Navigating MiFID II
24 Jan 2024
Qomply’s Sophia Fulugunya, director of transaction reporting, discusses reporting requirements around MiFID II and what firms need to do to achieve successful reconciliation
Image: Qomply
Data published by the Financial Conduct Authority (FCA) suggests that 50 per cent of MiFID II investment firms are not fully compliant with the regulations. The transaction reporting regulatory regime places a significant emphasis on accurate and timely transaction reporting. Submitting inaccurate, late or incomplete reports exposes firms to enforcement action and, in some cases, punitive fines. To date, in the UK alone, over £100 million worth of fines were handed down to firms for MiFID transaction reporting failures.
“Inadequate quality assurance, reconciliation and remediation procedures play a crucial role in the regulator’s decision to issue these penalties. Although, there have been no enforcement actions, in terms of fines related to MiFID II , we have seen an increase in regulator contact related to poor data quality,” observes Sophia Fulugunya, director of transaction reporting for regulatory technology firm Qomply.
MiFID II requires firms to perform a meticulous reconciliation process. This process, outlined in detail in the relevant technical standards, necessitates a three-way reconciliation between a firm’s internal trading records, data from approved reporting mechanisms (ARMs) and data extracts from the national competent authority — for UK entities, this would be the FCA’s market data processor. This multifaceted approach is designed to verify the accuracy, completeness and timeliness of the reported data. In straight-forward terms, the regulators want affirmation that the trading data in a firm’s front-office system matches the data received and accepted by the regulator.
Fulugunya shares her insight on the reconciliation requirements: “The requirement to conduct regular reconciliation, remediate issues and complete back reporting is one of the most burdensome areas of transaction reporting requirements. Not only are ARMs charging punitive fees for resubmissions, but there are many firms that do not have the in-house expertise nor the technology to meet their requirements.”
Fulugunya’s professional background includes a six-year tenure at the UK FCA, where she specialised in MiFID II transaction reporting and instrument reference data regimes. During her time at the FCA, Fulugunya played a pivotal role within the markets reporting team (MRT). She now assists firms with their regulatory obligations.
From her experience as a regulator and a capital markets consultant, Fulugunya shares some key components to successful reconciliation:
Completeness
Firms are required to ensure the submission of all reportable transactions, avoiding both under-reporting and over-reporting. A proactive approach involves assessing the reportability of new products before execution and periodic reviews. For over-the-counter transactions, this may need to be undertaken on each trade date.
“This is an area I have seen firms struggle with, especially where they are manually checking through financial instruments reference data systems to confirm reportability. There are tools available, and Qomply offers a free checker that allows firms to search hundreds of ISINs against FIRDS, providing an efficient starting point,” states Fulugunya.
Accuracy
Beyond simple data matching, firms should verify the accuracy of their reports. This involves a thorough examination of whether the content aligns with the firm’s trading activities and adheres to regulatory guidelines. Concepts within the regulation, such as reporting aggregated orders, accurate representation in a chain and proper reporting of decision makers, require meticulous scrutiny at a line-by-line and field-by-field level.
Timeliness
Timely submission of reports within a one-business-day deadline is a critical aspect of the reconciliation process. Firms must not only focus on meeting this deadline consistently but also identify and remedy instances where this is not the case; for example, where details from brokers may not be received promptly.
Reconciliation frequency and representative samples
“Determining the frequency of reconciliations depends on various factors, including the complexity of trading scenarios and the volume of transaction reports. While monthly reconciliations are generally acceptable, more frequent reconciliations reduce the duration of potential issues, resulting in lower back reporting volumes,” outlines Fulugunya.
She adds: “The regulation requires firms to reconcile a representative sample of their data. Regulatory guidance suggests that this sample should include all trading scenarios, covering instruments, client types, trading capacity and order types. For some firms, such as managers with a few funds trading in the same instruments, this can be 10 per cent of their total volumes. However, for others — such as retail trading platforms with hundreds of thousands of clients trading in hundreds of instruments — this could be 90 per cent. So, it’s important to understand your universe of reportable trades and ensure that your sample is aligned with the guidance.”
Remediation and back reporting
Identifying discrepancies during the reconciliation process is only the first step. Firms must promptly address errors and omissions to maintain compliance. Remediation efforts involve understanding the root cause of discrepancies, implementing corrective measures, ensuring that the reporting process is adjusted to prevent reoccurrence and notifying the regulator promptly where issues are identified. For those firms reporting to the FCA, this involves submitting an errors and omissions (E&O) notification.
During her tenure at the regulator, Fulugunya reviewed more than 400 E&O notifications from a diverse range of firms.
With this extensive experience, she states: “I often get asked when these forms should be submitted, and the answer is, when you have collated the adequate information to allow the regulator to understand the issue, your remediation plans and approximate back reporting timelines (where necessary).
“The FCA shared data in Market Watch 74 revealing a decline in the number of firms reporting E&Os over the last three years, with a 17 per cent decrease in firms submitting notifications in 2022 (346) compared to 2020.
“While this may suggest that most firms have good data quality, the FCA cautions that this might not always be the case as its supervisory activities have uncovered issues the industry has previously been warned about.”
A large part of remediation is back reporting. It has been six years since the implementation of MiFID II , and the significance of validation rule 269 cannot be overstated. Firms are still uncovering issues dating back to 2018, and this validation rule means that reports submitted for the first time or as an amendment with a trade date exceeding five years will receive a CON-281 rejection.
However, despite the inability to submit, firms are still expected to provide details of the impacted reports, including the total number, within the E&O notification. The FCA has also advised against cancellation of reports that are impacted by this rule.
Looking forward
Firms are struggling with the rules without the internal knowledge or resources to confidently meet the requirements. This has resulted in a shift within the industry to more delegated models.
Speaking on this, Fulugunya states: “At Qomply, we offer a service that enables firms to focus on their core business whilst we operate aspects of their transaction reporting. The highest level of interest has been from firms that submit between 10,000 and 500,000 transaction reports a year. We’ve seen that, through the managed service, these firms save up to 50 per cent of their reporting costs.
“This accounts for internal resources, ARM costs, additional quality assurance tools and external regulatory advice. This approach allows for risk mitigation and confidence that their reporting requirements are aligned with the regulator’s expectations. Firms can be as hands-off or hands-on as necessary, as we take on the entire process. This encompasses report creation, daily exception management, submission to the ARM/FCA, monthly completeness and accuracy checks, two/three-way reconciliations and support with completing E&O notifications.”
The landscape of MiFID II transaction reporting reconciliation and remediation is complex, demanding resources, expertise and proactivity. Firms should ensure that they are doing everything to meet their obligation in this area. There is an industry expectation that it is only a matter of time before enforcement action on MiFID II becomes a headline.
“Inadequate quality assurance, reconciliation and remediation procedures play a crucial role in the regulator’s decision to issue these penalties. Although, there have been no enforcement actions, in terms of fines related to MiFID II , we have seen an increase in regulator contact related to poor data quality,” observes Sophia Fulugunya, director of transaction reporting for regulatory technology firm Qomply.
MiFID II requires firms to perform a meticulous reconciliation process. This process, outlined in detail in the relevant technical standards, necessitates a three-way reconciliation between a firm’s internal trading records, data from approved reporting mechanisms (ARMs) and data extracts from the national competent authority — for UK entities, this would be the FCA’s market data processor. This multifaceted approach is designed to verify the accuracy, completeness and timeliness of the reported data. In straight-forward terms, the regulators want affirmation that the trading data in a firm’s front-office system matches the data received and accepted by the regulator.
Fulugunya shares her insight on the reconciliation requirements: “The requirement to conduct regular reconciliation, remediate issues and complete back reporting is one of the most burdensome areas of transaction reporting requirements. Not only are ARMs charging punitive fees for resubmissions, but there are many firms that do not have the in-house expertise nor the technology to meet their requirements.”
Fulugunya’s professional background includes a six-year tenure at the UK FCA, where she specialised in MiFID II transaction reporting and instrument reference data regimes. During her time at the FCA, Fulugunya played a pivotal role within the markets reporting team (MRT). She now assists firms with their regulatory obligations.
From her experience as a regulator and a capital markets consultant, Fulugunya shares some key components to successful reconciliation:
Completeness
Firms are required to ensure the submission of all reportable transactions, avoiding both under-reporting and over-reporting. A proactive approach involves assessing the reportability of new products before execution and periodic reviews. For over-the-counter transactions, this may need to be undertaken on each trade date.
“This is an area I have seen firms struggle with, especially where they are manually checking through financial instruments reference data systems to confirm reportability. There are tools available, and Qomply offers a free checker that allows firms to search hundreds of ISINs against FIRDS, providing an efficient starting point,” states Fulugunya.
Accuracy
Beyond simple data matching, firms should verify the accuracy of their reports. This involves a thorough examination of whether the content aligns with the firm’s trading activities and adheres to regulatory guidelines. Concepts within the regulation, such as reporting aggregated orders, accurate representation in a chain and proper reporting of decision makers, require meticulous scrutiny at a line-by-line and field-by-field level.
Timeliness
Timely submission of reports within a one-business-day deadline is a critical aspect of the reconciliation process. Firms must not only focus on meeting this deadline consistently but also identify and remedy instances where this is not the case; for example, where details from brokers may not be received promptly.
Reconciliation frequency and representative samples
“Determining the frequency of reconciliations depends on various factors, including the complexity of trading scenarios and the volume of transaction reports. While monthly reconciliations are generally acceptable, more frequent reconciliations reduce the duration of potential issues, resulting in lower back reporting volumes,” outlines Fulugunya.
She adds: “The regulation requires firms to reconcile a representative sample of their data. Regulatory guidance suggests that this sample should include all trading scenarios, covering instruments, client types, trading capacity and order types. For some firms, such as managers with a few funds trading in the same instruments, this can be 10 per cent of their total volumes. However, for others — such as retail trading platforms with hundreds of thousands of clients trading in hundreds of instruments — this could be 90 per cent. So, it’s important to understand your universe of reportable trades and ensure that your sample is aligned with the guidance.”
Remediation and back reporting
Identifying discrepancies during the reconciliation process is only the first step. Firms must promptly address errors and omissions to maintain compliance. Remediation efforts involve understanding the root cause of discrepancies, implementing corrective measures, ensuring that the reporting process is adjusted to prevent reoccurrence and notifying the regulator promptly where issues are identified. For those firms reporting to the FCA, this involves submitting an errors and omissions (E&O) notification.
During her tenure at the regulator, Fulugunya reviewed more than 400 E&O notifications from a diverse range of firms.
With this extensive experience, she states: “I often get asked when these forms should be submitted, and the answer is, when you have collated the adequate information to allow the regulator to understand the issue, your remediation plans and approximate back reporting timelines (where necessary).
“The FCA shared data in Market Watch 74 revealing a decline in the number of firms reporting E&Os over the last three years, with a 17 per cent decrease in firms submitting notifications in 2022 (346) compared to 2020.
“While this may suggest that most firms have good data quality, the FCA cautions that this might not always be the case as its supervisory activities have uncovered issues the industry has previously been warned about.”
A large part of remediation is back reporting. It has been six years since the implementation of MiFID II , and the significance of validation rule 269 cannot be overstated. Firms are still uncovering issues dating back to 2018, and this validation rule means that reports submitted for the first time or as an amendment with a trade date exceeding five years will receive a CON-281 rejection.
However, despite the inability to submit, firms are still expected to provide details of the impacted reports, including the total number, within the E&O notification. The FCA has also advised against cancellation of reports that are impacted by this rule.
Looking forward
Firms are struggling with the rules without the internal knowledge or resources to confidently meet the requirements. This has resulted in a shift within the industry to more delegated models.
Speaking on this, Fulugunya states: “At Qomply, we offer a service that enables firms to focus on their core business whilst we operate aspects of their transaction reporting. The highest level of interest has been from firms that submit between 10,000 and 500,000 transaction reports a year. We’ve seen that, through the managed service, these firms save up to 50 per cent of their reporting costs.
“This accounts for internal resources, ARM costs, additional quality assurance tools and external regulatory advice. This approach allows for risk mitigation and confidence that their reporting requirements are aligned with the regulator’s expectations. Firms can be as hands-off or hands-on as necessary, as we take on the entire process. This encompasses report creation, daily exception management, submission to the ARM/FCA, monthly completeness and accuracy checks, two/three-way reconciliations and support with completing E&O notifications.”
The landscape of MiFID II transaction reporting reconciliation and remediation is complex, demanding resources, expertise and proactivity. Firms should ensure that they are doing everything to meet their obligation in this area. There is an industry expectation that it is only a matter of time before enforcement action on MiFID II becomes a headline.
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