Data Regulatory Reporting Mistakes
Data reporting errors that firms should seek to avoid
Complete and accurate data is critical to successful and compliant transaction reporting. In order to be able to monitor for market abuse effectively, regulators need to receive complete and accurate information regarding the types of instruments traded, when they are traded and by whom.
In particular, this precedent is set in Article 26(1) of the UK’s MiFIR regulation, which states that financial firms that execute transactions must report complete and accurate details of such transactions.
Each transaction report includes, amongst other elements:
Information about the financial instrument traded: Accurate, complete and timely submission of instrument data is critical in enabling instrument validation in transaction reports. Some trading venues and systematic internalisers may not always be submitting this data within the required timeframe;
The firm undertaking the trade: The type of firm undertaking the trade should be clearly defined, for example investment firms, trading venues and Approved Reporting Mechanisms (ARMs) acting on behalf of investment firms;
The buyer and the seller: Firms must ensure that the buyer and seller identification codes are reported accurately. Mistakes are often made in the context of misreporting the buyer as the seller and vice versa. It is crucial that firms have arrangements in place to report party identifiers correctly. These should include controls to ensure transactions are not entered into prior to a client obtaining a legal entity identifier (LEI), and;
The price, date/time of the trade and the venue on which it took place: The price should be reported in the major currency (pound sterling) rather than minor currency (pence). Misreporting the currency presents a misleading impression of the value of the transaction and reduces the likelihood of market abuse being detected. In addition, the time when the transaction was executed should be reported in Coordinated Universal Time (UTC), with necessary adjustments made when the clocks transition to and from British Summer Time.
Generally speaking, there are several major data-related concerns in regulatory/transaction reporting for financial firms, which include:
Data aggregation challenges: Financial institutions face challenges in creating systems to adequately identify, aggregate, and monitor data across the organisation, as required by regulations such as the Basel Committee's principles on risk data aggregation, for example. This can be due to legacy architectures and data fragmentation across the business. Firms need to have a standardised data collection and validation approach before it is used for reporting purposes;
Data management for counterparty credit risk: Regulatory concerns over counterparty credit risk and credit risk concentrations require financial institutions to have capabilities to manage and report exposures across the organisation and wider industry. Given the impending transition to T+1 security trade settlement in the US, which could see increasing numbers of trade failures and paradoxically, heightened counterparty risks if firms do not make the necessary changes, firms need to ensure their data on these counterparties is accurate and collected in real-time;
Data as an asset: Unlike a financial asset, which can be accounted for on a balance sheet, data is intangible. As banks are increasingly realising greater volumes of data as part of their operations and business processes, the value of their data is multiplying. The challenge for banks is how to distinguish valuable data from non-valuable data in order to direct their data management resources toward data with the greatest potential for driving profitability and avoiding regulatory penalties. Certain data types are valuable across the bank, while other types are valuable only to specific functions within the firm. Failure to distinguish between data can lead to transaction reporting bottlenecks, and;
Data integrity and accuracy issues: As outlined above, it is essential that data within transaction reports is accurate. Deficiencies in this data reporting may result from over reliance on manual processes and data integrity issues that impact the accuracy and timeliness of regulatory reporting. Regulators such as the UK’s Financial Conduct Authority have expressed concerns about the lack of progress in tackling these issues. Enhancing the accuracy and quality of data is a continuous exercise that requires a robust data strategy supported by senior management, which ensures a sustained focus on enhancing systems and processes to produce and build quality data and ensure accuracy.
Financial firms must ensure they are taking extra care with their data management and reporting processes, with growing pressures from regulators as highlighted above.