The Financial Services Authority (FSA) has slapped Barclays Capital Securities and Barclays Bank with a £2.45 million fine for failing to provide accurate transaction reports to the regulator over a period of a year. The FSA indicates that Barclays and its subsidiary had serious weaknesses in systems and controls in relation to transaction reporting, which resulted in data errors in reports submitted to the regulator for an estimated 57.5 million of its transactions.
Firms are required to submit data for reportable transactions by close of business the day after a trade is executed. The FSA then uses this data to detect and investigate suspected market abuse: insider trading and market manipulation. The transaction report therefore contains data including details of the product traded, the firm that undertook the trade, the trade counterparty and the trade characteristics such as buy/sell identifier, price and quantity.
Alexander Justham, FSA director of markets, explains: “Complete and accurate transaction reports are an essential component of the FSA’s market monitoring work. Barclays’ reporting failures could have a damaging impact on our ability to detect and investigate suspected market abuse. The penalty imposed on Barclays is significantly higher than previous penalties imposed for transaction reporting errors. This reflects the serious nature of Barclays’ breaches and is a warning to other firms that the FSA will not tolerate inadequate systems and controls.”
The bank could have received an even higher penalty if it had not cooperated with the regulator, says the FSA. For assisting the regulator in its investigation BarCap received a 30% discount on the fine, without which it would have had to pay up £3.5 million.
The regulator discovered discrepancies in Barclays’ data while reviewing a suspected incident of market abuse by a third party in October 2008. A subsequent review of Barclays’ transaction reporting arrangements revealed that it did not have adequate systems and controls in place to meet the transaction reporting requirements as well as a substantial number of errors in the data submitted to the FSA.
Barclays’ breaches occurred despite repeated reminders to firms of their obligations to provide accurate data and the importance of compliance with the FSA rules on transaction reporting during the course of 2007 and 2008, says the regulator. As well as inaccurate reports, the bank was therefore charged with failing to take “reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems, to meet the requirements to submit accurate transaction reports to the FSA”.
Moreover, it also failed to conduct its business with “due skill, care and diligence in failing to respond sufficiently to opportunities to review the adequacy of its transaction reporting systems,” says the FSA.
The errors identified affected eight different systems used by Barclays to report transactions to the FSA, across all of the bank’s core reportable asset classes. According to the FSA, the most serious errors included: the failure to submit any report at all for 17 million transactions (a fairly serious error by all accounts), failure to accurately report the required fields for 5.8 million cash equity transactions, the incorrect trade time was recorded for 24.6 million transactions; the incorrect counterparty codes for seven million transactions; failure to identify the underlying instruments for 2.2 million transactions; and failure to identify whether the transaction was a buy or sell from the perspective of Barclays in relation to 3.8 million transactions. Quite a catalogue of errors.
To take account of the scale of these failures, the fine represents the eighth highest fine the regulator has ever levied and the first fine resulting from data issues in transaction reporting. It may be the first, but it is not likely to be the last, however. Inaccurate and inconsistent reference data has long been a problem within the market but, up until now, it has often taken a back seat in terms of investment priorities within institutions.
The FSA’s decision to charge such a high fine for this type of breach highlights the fundamental importance of data to firms’ compliance and risk management endeavours. “The fine indicates that the regulator is watching and ready to take action with regards to financial institutions dragging their heels in this area. The market’s awareness of the importance of getting data right will necessarily be increased by this move,” contends PJ Di Giammarino, CEO of think tank JWG-IT.
Di Giammarino highlights the errors related to counterparty data as a particular area of concern, given the high number of transactions affected: around 16% of the firm’s overall reference data. “If everybody in the market has problems with at least 16% of its reference data, what happens when the market tries to use that data for macro-prudential oversight purposes? According to our calculations, it could represent up to half a trillion pounds in bad data issues,” he says.
The fine also indicates that firms have not taken transaction reporting changes resulting from MiFID as seriously as they should have done. The implementation of MiFID on 1 November 2007 introduced changes to the list of products in which transactions have to be reported and standardisation of the list of fields that need to be included in the reports. The FSA provided information to firms on transaction reporting issues with respect to changes introduced by MiFID via a Transaction Reporting User Pack (TRUP) in July 2007. This document indicated that firms should regularly review the integrity of transaction report data.
The FSA has recently been engaged in a regulatory exercise to review the industry’s adoption of MiFID and the market impact of the directive, and this fine is likely an integral part of that review process. “The fine signals the importance that the regulator is now placing on the data space and the extent to which it is scrutinising firms’ practices. It should help firms to build a business case for cleaning up their brownfield infrastructures,” says Di Giammarino.
Since the fine, Barclays says it has taken a number of steps to address the concerns raised, including commissioning a review of its transaction reporting process and committing “extensive” resources to improve its processes and resolve the errors with the establishment of an “operations regulatory team”. The regulator hopes this will act as somewhat of a wake up call to the industry about meeting its strict requirements around the transaction reporting process post-MiFID.
The final notice to Barclays regarding the breaches is available to download here.