Market Watch 70

In Market Watch 59[2] and 62[3], we highlighted that 1st priority national identifiers must be used wherever available to identify natural persons in transaction reports. Despite our warnings, we continue to see firms failing to conduct sufficient due diligence when onboarding clients to obtain these identifiers. This has been particularly common amongst firms offering services to retail clients electronically, such as via mobile-based applications.

Best practices in this area include:

• Ensuring transactions are not executed for clients until an identifier has been subject to internal review and validation. This should include checking that the format of the identifier conforms to the standard outlined in the ESMA Q&A on MiFIR data reporting[4].  
• Reviewing identifiers received to ensure no duplicates exist within a database of clients. 
• Requiring explanations from clients that do not provide a 1st priority identifier.

Confusion has arisen regarding the identification of principal firms, appointed representatives (ARs) and tied agents in transaction reports. For transaction reporting purposes, we view an AR as its principal firm. This means that when a transaction is executed by an AR providing the investment service of reception and transmission for a principal firm that is subject to transaction reporting obligations, the principal firm should be identified in applicable fields of its transaction report, such as in the executing entity field. The AR should not be identified.

We have identified concerns with the care taken by some principal firms in overseeing the activity of ARs. In some cases, this has led to the submission of inaccurate transaction reports by principal firms. Principal firms are responsible for ensuring that their transaction reports are complete and accurate, and for implementing an adequate systems and controls framework to identify potential data quality issues, including where caused by an AR.

UK branches of third country investment firms appear to be taking a variety of approaches to determining when they are ‘executing’. While recognising the complexities attached to conducting this assessment for the purposes of an entity that is a branch, we do not expect firms to determine their reporting obligations based on the geographic location of a trader alone. In addition to the criteria in Article 3 of RTS 22, other factors should be considered, such as the location(s) of the branch that received the order from the client, the branch that oversaw the individual responsible for making the investment and execution decisions, and the branch whose membership was used for executing transactions on a trading venue.

We expect UK branches of third country investment firms to report whether the investment firm is covered by directive 2014/65/EU (Field 5, RTS 22) with ‘TRUE’. This allows us to distinguish the reports they submit from those submitted by trading venues under Article 26(5) of UK MiFIR for transactions executed on their platforms by third country firms, which should contain ‘FALSE’ in this field.

• We have identified more firms misusing the ‘INTC’ reporting convention. Examples include reporting an order from one client executed in multiple fills, using ‘INTC’ to signal an internal trading account, or failing to report both the market side and the client side of a transaction.
• Trading venues are responsible for the quality of the transaction reports they submit. Some trading venues have sought to place this responsibility on their members. Trading venues should have robust processes in place to ensure the timely receipt of information from members necessary for them to submit complete and accurate transaction reports.
• Some firms continue to report a market identifier code (MIC) when they transmit an order to an executing broker, who in turn executes the transaction on a trading venue. The venue (Field 36, RTS 22) should be populated ‘XOFF’ by investment firms who are in a chain and who do not access the venue directly. This is explained in Section 5.4.2 of the ESMA Guidelines on transaction reporting[5].
• For transactions executed in financial instruments that are not admitted to trading or traded on a trading venue (eg CFDs), the instrument full name reported should contain a clear description of the financial instrument traded (eg Vodafone CFD).

Trading venues and SIs should have arrangements in place to enable them to identify incomplete or inaccurate instrument reference data. These arrangements are required by Article 6(2) of RTS 23[7]. They should ensure data is being submitted in line with Table 3 of RTS 23 and in accordance with ESMA guidelines and Q&As.

Our MDP system provides feedback for each reference data file received. Trading venues and SIs should ensure they have procedures in place to review feedback files, including any warning messages received, which notify the submitting entity that its record differs from the master record used to validate transaction reports. These procedures should include investigating why records or files have been rejected. Submitting entities should not amend their reference data to match the master record without first confirming its accuracy.

Where a trading venue or SI identifies incomplete or inaccurate instrument reference data in its submissions, we expect to be notified promptly via the submission of an instrument reference data errors and omission notification form. Corrected data should be submitted without delay. 

Under Article 27(1) of UK MiFIR, SIs should only report instrument reference data for instruments in which they are an SI and that are reportable under Article 26(2)(b) or (c) of UK MiFIR. We have identified SIs submitting instrument reference data for instruments that are admitted to trading or traded on a trading venue and that are reportable under Article 26(2)(a) of UK MiFIR. We have also identified SIs submitting instrument reference data for instruments that are not reportable under Article 26(2)(b) or (c) of UK MiFIR, either because there is no underlying (for example, equities) or because the underlying is not admitted to trading or traded on a trading venue. This can lead to confusion for investment firms as the scope of transaction reporting requirements is determined by whether an instrument is admitted to trading or traded on a trading venue, and not whether it is reported by an SI or is in FCA FIRDS.

• For reporting instrument reference data under UK MiFIR, ISO 10962 CFI codes issued by the relevant National Numbering Agency (NNA) should be used. We have identified trading venues and SIs submitting instrument reference data where the CFI code (Field 3, RTS 23) does not match that of the NNA. Trading venues should have arrangements in place to ensure that the CFI reported matches that of the NNA.
• Trading venues and SIs should only populate the issuer or operator of the trading venue (Field 5, RTS 23) with their own LEI when they create or issue the financial instrument. We have identified cases where trading venues and SIs report their own LEI for instruments where the LEI of the issuer is available.
• The termination date (Field 12, RTS 23) should be populated with the date and time the instrument is expected to cease trading. This date should be earlier than or equal to the maturity date (Field 15, RTS 23) or expiry date (Field 24, RTS 23), where applicable. We have identified trading venues and SIs failing to populate the termination date even after the instrument has matured or expired.
• Some trading venues have submitted data for instruments that are not commodity derivatives with the commodities or emission allowance derivative indicator (Field 4, RTS 23) populated ‘TRUE’. This can cause investment firms to receive a CON-460 transaction reporting validation error for failing to populate the commodity derivative indicator. In these cases, we have identified good practice from investment firms who contact the trading venue on which the transaction was executed to ensure the instrument reference data is accurate. However, responsibility remains with trading venues to submit accurate data and have procedures in place to identify potential shortcomings.

Additional information is available on our transaction reporting[8] webpage.

You can send queries regarding transaction reporting and instrument reference data to us at:  [email protected].