According to the FCA’s observations in Market Watch 81, the issues are often caused by weaknesses in specific business areas connected to operations and data including:
- change management;
- reporting process and logic design;
- data governance;
- control frameworks; and
- governance, oversight and resourcing.
The regulator has noted that data quality issues, where present, tend to persist and reoccur even after remediation and suggests that this may be caused by the fact that weakness in one area, where unaddressed, can spread to others.
Commenting on this new Market Watch newsletter Rob Mason, Director of Regulatory Intelligence at Global Relay, pointed out that themes of data governance, as well as control framework issues continue to be highlighted by regulators more generally. According to Mason the release of this Market Watch is another warning shot to firms that are still failing to report transactions effectively, despite numerous different messages, including previous enforcement outcomes.
Key points from Market Watch 81
The Market Watch newsletter provides useful practical detail on the issues that the FCA has observed in each area, which we have broken up into a series of tables below.
Change management
| Issue | Consequences | Recommendations |
| Poor change management practice. | Data quality issues coincide with change and can lead to significant reporting gaps. For example, information incorrectly sourced from clearing systems leads to discrepancies in RTS 22 field 28 (trading date time). | Ensure that adequate business analysis is undertaken in connection with any change, whether cyclical or ad-hoc. Business analysis should map out business and functional requirements. |
| Insufficient change-related documentation. | Results in knowledge gaps and complexity during remediation and back reporting. | Ensure adequate documentation is held, including records of key decisions. |
| Data quality issues connected with outsourcing. | Inadequate oversight of third parties, including over scope of deliverables, can lead to problems – worsened by an absence of subject matter expertise within the firm. | Ensure adequate third party oversight, including adequate internal subject matter expertise and management information to monitor progress. |
| Staff turnover and absences. | Data quality issues including a failure to report transactions where there are key, unmanaged, staff dependencies. | Implement clear policies and procedures to manage reporting in the absence of key staff. |
Reporting process and logic design
| Issue | Consequences | Recommendations |
| Reporting logic issues. | Misreporting such as populating RTS 22 field 36 (venue) with a trading venue market identifier code when reporting as a DEA user. | Regulatory requirements and reporting logic to be developed in alignment with the firm’s business context including involvement of the first and second lines of defence in the design process (as explicitly required by MiFID Org Regs Article 22(2)(b) |
| Lack of implementation clarity. | Results in ad-hoc resource assignment and deliverables that are unclear and in the introduction of manual processes, which in turn lead to late reporting, backlogs in exception management and issues with the cancellation and amendment of transaction reports. | As above. |
Data governance
| Issue | Consequences | Recommendations |
| Data gathering from various external and internal sources. | Fragmented data owners, access, maintenance and storage all resulting in the increased likelihood of errors and procedural inefficiencies. | Ensure effective governance of data including using data dictionaries and data lineage documentation to identify and document how data elements are used and transformed. Implement adequate recordkeeping as required under UK MiFIR Article 25(1) – including data relating to all orders and transaction in financial instruments stored for five years. Implement a higher threshold for security and change management involving personal data. |
Control framework
| Issue | Consequences | Recommendations |
| Poorly designed and inadequate reconciliation processes. | Prevent firms from identifying data quality issues and mean that errors remain and omissions remain unidentified. Omissions of data creates potential gaps in monitoring and can prevent the identification of issues originating outside of the firm. | Reconciliation work should be regular and controls should be reviewed or updated as reporting processes evolve. Data provided by third parties and front-office records must be included as part of the firm’s control and reconciliation framework. |
Governance, oversight and reporting
| Issue | Consequences | Recommendations |
| Excluding transaction reporting from a firm’s wider risk management framework. | Results in limited consideration of transaction reporting as an operational, compliance and reputational risk. | Ensure that non-financial risk management is prioritized and manage and measure transaction reporting risk. |
| Lack of relevant management information. | Creates a monitoring gap and prevents the board of the firm from understanding the risks arising in connection with transaction reporting. The consequences can include an impeding of decision making and a stalling of risk management interventions. | Adequate governance must include risk reporting and information flows and updates to relevant governance bodies of the firm. This is also essential in order to ensure that relevant persons are aware of the procedures that apply to the proper discharge of their responsibilities. |
| Deficient organisational structures. | Ineffective oversight of transaction reporting risks and reporting issues. | Introduce and document reporting lines including clarity around the allocation of functions and responsibilities connected to transaction reporting. |
| Limited compliance oversight over transaction reporting. | Hinders firms from improving reporting processes through independent challenge and advisory work. | Introduce a formal Compliance Risk Assessment (CRA) process and make certain that adequate subject matter expertise exists within the firm to provide guidance on transaction and reporting issues. |
| Lack of accountability over transaction reporting process. | Results in ineffective process assessment as well as policies and procedures and disincentivises firms from addressing emerging deficiencies. | Clarity in terms of responsibility and accountability should be a part of effective management and governance of operations in this area. |
| Insufficient resourced reporting function. | Operational flaws including delayed transaction and exception reporting as well as delays in the delivery of remedial work, back reporting or work connected to regulatory changes. | Consider team structure, resourcing as well as access to adequate support from technology and other functions (see the point on business analysis in the change management section). |
