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UK FSA Provides More Derivatives Transaction Reporting Data Details, Including Cleared Derivatives Reporting Requirements

Last month, the UK Financial Services Authority (FSA) launched its Zen transaction reporting and market surveillance system for the collection of Alternative Instrument Identifier (AII) codes and has opened a four month window for firms to adopt the codes ahead of the November deadline. Accordingly, this month’s FSA Market Watch newsletter is focused on providing market participants with more detail regarding individual codes for derivatives reporting, including reporting trades conducted on the London Stock Exchange’s (LSE) Turquoise Derivatives multilateral trading facility (MTF). The regulator has also extended the deadline for reporting transactions in derivatives conducted through clearing platforms of a derivative market until March next year.

At the start of May, EDX London was integrated into Turquoise Global Holdings Limited to form Turquoise Derivatives and, as a result, the derivatives admitted to trading on this MTF are considered to be OTC by the UK regulator for the purposes of transaction reporting. However, this throws up a potential problem for firms aiming to report these instruments before the relevant OTC legislation and requirements are in place.

On this note, the FSA states: “Given the potentially significant technical changes firms may have to undertake to report these transactions, the FSA is proposing that firms may continue to report transactions executed in derivatives admitted to trading on Turquoise Derivatives as if they were derivatives admitted to trading on a regulated market. This is done by populating the instrument identifier with the relevant International Securities Identification Number (ISIN) of the derivative and the trading venue with the Turquoise Market Identifier Code (MIC). At the same time, firms wishing to report transactions executed in derivatives admitted to trading on Turquoise Derivatives as OTC derivatives transactions, may do so. The FSA is required to consult on this and will be publishing a consultation on the guidance section of its website.”

The regulator is endeavouring to encourage firms to begin adopting AII codes before the 13 November deadline and is aiming to clarify any outstanding issues that firms may have in determining which standards and codes to use. The key objectives of the FSA’s AII project are to meet MiFID obligations for reporting all AII derivatives transactions in an efficient and secure manner. Additionally, all reference data must be obtained in order to understand, validate and route transaction reports to the relevant competent authority according to MiFID’s criteria. The Zen system replaces the existing FSA SabreII system and, according to the regulator, it provides enhanced regulatory capabilities including a market abuse monitoring, alerting and reporting function. It also provides support for increased transaction volumes from the industry and to/from the European Securities and Markets Authority’s (ESMA) central Transaction Reporting Exchange Mechanism (Trem).

The FSA has also extended its previous transaction reporting guidance to indicate that if a transaction conducted through a clearing platform of a derivative market is in a derivative instrument fungible with an exchange standardised derivative, the reporting firm would have the choice to report it as an on-exchange derivative transaction or as an OTC derivative transaction. This, in turn, will affect the codes used when reporting the transaction to the regulator. The designation of the identifier as AII or ISIN, for example, is determined from the designation of the market as an AII or ISIN market and when a transaction is executed on behalf of a client, the ‘client side’ transaction report must include the MIC of the derivative exchange in the venue field.

Although firms have until November this year to adopt AII codes, these extended requirements regarding reporting transactions conducted through clearing platforms of derivative markets will not come into force until 31 March next year. In its newsletter, the regulator provides examples to illustrate the reporting process for ISIN and AII derivative market transactions (including both fungible and non-fungible contracts). For example, for a fungible contract that is conducted via BClear (thus falling under the AII designation), the firm must use an AII code, which will contain an: instrument ID, quantity, strike price, expiry date, derivative type, put/call indicator and venue ID.

The regulator notes that there may be some discrepancy due to this delayed introduction of these requirements versus the November deadline for AII codes, which could result in the rejection of AII transaction reports with different maturity dates until the March deadline has passed.

There may also be issues where instrument reference data has not been provided to either the FSA or the approved reporting mechanisms (ARMs) by the relevant derivatives exchange, according to the regulator. “In circumstances where this reference data is not available to the FSA and ARMs we will be consulting on proposed guidance to require firms to report these transactions using the equivalent ISIN for ISIN derivative markets or AII code for AII derivative markets of the standardised derivative contracts (order book contracts). This proposed guidance will be published for consultation via the FSA website, with a view to implement the change on 31 March 2012. Prior to this implementation date, firms are not required to report transactions in derivatives conducted through clearing platforms of derivative markets where reference data is not available to the FSA and ARMs,” explains the FSA newsletter.

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