The period since January 3, 2018, when the second Markets in Financial Instruments Directive (MiFID II) got into effect has brought marked changes to regulatory reporting at least in terms of quantity and quality of information the UK Financial Conduct Authority (FCA) receives. This transformation has been highlighted in a recent speech delivered by Mark Steward, Director of Enforcement and Market Oversight at the FCA.
The change over the last six months has been significant, he says.
Mr Steward noted that the FCA estimates around 130,000 LEIs and over 2.3 million national identifiers that now form part of the MiFID II framework.
Since MiFID II got into effect on January 3, 2018, the FCA market data processor has ingested nearly 3.5 billion transaction reports, averaging over half a billion reports per month. By contrast, for the first six months of 2017, the monthly average was around 390 million. This translates into an increase of over 55%.
Previously, the FCA had 8 entities submitting transaction reports to it on behalf of approximately 800 firms. The regulator now has 23 entities submitting transaction reports, including 7 Approved Reporting Mechanisms (ARMs); 10 are trading venues and there are six investment firms. Those 23 entities are submitting data on behalf of 3,150 executing firms of which 1,500 are UK firms subject to the Markets in Financial Instruments Regulation (MiFIR) transaction reporting obligations. If the transaction reports routed to the FCA from other National Crime Agencies are added, this brings the total number of executing firms to more than 6,000.
Mr Steward also stressed that the reports are now providing a much more detailed, complex and clearer picture of the market, identifying the buyer, the seller, the decision maker (where applicable), the investment decision within the firm (either an individual trader or an algorithm) and the type of execution within the firm (either an individual trader or an algorithm).
There are some weird findings too.
“The additional data has identified a number of anomalies (and we do carry out quality checks) identifying individuals executing transactions who were apparently born in 1900”, Mark Steward says.
The regulators are processing 30 million transaction reports per day and there are plans for a 20% increase in capacity and processing of data over 5 years.
In this context, the FCA is now also asking for and receiving, daily, order book and trade report data from 7 UK trading platforms, processing approximately 140 million rows of data per day. There are approximately 70 billion rows of order and trade data currently being stored for FTSE 350 entities for the period January 2013 to April 2017. This number is likely to increase significantly this year as the regulator has now requested order book data for all FTSE and AIM stocks. On top of that, the FCA is also uploading all the data collected under MiFID I which constitutes approximately 20 billion rows of data.
Mr Steward notes the benefits of using software developed in-house to normalise and ingest disparate order book data-sets from the main lit and dark UK trading venues, as this makes it possible to track potentially related trading activity on different venues and detect cross-market manipulation (i.e. artificially influencing the price of a financial instrument in one market while benefiting in another).
Mr Steward also addressed the issue of money laundering in capital markets.
The FCA has several investigations on foot dealing directly with series of capital market transactions that appear to have no apparent market purpose or function.
“If our suspicions are right, not only do these transactions falsify liquidity, trading volume and supply and demand in the market, the purpose of these transactions is unrelated to the sale and purchase of the underlying instruments, begging very hard questions”, Mr Steward says.
“We have also commenced a small number of investigations into firms’ systems and controls where, for the first time, we have indicated to those firms that we are looking at whether there has been any misconduct that might justify a criminal prosecution under the Money Laundering Regulations”, he added.
However, Mr Steward explained that an investigation is primarily a fact-finding mission with any decision about what, if any, might result being best left until the end. In short, all the presumptions of innocence apply which is why these firms should not be identified unless and until any charges are laid.
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