Navigating the complexities of transaction reporting

Paul Joseph, Global Relationship Manager, Consulting at Davies

Over recent years, we have seen many banks impacted by substantial regulatory imposed penalties relating to erroneous transaction reporting and/or inadequate processing controls.

These high-profile incidents highlight the critical importance of transaction reporting, which must adhere to regulatory requirements but also involves significant challenges.

The impact on organisations goes beyond monetary fines, although these fines can be substantial. Reputations are also damaged as these penalties are widely reported, which in turn will likely impact the company bottom line.

Additionally, regulators may enforce unfavourable timelines for remediation, resulting in costly and subpar solutions. This perpetuates an inefficient process that incurs high operating costs. Moreover, operational areas may be stretched to capacity without sufficient resources for scaling.

So, why is it so important? Firstly, transaction reporting serves as the first line of defence against financial crime, making it a vital tool for maintaining market stability, as well as detecting and investigating market abuse.

Secondly, to support market stability by providing a view of transactions for aggregation and oversight by the regulators.

From a financial crime prism, the need for complete and accurate reporting has never been more important. However, the vast and diverse challenges posed by managing a global trading book add significant complexity to this task.

A deep understanding is required of various elements, including the types of instruments; the timing of transactions; how they came about; the parties involved; how to capture all relevant data; reporting within the required and possibly almost instantaneous time constraints. But more on this later.

Correctly interpretating regulatory guidelines

Regulatory guidelines obviously play a significant role in shaping best practice for transaction reporting. In the UK, for example, the FCA “expects firms and market participants to apply the guidelines to the extent that they remain relevant and to sensibly and purposefully interpret”

But what does this mean?

In short, that the onus is on the institution to ensure it interprets the regulatory reporting requirement correctly, applying the appropriate actions allowing for scale, counterparty and jurisdictional diversity.

Navigating the complexities of transaction reporting requires a strong and nuanced understanding of the appropriate guidelines and their applications.

Example penalties levied for reporting non-compliance.

A large US Investment Bank was fined £13.2 million for failing to correctly report on transactions. The fine reflected a failure to address root causes over several years.

Elsewhere, the London branch of a leading European headquartered bank suffered a fine worth £4.7 million for inaccurately reporting its Equity Swap CFD transactions. Similarly, a major UK bank was fined £5.6 million for failing to report 37% of their relevant transactions and breaching their requirement to have adequate management controls.

These examples highlight the severe consequences of non-compliance the global banks are facing despite their undoubted sophistication and available financial and intellectual resources.

Looking beyond tier 1 banks, it’s hard not to consider the exposure faced by other institutions. The financial and reputational impacts on these firms could be significant if issues and anomalies are discovered, especially as regulatory scrutiny broadly expands.

Accessing transaction data and streamlining the automation process

In today’s interconnected global landscape, transactions often span multiple international jurisdictions, involving equally geographically diverse counterparties and regulatory regimes.

The complexity of transaction reporting is further compounded by the sheer volume of applicable transactions to be reported on. To address this challenge, a robust and efficient automation process is essential. This is why many businesses turn to specialist technology firms such as Broadridge and Bloomberg for processing.

Additionally, they may seek the expertise of consultancies, such as Davies Consulting, to establish data and technology foundations. These foundations enable effective and efficient data acquisition, standardisation, and aggregation. They are also governed for data quality, ensuring timeliness, completeness, accuracy, consistency, validity, and uniqueness.

Moreover, data, technology and governance strategies should be developed in consideration of each other rather than sequentially to ensure maximum effectiveness and efficiency. A siloed approach to developing each element individually creates high friction environments that suffer from considerable inefficiency.

The integrated data, technology, and governance approach is being adopted by the Trade Reporting and Transaction application vendors. Indeed, vendors are incorporating industry reference data sources into clients’ regulatory reporting data governance strategies. Regulatory harmonisation, particularly through initiatives like the CPMI/IOSCO Common Data Elements (CDE) and the adoption of ISO 20022, is helping to simplify one aspect of the data challenge.

As vendors publish increasingly similar data to different regulators, albeit with some exceptions in interpretation, they face higher regulatory scrutiny regarding data sourcing and accuracy.

Therefore, a robust data processing, management, and governance strategy is crucial for responding to regulatory audits. And there is a growing need for alignment between counterparts, such as increased focus on pairing and matching breaks under regulations like EMIR, as well as the increasing complexity of UTI generator determination.

The question is why this approach is not being taken by many for the data layers that feed the Trade and Transaction Reporting applications.

Perhaps because there are some common challenges in large data programs, which often struggle to provide effective solutions without resorting to workarounds, high costs, and complexity. Work is not easy after the reporting tool has been implemented, it’s just the beginning.

Too frequently, businesses are overlooking some important best practice strategies. For one, they fail to align reporting requirements with data and technology needs, often resulting in simplistic approaches or prioritising technology over data design.

Additionally, they miss the opportunity to integrate data processing, management, and quality into a unified design, tackling them sequentially instead, which leads to suboptimal outcomes. Finally, they design systems as expedient solutions rather than as a coherent set of components, risking effectiveness and longevity.

Seamless regulatory reporting

If businesses can implement – rather than overlook – these best practices, organisations will have a much clearer picture of their digital landscape and, more specifically, their transaction data. In turn, this will make it significantly easier to automate their systems to give accurate reports that match their interpretation of the guidelines laid out by regulatory bodies like the FCA.

For many businesses, such an overhaul of their data governance regime might seem daunting. As such, seeking out partners who are able to assess existing systems, identify gaps, and recommend solutions to enhance data quality, streamline processes, and enable seamless regulatory reporting is of immense and critical value.

Paul Joseph is a Global Relationship Manager within the Corporate Functions team at Consulting at Davies. Formerly known as Sionic, Davies acquired the global consulting firm specialising in financial services in 2021, and it is now referred to as Consulting at Davies. Joseph has 20+ years of experience in the banking and financial technology sectors.