Regulatory reporting inaccuracies—It's better to know than be told
By Chris Smith | 15 May 2024
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Reporting transactions by an investment firm to a regulator, or National Competent Authority (NCA), has been around in its current form since the advent of MiFID II (Markets in Financial Instruments Directive: 2002/92/EC) came into effect in January 2018.
Investment firms trading in a wide variety of financial instruments are obliged to send up to 65 fields of data—details of a transaction that they have completed—to the regulator by the end of the business day following the trade date. This might seem a relatively simple ask, yet many firms make errors in reporting these transactions. They then must expend significant effort and cost remediating trade details and replaying them to the regulatory authorities.
Timeliness and accuracy counts
As an Approved Reporting Mechanism (ARM), MarketAxess facilitates the reporting connection between the firm and the NCAs. In 2023 alone, more than 1 billion trades were replayed via this ARM, with the average age of the replay 243 days PAST the trade date.
This matters. It matters significantly to regulators who use the data they receive from investment firms to analyse market activity, conduct surveillance into nefarious trading activity, plus the data is used to inform their planning for the long-term safety and soundness of markets.
The UK (FCA), German (BaFIN) and French (AMF) regulators are making it clear that their patience for firms persistently committing reporting errors and then rectifying them months and months after the trade date is wearing thin. Enforcement, and with it the reputational damage of being named by the regulator is increasingly likely.
Preventing errors from becoming issues
So how does a firm ensure that their firm doesn’t fall into this trap? Ensuring the framework in place for controlling and monitoring transaction reporting is comprehensive, with thorough and complete checks and balances. Conducting a reconciliation periodically should be mandatory for each firm as a minimum.
What else should be considered? Conducting an assessment with external SMEs who review their whole control framework is something many believe worthwhile, as is testing reporting data for completeness, accuracy, and timeliness. The real question is how does each firm get comfortable with the accuracy of reporting up to hundreds of thousands of transactions on a daily basis with all of the possible data elements.
Artificial intelligence. Genuine support.
Using new advanced machine learning techniques can help. By putting MarketAxess' vast troves of data (over 20 billion transactions) to work, your firm can be protected from the pain of remediation and the risk of reputational damage. MarketAxess has developed SensAI® which not only monitors ALL transactions ALL of the time, (no periodic reconciliation here), but highlights any errors in reporting whilst comparing transactions with peers.
SensAI is clever enough to monitor transactions and rank any errors by importance so teams can address those deemed high risk, and demanding immediate remediation. When a firm makes changes to trade capture systems that can impact reporting quality. SensAI monitors reporting in near-real-time, enabling instant correction of the error, and avoiding a build-up of flawed reporting.
The last thing a firm—or the person with SMF responsibility for reporting—wants is the regulator to knock on the door armed with a litany of issues. It's better to KNOW, than to BE TOLD.
Regulators are tightening their focus on Regulatory Technical Standards (RTS) reporting, particularly RTS 22, the section covering obligations and reportable fields. And for good reason. Six years after implementation of the regulation the industry should be doing better.
As Jay Leno once said, "Regulations force people to do better" – as an industry we must do better – SensAI is the solution the industry has been waiting for!
