Sample tests of transaction data provided by national competent authorities (NCAs) back to market participants is an “extra layer of complexity, and cost” which essentially results in “doing the same job twice,” said Adrian Clark, head of business risk and governance, at RBC Global Asset Management, at an industry event in London this week.
After firms report transaction data under the second Markets in Financial Instruments Directive (Mifid II) requirements and it has been validated against instrument reference data, NCAs provide sample data back to the firms in order to help identify errors in reporting. It's become an unpopular exercise, according to Clark.
“If you are generally testing if your data which you sent around was the correct data, then you are essentially doing the same job twice. Which becomes very difficult,” he said.
“We were told the other day by somebody in the market that for transaction reporting for instance, you need to test your data back, go to the Financial Conduct Authority (FCA) and ask them for samples of the data you provided, and we were told about 5% of buy-side firms have done that,” he said.
In a paper published by the UK’s FCA following a transaction reporting forum in July last year, the regulator stated that only 180 entities were requesting sample data.
The paper also outlined that data reconciliation through the use of sample data was necessary “to ensure completeness and accuracy.”
The acceptance of data sampling as a method of testing the accuracy of transaction reporting differs depending on the regulator added Ronan Brennan, chief product officer at CSS.
“So many NCAs in different markets have different thematic reviews. I have noticed that there are certain central banks and NCAs are having a big push on Emir reconciliation, and yet I am not coming across it too much here,” said Brennan.
“Some regulators are even frowning on what they call the sampling. They are saying, ‘no, you need to do full end-to-end, you need to know that absolutely everything has been reported, it is not a sampling process. But then what we are noticing is that different regulators accept sampling, and others don’t. And again, that is a challenge,” he said.
Clark said the impact of taking on research costs - also mandated under Mifid II rules - had also created a barrier to entry for new firms wishing to enter the market.
“In Europe, and especially in the UK pretty much everyone, but not everyone, has chosen to take research costs onto their P&L,” said Clark.
“It is a pressure that is much easily absorbed by the bigger firms with the bigger economies of scale, who’s research costs are just one or two bips of their assets under management, rather than the smaller firms, the growing firms,” he said.
“So, it has definitely created a barrier to entry, a difficulty for smaller firms.”
For Brennan, the Securities Financing Transactions Regulation (SFTR) - which is due to come into force later this year - is also a current concern for some firms who are struggling with understanding the rules before implementation.
“Some of our folks sit on a working group for SFTR, and just looking at the work that needs to go in the background just to understand what the data fields that they are asking for are, and the fears and challenges around the table where firms are saying, ‘we don’t capture this, we don’t store this, we don’t even know where this is, we don’t understand what this actually really means, or what the intention of the regulator is here,’” said Brennan.