknesses and identify whether any enhancements are required to its transaction reporting governance and control framework. Firms should also ensure that its staff possess the relevant knowledge to ensure that it complies with the relevant regulatory requirements related to transaction reporting.

Finally, senior management should be kept abreast of matters related to transaction reporting, including regulatory developments, live or historic risk events, an overview of any remedial work being undertaken and the outcomes of reconciliations performed by the firm.  

How can Cosegic help?

Cosegic continues to support its clients on transaction reporting related matters. Our key services include:

• Reviewing the robustness and effectiveness of your transaction reporting governance and control framework (including assessing the adequacy of policies and procedures, MI and the new product approval process);
• Performing sample testing of transaction reports submitted to the FCA;
• Reviewing business requirements documents to ensure that the interpretation of the specific fields and how these should be populated is consistent with the FCA’s expectations; and
• Assisting firms to remediate any historic or ongoing transaction reporting issues.

If you would like further information please contact us below.

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