In its latest newsletter, the UK Financial Services Authority (FSA) elaborates on the reference data integrity checks that firms need to conduct to ensure that their transaction reports are commensurate with the regulator’s requirements. This includes clarification about the length of Bank Identifier Codes (BICs) for client and counterparty identification; an area where a number of firms have fallen foul of the regulator over the last 12 months (see Commerzbank’s fine in April for example).
The regulator warns: “We will continue to take action when firms fail to transaction report correctly or fail to have the necessary systems and controls supporting their transaction reporting processes. In addition to privately censuring firms and requiring comprehensive reviews of their historic reporting and their current reporting arrangements, we have employed our powers to publicly censure and fine firms. Since August 2009 we have used our enforcement tools in respect of five firms where their reporting arrangements were inadequate levying fines in excess of £7 million.”
As well as Commerzbank, another high profile fine with regards to data integrity issues was the £2.45 million slapped on Barclays Capital Securities and Barclays Bank in September last year. Both cases represented failures with regards to underlying reference data in their identification of clients and counterparties, among other things.
The regulator states: “In Annex 1 of SUP 17,we make it clear that if a reporting firm’s counterparty or client does not have an FRN or a BIC, they must use the unique internal code allocated by the reporting firm consistently across all instrument types and platforms. We would like to remind firms that this includes clients and counterparties that are introduced to them by third parties or transmitted to them by firms that receive and transmit orders. So, if the reporting firm has an existing code for a client or counterparty, this code should also be used when the entity identity is transmitted to them by a third party.” Entity data is seemingly near the top of the watch list for the regulator.
In order to ensure that firms regularly review the data integrity of these reports and are aware of any potential issues, the FSA has provided an online form for firms to request to see a sample of what it is looking for in these reports. It indicates that, until now, data samples have been delivered in csv files of 50.000 records each, but firms can now receive data samples in csv files of either 50.000 or 900.000 rows.
The FSA also notes that some firms have failed to submit transaction reports about securitised derivatives that are admitted to trading on regulated markets or prescribed markets, and inter-company transactions (essentially, transactions between two or more legal entities in the same group). These are both reportable and the regulator will be watching to make sure these items are not left out in future.
In terms of formatting, the FSA indicates that BIC codes should be 11 characters long, rather than eight, in order for the regulator’s system to be able to process the data. Confusingly, however, the FSA admits that its own Transaction Reporting User Pack does not make this requirement clear and seemingly indicates that an eight character BIC is also acceptable. If a firm is using an eight character code, it must append the field with “XXX”.
It also issues a ‘friendly’ reminder that all MiFID investment firms need to obtain a BIC to allow for the tracking of data cross border in the European Economic Area. After obtaining a BIC, firms must then email the Transaction Monitoring Unit (TMU) with their BIC and FRN details in order for the regulator to map the FRN to the respective BIC in its systems. When transaction reporting, firms may continue to populate the reporting firm field with their FRN, however, they need to ensure the TMU is aware of the BIC as well.
The FSA warns: “Please note we intend to remove the option to identify all entities with an FRN in the future. We will fully involve firms in scheduling this date.”
The move from other codes to the BIC will, of course, involve some degree of investment in data management systems in order for those not using the codes to be able to produce the required reports. Hopefully, the FSA will take this into account in its timeline and allow for a sufficiently long transition period for upgrades to be made.