Transaction Reconciliation

The Importance of Transaction Reporting Reconciliation

Regulators are fully aware of the frequency at which investment firms conduct reconciliations.

Data quality has been a common theme emphasised by ESMA and the FCA. ESMA has released several reviews stressing the significance of sending quality data to NCAs to enable effective market surveillance.

Detecting discrepancies in data between your Front Office system and files sent to regulators ensures a higher degree of data quality. This process also strengthens the entire reporting chain, ultimately improving efficiency in report production.

1) Periodic Reconciliation is a MiFID Requirement

The FCA has repeatedly emphasised the importance of periodic reconciliation in their MarketWatch statements. This serves as a reminder to firms of their requirement to reconcile transactions against the FCA's MDP files. In April 2019, in MarketWatch 59, the FCA stated:

“We wish to stress the importance of market participants maintaining adequate procedures, systems and controls to meet their transaction reporting obligations. [..] This includes the requirement to conduct regular reconciliation of front office trading records against data samples provided by competent authorities. The FCA provides a facility for firms to request samples of their transaction reporting data. However, the number of data extract requests we receive suggests some market participants may not be aware of this, or may not be conducting regular or sufficiently thorough reconciliation.”

Subsequently, in October 2022, the FCA released MarketWatch 70, specifically highlighting the number of firms that have requested MDP data extracts.

“More firms are demonstrating awareness regarding the importance of arrangements that identify and remediate reporting issues proactively and promptly. These arrangements must include regular reconciliations of transaction reporting data extracts with front-office records. [..] Firms not making regular requests are reminded this is a requirement under Article 15(3) of RTS 22. “

In short, if you haven't yet requested a copy of your MDP file from the FCA, then this may draw the attention of the regulators.

2) You May Be Over-Reporting Transactions

Over Reporting refers to the act of submitting transactions to the regulator that involve instruments which are not required to be reported under MiFID II regulations. It is essential to note that not all financial instruments fall under the reporting obligations of MiFID II. Sending these non-reportable transactions to the regulator can attract undue attention and potentially expose your firm to regulatory fines.

We understand that verifying the reportability of instruments can often be burdensome and time-consuming, and it's an area where many firms face challenges. However, there are efficient methods to streamline this process. Qomply offers a free tool designed to simplify this crucial aspect of MiFID II compliance and which allows you to simultaneously check multiple ISINs, swiftly delivering results that clearly identify which instruments are subject to reporting requirements under both UK and EU MiFID regimes.

For additional information and to access this tool, please visit https://qti.qomplypi.com/firdslookup

3) You May Be Under-Reporting Transactions

Similar to point 2 above, not sending transactions that pertain to instruments that ARE reportable under MiFID is known as "Under Reporting." Failing to submit these transactions could expose your firm to fines. You may be using an ARM to filter non-reportable instruments and only send the good data. However, the burden is on you to ensure that the ARM is effectively performing this task.

4) Recurring Issues May Indicate that “Operational Workflows” Require Strengthening

Periodic reconciliation of transaction reports highlights issues such as late submissions and mismatches between your Front Office and the Regulator. If your transactions are routinely submitted late, this may indicate internal issues related to staff coverage, training, or procedures. Patterns of late submissions around holidays have been observed across the industry.

Similarly, if certain fields of your transaction reports consistently differ from those sent to the regulator, it could indicate an issue in the Systems and Controls framework, likely tied to an automated process, which could affect data quality by introducing data after reports are submitted to the regulators.

5) Inconsistent Data Could Indicate A Larger Issue

When data in the Front Office system does not align with data received by the Regulator, it indicates a system breakdown. For example, operations teams, under pressure to resolve exceptions, may change data in the ARM directly and transmit these changes back to the Front Office system.

However, without clear and robust procedures for editing data outside of the Front Office system, inaccurate data may be retained in the Front Office system or transmitted to the regulator. For example, discrepancies in LEIs (Legal Entity Identifiers) are common issues, and it's crucial to involve Client Onboarding and Front Office Teams in resolving such issues.

Similarly, instrument, price, and quantity data could also be subsequently corrected by Operations teams but never updated in the Front Office system. This too may have downstream impacts.

Summary

Best practices for reconciliation should encompass the entire trade flow, starting from onboarding and extending through to the submission to the relevant competent authority. To ensure a robust reconciliation process, consider the following key factors:

1. Timeliness: Ensure that all reports are submitted within the T+1 deadline to meet regulatory requirements.

2. Completeness: Verify that data related to all reportable instruments is included and implement measures to prevent over-reporting.

3. Accuracy: Confirm that the content within your reports aligns with your trade systems and complies with the requirements outlined in the RTS.

Reconciling transaction data doesn't have to be difficult or costly. Qomply makes technology accessible to all firms by pricing its tools based on transaction volumes. Contact Qomply for a demonstration of the MiFID Reconciliation Tool and information on subscription fees.