The challenges continue
18 Nov 2020
Although some changes around MiFID II have been positive, Alan Dzhanaev and Nicolas Nicolaou of Point Nine explain that the market continues to struggle with adopting the right regulatory reporting process, having a quality control and correct treatment of regulatory technical standards
Image: denisismagilov/adobe.stock.com
After almost three years since the second Markets in Financial Instruments Directive (MiFID II) implementation was entered into force the clarity to the best market practice is not achieved by parties obligated to transaction reporting. Although some changes have been positive, the market continues to struggle with adopting the right regulatory reporting process, having a quality control and correct treatment of regulatory technical standards.
According to the recent request made by Nick Bayley “Duff & Phelps to a Freedom of Information (FOI)”, 546 firms admitted that there were errors or a general lack of quality in their transaction reports. Despite the attempts to bring clarity to the market, such as holding meetings and publishing news content and updates on ‘Market Watch’, regulators continue to struggle with getting firms to understand how to produce high-quality reports.
The Financial Conduct Authority’s (FCA) Market Watch ‘Newsletter on market conduct and transaction reporting issues’ brought some light on the common errors and omissions used by reporting parties without validation errors from their approved reporting mechanism (ARM) or any regulatory reporting service providers. Furthermore, regulators are trying to highlight the importance of the unreported transactions, what is the immediate underlying and the importance of the systems and control functions within the reporting firm.
The shortest ever Market Watch 64 has clearly stated that a UK-based firm and ARM would need to comply with the changes to their regulatory obligations by the end of the transition period on 31 December 2020.
Although the majority of the market issues are similar, regulators aren’t providing firms with the best possible approaches or solutions to minimise reporting risks or poor data quality. Investment managers are able to analyse the quality of reported transactions by requesting them from the FCA’s market data processor system, but only 682 firms have done it, according to the data obtained by Duff & Phelps. This is one of the biggest challenges and obstacles that the industry faces.
Considering that the transaction reports submitted by almost 15 percent of the total UK-based firms with an obligation to MiFID II had errors or omissions in them can be misunderstood. At first glance, this appears that the remaining 85 percent of firms are submitting perfect reports, however, report quality could be significantly worse than those with errors and/or omissions.
One of the biggest issues we see is a breakdown in communication between regulators and corporations. Regulators claim that regulatory reporting errors and omissions are not reaching the appropriate contact at the report submission firms. In fact, according to a Cappitech survey, almost 70 percent of the respondents said that they never received any errors or omission reports from the regulator.
The European Market Infrastructure Regulation (EMIR) which mandates to report all derivatives to Trade Repositories is not looking greater than the MiFID transaction report. The latest statistics from the European Securities and Markets Authority’s (ESMA) Supervision – 2018 Annual Report and 2019 Work Programme present only 86 percent of pairing trades and 40 percent of matching in accordance with legal officer Enrico Gagliardi from ESMA. This rate after six years since the implementation is extremely low. We believe that the majority of the matched trades are due to the delegated reports, which are widely used for algo trading or high-frequency trades on derivatives products.
Furthermore, the matched reports could have errors and omissions which were validated by trade repositories. Therefore, the delegating party may not be aware of the potential misuse of the information in the report itself.
Nevertheless, regulators are using received data to produce the ESMA annual statistical report on EU derivatives markets from EMIR. However, we strongly believe that the accuracy of the produced market structure and market trends are riddled with errors and omissions by submitting firms.
As a result, we may see that the overall figures in terms of the transactions and outstanding volume have expanded to 66 million open derivative transactions (covering trades and positions).
Overall, these accounted for a total outstanding amount of approximately €735 trillion, which includes both over-the-counter and exchange-traded derivatives, and presented an 11 percent increase from the €660 trillion for Q4 2017.
The increasing volume of regulatory reporting and feedback for quality improvements from national competent authorities (NCAs) are not enough to meet industry needs.
Needless to say, the regulatory reporting process became a headache for the industry, specifically the allocation of appropriate resources to implement in-house solutions as well as ongoing controls and maintenance.
Despite the gained experience on the previously implemented regimes, the complexity of the reporting process and the number of the fields to be provided and matched to the other counterparties and the interconnections between different message types is making it difficult to control and overview.
Point Nine Data Trust is one of the leading regulatory reporting solution providers. We are equipped with in-house proprietary technology to provide customers with a complete solution to all customers and regulators for different types of reporting requirements, and a solution that is also flexible, adaptable, and easy to implement.
According to the recent request made by Nick Bayley “Duff & Phelps to a Freedom of Information (FOI)”, 546 firms admitted that there were errors or a general lack of quality in their transaction reports. Despite the attempts to bring clarity to the market, such as holding meetings and publishing news content and updates on ‘Market Watch’, regulators continue to struggle with getting firms to understand how to produce high-quality reports.
The Financial Conduct Authority’s (FCA) Market Watch ‘Newsletter on market conduct and transaction reporting issues’ brought some light on the common errors and omissions used by reporting parties without validation errors from their approved reporting mechanism (ARM) or any regulatory reporting service providers. Furthermore, regulators are trying to highlight the importance of the unreported transactions, what is the immediate underlying and the importance of the systems and control functions within the reporting firm.
The shortest ever Market Watch 64 has clearly stated that a UK-based firm and ARM would need to comply with the changes to their regulatory obligations by the end of the transition period on 31 December 2020.
Although the majority of the market issues are similar, regulators aren’t providing firms with the best possible approaches or solutions to minimise reporting risks or poor data quality. Investment managers are able to analyse the quality of reported transactions by requesting them from the FCA’s market data processor system, but only 682 firms have done it, according to the data obtained by Duff & Phelps. This is one of the biggest challenges and obstacles that the industry faces.
Considering that the transaction reports submitted by almost 15 percent of the total UK-based firms with an obligation to MiFID II had errors or omissions in them can be misunderstood. At first glance, this appears that the remaining 85 percent of firms are submitting perfect reports, however, report quality could be significantly worse than those with errors and/or omissions.
One of the biggest issues we see is a breakdown in communication between regulators and corporations. Regulators claim that regulatory reporting errors and omissions are not reaching the appropriate contact at the report submission firms. In fact, according to a Cappitech survey, almost 70 percent of the respondents said that they never received any errors or omission reports from the regulator.
The European Market Infrastructure Regulation (EMIR) which mandates to report all derivatives to Trade Repositories is not looking greater than the MiFID transaction report. The latest statistics from the European Securities and Markets Authority’s (ESMA) Supervision – 2018 Annual Report and 2019 Work Programme present only 86 percent of pairing trades and 40 percent of matching in accordance with legal officer Enrico Gagliardi from ESMA. This rate after six years since the implementation is extremely low. We believe that the majority of the matched trades are due to the delegated reports, which are widely used for algo trading or high-frequency trades on derivatives products.
Furthermore, the matched reports could have errors and omissions which were validated by trade repositories. Therefore, the delegating party may not be aware of the potential misuse of the information in the report itself.
Nevertheless, regulators are using received data to produce the ESMA annual statistical report on EU derivatives markets from EMIR. However, we strongly believe that the accuracy of the produced market structure and market trends are riddled with errors and omissions by submitting firms.
As a result, we may see that the overall figures in terms of the transactions and outstanding volume have expanded to 66 million open derivative transactions (covering trades and positions).
Overall, these accounted for a total outstanding amount of approximately €735 trillion, which includes both over-the-counter and exchange-traded derivatives, and presented an 11 percent increase from the €660 trillion for Q4 2017.
The increasing volume of regulatory reporting and feedback for quality improvements from national competent authorities (NCAs) are not enough to meet industry needs.
Needless to say, the regulatory reporting process became a headache for the industry, specifically the allocation of appropriate resources to implement in-house solutions as well as ongoing controls and maintenance.
Despite the gained experience on the previously implemented regimes, the complexity of the reporting process and the number of the fields to be provided and matched to the other counterparties and the interconnections between different message types is making it difficult to control and overview.
Point Nine Data Trust is one of the leading regulatory reporting solution providers. We are equipped with in-house proprietary technology to provide customers with a complete solution to all customers and regulators for different types of reporting requirements, and a solution that is also flexible, adaptable, and easy to implement.
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