ESMA fine + Increased Risk of Market Abuse as Transaction Reporting Still not Top Priority
- 28.04.2022 11:05 am
New research from leading governance, risk and compliance (GRC) advisor ACA Group reveals that confidence among financial services firms in the quality of their own reports is declining – down to 65% from 87% in 2021.
Despite this, and the significant costs and regulatory scrutiny that can arise reporting errors, only 19% identified trade and transaction reporting as a top compliance challenge for 2022. It was also absent from their list of primary focus areas for the year ahead.
These findings, derived from a survey conducted at ACA’s Regulatory Horizon virtual conference last month, come off the back of 2021 analysis by the firm which showed 97% of reports under Markets in Financial Instruments Regulation (MiFIR)/European Market Infrastructure Regulation (EMIR) contain inaccuracies. The report warned that errors could lead to undetected market abuse and a lack of transparency into systemic risk, while also posing significant financial, reputational and compliance risks for reporting firms. It also warned that a regulatory crackdown from the FCA and ESMA was likely imminent, with ESMA’s recent penalty to a leading European trade repository for breaches of EMIR indicating a continued focus on data quality.
Worthy of note for regulated firms is that among the failures underpinning that penalty were the incorrect rejection of reports and, separately, the creation of incorrect reports, by the trade repository concerned. This illustrates the danger of over-reliance on third-parties by investment firms without supplementary specialist reporting data oversight and review to make sure the reporting output is correct.
ACA has warned that firms can expect more involvement from the regulator around transaction reporting in the months to come, reiterating the need for firms to become savvier regarding their reporting obligations.
Matt Chapman, Managing Director and Co-Lead of the ACA’s Regulatory Reporting Monitoring & Assurance (ARRMA) Service, ACA Group, comments: “It’s good to see a downturn in the overconfidence that so concerned us in last year’s report. But there remains a dangerous lack of understanding or prioritisation around the current processes required to meet MiFIR/EMIR standards. The longer it takes firms to realise they have a problem, the more expensive and time consuming it becomes to fix, and the more embarrassing the conversation with the regulator becomes.”
Charlotte Longman, Director and Co-Lead of the ACA’s Regulatory Reporting Monitoring & Assurance (ARRMA) Service, ACA Group, added: “It’s no surprise that regulators aren’t happy - they aren’t receiving the data they need to successfully identify market abuse and monitor for systemic risk in the derivatives market. Our analysis last year found more than 6 million transaction reporting errors across a sample of 30 review projects. That’s an average of 200,000 errors per review. If firms want to avoid fines for non-compliance, they need to urgently review and rework their data and compliance processes, including their exception management program, and implement close, ongoing transaction monitoring. It sounds overwhelming but there are tools out there to help. Our ARRMA solution has seen clients who have implemented consulting recommendations rapidly increase the quality of their reporting, making it possible for firms to quickly identify and remediate transaction reporting errors before they are identified by the regulator.”
Recent ESMA findings arising from multiple supervisory projects suggest that EMIR and SFTR reporting quality is generally improving, so those firms who are not identifying and fixing their reporting problems may now find themselves being left behind. And with MiFIR reporting remaining a focus for the FCA as a data-driven regulator, ACA warns that firms can expect more scrutiny of their reporting in the months to come.”