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IT teams will want to contribute to the debate over the FCA’s proposed changes, which could introduce additional complexities and lead to major IT costs for firms.

By Rob Moulton and Becky Critchley

On 15 November 2024, the FCA issued a Discussion Paper on improving the UK transaction reporting regime (DP24/2). The FCA receives seven billion transaction reports a year on 20 million different reportable financial instruments, and firms find submitting such reports accurately a difficult, costly, and time-consuming task.

The FCA’s view is that “the regime works well”. Indeed, it forms the bedrock of the FCA’s efforts to combat market abuse. However, and focusing on its own needs (rather than the challenges for firms) the FCA now states “our markets and our market data needs have evolved since 2018” (emphasis added), which is when MiFID II made major changes to the data which was required to be reported, including increasing the number of reportable fields from 23 to 65. The FCA is opening a discussion on changes to the number of and content in the 65 reportable fields.

Whatever changes may be made are likely to result in a major IT project for firms, and lead to complexities and errors in transaction reports going forward. In particular, the regime is currently closely aligned with that in the EU and, although some changes are likely to occur to transaction reporting in the EU anyway, the FCA’s proposals would make it difficult to contemplate using a single approach to transaction reports on a pan-European basis. Therefore, Compliance, Legal, IT, and Ops departments are all likely to have a view on the direction of travel and whether any “simplification” actually brings benefits in real terms.

Scope

The FCA is considering:

  • extending the scope of the regime to require reporting by AIFMs and UCITS managers;
  • simplifying the type of instruments that must be reported if an underlying is traded on a trading venue because of the complexity in determining whether certain instruments have such an underlying. This is likely to mean fewer, rather than more, reportable instruments;
  • dropping the use of an ISIN for OTC derivatives, as a separate ISIN needs to be created every day, and instead using a UPI which does not suffer from this defect. However, this may require some firms to obtain UPIs if they have not previously had to do so. Therefore, the FCA is also considering whether a modified ISIN, which no longer includes the expiry date, would be a better way forward;
  • removing the requirement for SIs to submit instrument reference data, to avoid confusion around the submission of such data by firms which are not considered trading venues;
  • permitting UK firms (including UK branches of third-country firms), if they choose to do so, to act as a receiving firm for non-MiFID investment firms, such that UK firms could then simplify their reporting obligations by looking through a transmission chain involving a non-UK MiFID investment firm. The FCA seems to be concerned that making the UK firm responsible for the information (e.g., from an affiliate) would “make the model unattractive or inoperable for most firms”, but it may still be attractive to some firms when compared to the complexities of requiring separate reports in the EU and UK for the same execution;
  • requiring UK trading venues to report all transactions by third-country investment firms, irrespective of whether a UK branch was involved. At the moment, the obligation to report by UK branches of third-country firms differs according to whether the transaction is, or is not, executed on a UK trading venue.

Content

The following are some of the changes to transaction reporting fields that the FCA is considering:

  • Allowing firms to report the underlying beneficiary of a trust (and using their LEI) in all circumstances, rather than only when the firm helped to establish the trust
  • Whenever a counterparty is not known at the point of execution (because, for example, a transaction is executed on a trading venue), requiring only the segment MIC of the trading venue to be reported (rather than, as occurs in the majority of instances, that of the CCP that may also be involved)
  • Making changes to the “transmission of order indicator” as firms regularly report incorrectly the trading capacity as AOTC and the transmission order indicator as “TRUE” (although there is no specification of how this would be achieved)
  • New guidance on the quantity and price type fields for equity swaps, if there are currently nine different approaches taken across the industry, with the largest of them accounting for only 32% of equity swaps reported
  • Removing the following indicator fields: waiver, short selling, OTC post-trade, commodity derivative, and securities financing transaction

In addition, the FCA is considering creating some new reporting fields:

  • An aggregate client linking code to improve on the current INTC field. This would involve a unique indicator to try to link different transactions, although the examples given by the FCA are too simple to help with more complex linked transactions (if, for instance, separate market legs do not exactly align with different underlying client legs)
  • A client category field to distinguish between, for instance, retail and professional underlying clients
  • A DEA indicator
  • Extending the obligation to report the full name and date of birth of individuals from not only the buyer and seller fields but also the investment and execution decision-maker fields. This would involve the transmission of personal information about employees, raising additional data privacy concerns

Next Steps

The FCA clearly intends to make significant changes to the transaction reporting regime. As any changes will involve divergence from the EU’s approach, incur major IT costs for firms, and produce new complexities, the FCA will likely receive cost-benefit challenges, as well as those based on more technical feedback, as part of the discussion process.

The Discussion Paper is open for comment until 14 February 2025. The FCA plans to publish a full consultation on formal policy proposals in the first half of 2025.