2021: The Year for Getting 3-Way Trade Reconciliation Right
Trade reconciliation is nothing new, but it is becoming a hot topic in the regulator’s eyes. Yet despite trade reconciliation being mandated for a while under RTS 22 Article 15 clause 3 “Investment firms must have arrangements in place to ensure that their transaction reports are complete and accurate,” many firms still struggle to implement it correctly.
With MiFID II reporting now in a more mature stage, firms should shift their focus towards ensuring that their front office trade data and the data they are reporting to the regulator is meticulously checked, complete and accurate.
Why is it mandated that firms must ensure that the transaction data that they are reporting to regulators is complete and accurate?
Accurate and complete regulatory reporting is critical for the regulators to help maintain fair and orderly markets, monitor systemic risks in financial markets, detect market manipulation and avoid financial crisis such as the that which occurred in 2008. All of these factors ultimately hurt end investors and destroys confidence in financial markets.
What is the challenge with implementing reconciliation?
Although MiFID II is now 3 years old, there are still far too many firms employing manual processes and are not using robust 3-way reconciliation processes in their regulatory reporting target operating models. The challenge for many firms to get right is implementing a robust automated process and moving away from manual spreadsheets. You need to make sure that you have full auditing of all changes and who made the changes as part of your reconciliation process. You have to explain why the fields do not match and record your findings in case the regulator comes knocking.
How do you go about getting your reconciliation process right?
You should perform a 3-Way Reconciliation between your source books and records (OMS/EMS/PMS/Risk systems) ARM files and FCA MDP files. A 3-way reconciliation can alleviate the need to perform lots of backreporting to fix errors in the original reporting which costs each time you send to the ARM and on to the NCA or Trade repository.
It is important to download the MDP files so you can check your front office trades against what has been reported to the endpoint trade repository or regulator. It is also crucial that you are downloading the MDP files consistently. From what we have heard from a multitude of sources, the FCA is monitoring MDP file downloads and contacting firms that are not downloading MDP files and performing a robust reconciliation of their reporting data.
Another area to focus on is reviewing trades that are in scope and out of scope for reporting and that the data that is sent to the endpoint is accurate is crucial to ensure completeness and accuracy of reporting. We also advise having conditions and explanations for any fields that would not match due to booking processes for eg prices between trading systems and reporting systems could not have same amount of decimal places even though the price is the same.
Finally, if there is translation that occurs between source books, records and your reporting files then any errors will be picked up straight away and remediated.
How do you benefit from a 3-way reconciliation process?
When this process is done correctly it surfaces gaps in your reporting including detecting errors, late reporting, incorrect market identifier codes between trading systems, default times being used instead of correct trade time, incorrect volumes and missing unit prices to name but a few.
Using a 3-way reconciliation, our clients have been able to systematically check that all their transaction reporting data is complete and accurate. In many cases, if there are missing trades due to manual extracts not capturing all the trades or discrepancies in trades, they are able to expediate the remediation of their reporting.
Now is the time to get it right!
3-way reconciliation is not a nice to have. It has to be made a priority as this is mandated in the regulation. With the right partner knowledge and processes in place, reconciliation is not extremely complicated to get right. Employing a comprehensive and robust reconciliation solution that ensures diligence and attention to detail, accuracy and timely reporting will make the processes far easier and more accurate.
Those that have already managed to bed down the process have seen the benefits for all their regulatory reporting, not only for Mifid II because they do not have to compete with high volumes of back reporting to fix errors and living in fear that the regulator will find an inadequate process when they investigate reporting processes and procedures
To discuss in further detail, please feel free to contact us.