Avoiding Common Pitfalls in Reporting OTC Transactions for SI-Traded Instruments
Key Takeaways
- Thorough FIRDS checks: verify the submitting entity and confirm the presence of a ToTV underlying for SI-reported instruments.
- Understand the MIC context: Don't assume a transaction is unreportable solely because the MIC belongs to an SI; always evaluate the underlying.
- By addressing these challenges proactively, firms can significantly reduce the risk of both overreporting and underreporting, ensuring greater compliance and operational efficiency.
OTC transaction reporting for SI-traded instruments often fails in two ways: overreporting due to incomplete FIRDS checks and underreporting when firms ignore the underlying instrument context. This article explains the risks and the practical checks firms can apply to reduce misreporting.
When it comes to transaction reporting, ensuring accuracy is paramount, particularly for OTC trades involving instruments executed with Systematic Internalisers (SIs). A recurring issue arises when firms mistakenly report transactions that aren't reportable or fail to report those that are. Here, we address two key challenges and propose ways in which firms can mitigate them.
1. Inefficient FIRDS Checks
One major source of misreporting stems from incomplete or inefficient use of FIRDS.
Firms often report transactions for all instruments listed on FIRDS without fully considering the type of entity submitting the reference data. This is problematic, as the regulator has acknowledged inconsistencies in reference data submitted under RTS 23 by trading venues and SIs. For example, SIs sometimes provide reference data for instruments that lack a ToTV underlying, inadvertently bringing unreportable transactions into scope.
What's the Risk?
Overreporting can lead to extensive cancellation exercises, consuming significant time and resources.
The Solution?
Firms must go beyond merely checking FIRDS for an instruments inclusion. They need to identify whether the reference data was submitted by an SI and, crucially, confirm if the instrument has a ToTV underlying. This additional layer of scrutiny is essential to avoid unnecessary reporting which can lead to extensive and costly cancellation exercises.
2. Underreporting Due to Ignoring Underlying Instruments
Another frequent error arises when firms incorrectly classify transactions as non-reportable based solely on the SI being the only MIC listed, without considering the underlying instrument.
What's the Risk?
This type of oversight results in underreportinga critical compliance issue. Regulators, including the FCA, view underreporting as one of the highest-priority transaction reporting errors.
Insights From the FCA's Discussion Paper (DP24/2)
In its recent discussion paper, the FCA highlighted the scale of this issue. On August 28, 2024, approximately 60,000 instruments were reported to FIRDS without an underlying indicating these instruments were likely out of scope.
To address this, the FCA is considering removing the requirement for SIs to submit reference data (IRD). While this would necessitate firms populating fields 4256 for instruments traded with an SI, the operational simplicity of determining reportability would outweigh the added workload.
How Qomply can help
Qomply’s Regulatory Reporting Hub combines regulatory expertise with AI, automation and data analytics to deliver scalable, audit-ready reporting intelligence that reduces errors, lowers remediation costs, and minimises operational and regulatory risk.
Covering regimes including MiFIR, EMIR Refit, SFTR, CFTC, CSA, MAS, ASIC and HKMA, Qomply also offers a fully managed service and operates globally from London.
Frequently asked questions
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The article says the two main pitfalls are overreporting due to incomplete FIRDS checks and underreporting when firms ignore the underlying instrument context. Both errors stem from treating SI reference data too simplistically.
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They can cause overreporting because firms may report every instrument listed on FIRDS without checking who submitted the reference data or whether there is a ToTV underlying. The article says SI-submitted reference data can pull out-of-scope transactions into apparent scope.
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It warns against that because the underlying instrument still needs to be assessed. The article says firms can underreport if they see only an SI MIC and fail to consider the underlying context.
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It says the FCA highlighted that around 60,000 instruments in FIRDS on 28 August 2024 had no underlying, suggesting they were likely out of scope. The article uses that figure to show how large the issue has become.
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They should confirm whether the reference data was submitted by an SI and whether the instrument has a ToTV underlying. The article says that extra layer of FIRDS scrutiny is the key control for reducing both overreporting and underreporting.
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