The FCA’s Transaction Monitoring Unit revised its Transaction Reporting User Pack on 6 February 2015 and gave firms 6 months to implement relevant changes in order to comply with new reporting requirements. TRUP Version 3.1, as it is referred to, became effective from 6 August 2015.
Most firms are busy preparing for MiFID2/R implementation on 3 January 2017 and have project teams in place. However, this should not distract them from continuing to ensure existing reporting under MiFID remains accurate and complete. It is a challenging time for Operations, IT, and Compliance as it requires them to focus on future proofing their business while dealing with Business as Usual (BAU) issues.
The FCA does not appear to be taking its foot off the peddle in taking action against firms who continuously or repeatedly fail to report transaction reports accurately or fail to report at all.
The FCA fined Merrill Lynch International in April 2015 £13,285,900 for inaccurately reporting over 35 million transactions and failing to report approximately 121,000 transactions. The fine was a significant increase from previous fines levied against firms such as Deutsche Bank (£4.7m) and RBS (£5.6m), most notably as the FCA decided to increase its fine per breach from £1to £1.50. Frustrated at the quality of data it is receiving almost 8 years on from MiFID implementation, FCA determined this increase necessary in order to further improve standards of Transaction Reporting.
Firms should expect to have their transaction reports scrutinized more and more in the future as the Market Monitoring Team strengthens its group and improves its surveillance tools and techniques. Patrick Spens heads the team and now has over 70 staff comprising of PhD quantitative analysts and former intelligence officers. His savvy entrepreneurs write their own algorithms to detect unusual patterns and potential market abuse.
The accuracy of the data received on transaction reports is integral to the team being able to carry out its monitoring function properly. They will continue to educate firms about the need for sound transaction reporting. Firms must take heed of these headlines and get their house in order to mitigate the likelihood of ending up in the regulator’s spotlight.
Portfolio Managers set to transaction report under MiFIR
Buy side firms must recognize that where they rely on the portfolio manager exemption as set out in section 9.7 of FCA’s TRUP, there may well be instances in which they cannot rely on the broker to report and will have to report themselves. For example, where the firm deals directly with a non-EEA broker, the broker is not caught by MiFID Transaction Reporting rules. Under MiFIR, the portfolio manager exemption falls away and is replaced with the concept of transmission of orders which will require managers to (should they wish to adopt this approach):
- Enter into an explicit reporting agreement with the broker
- Transmit certain detailed information to the broker within T+1
- Still remain responsible for the accuracy and completeness of the reported information
Buy side firms need to review their existing architecture in earnest in order to develop robust operational processes, systems and controls in time for MiFIR go-live.