The five most common transaction errors across MIFIR and EMIR

Putting transaction reporting right needs to be an urgent priority for firms as regulators sharpen their claws on transaction reporting errors. Matthew Chapman and Charlotte Longman of compliance specialist ACA Group highlight the most common errors firms are making.

Accurate, timely, and complete transaction reporting remains a significant challenge in many financial services firms, despite regulators in the UK and EU making it clear that their patience is wearing very thin. With research showing that 97% of reports under MIFIR/EMIR contain inaccuracies, and on average each report has 30 separate error types, it’s crucial that firms address this particular form of compliance risk quickly – to avoid regulatory action and reduce remediation costs.

Understanding error origins

Regulators appear to be sharpening their claws on inadequate regulatory reporting. They are pushing back on firms when they find errors in their transaction reporting, and even harder on firms whose errors the regulators uncover. This is because transaction reporting requirements have been around for some time now. The Markets in Financial Instruments Directive II (MiFID II) celebrates its fifth anniversary in January 2023. The European Market Infrastructure Regulation (EMIR) was put in place in 2012, and the EMIR Refit regulation was adopted in 2019.

In the rush to ensure compliance by the implementation deadlines, many firms seem to have embedded errors in their transaction reporting processes that remain to this day. In other cases, changes and updates to those processes may have resulted in the unintended consequence of fresh errors.

The five most common error themes across both MIFIR and EMIR reporting, based on the experience of ACA Group’s transaction reporting professionals, are:

1. Filling in Instrument-Specific Reporting Fields. These fields tell the regulator what instrument is being bought or sold. Firms should check that they are only filling out the required fields, completing those only required for the specific instrument being traded and not stuffing reports with “0” or another character, which is incorrect and can result in providing more information than necessary resulting in conflicting data being in a report.
2. Instrument Reference Data That Doesn’t Match FIRDS (Financial Instruments Reference Data System). Sometimes firms can be logically inconsistent in the way they complete a transaction report. For example, under EMIR, an FX (foreign exchange) forward transaction can be reported with a valid ISIN, but with a product classification in the form of a CFI (Classification of Financial Instruments) code which isn’t consistent with the CFI code that the UK’s Financial Conduct Authority thinks is relevant for that instrument. These are particularly tricky errors to catch because they can often pass through validation software – including the regulator’s technology.
3. Incorrect Counterparty Static Data. Firm’s must ensure they are using the Legal Entity Identifier (LEI) of the legal entity that they actually traded with – this simple error is more common than it should be. For example, the LEIs of companies can change overnight because of corporate activities, such as mergers, acquisitions, legal entity reorganisations, and more. Firms need to be alive to such changes at their counterparties and clients and make sure that the LEI reference data they are using is up to date.
4. Logical Inconsistencies. This occurs when two fields contain valid and perfectly acceptable values that in isolation are fine, but when looked at in combination with another field or fields, make the report illogical.
5. Identifying Regime-Specific Issues. There are other common errors in transaction reporting which do not overlap between MiFIR and EMIR. For example, the FCA commented on the mistakes it is finding in personal identifiers for MiFID II transaction reporting in the recent Market Watch 70. It’s important that firms get these specific fields correct because these are used by the FCA in its market abuse detection technology. Another common mistake, under EMIR, is reporting both notional currencies in an FX forward as the same currency, when they should of course be the two-currency pair.

Many administrative forms have their own logic and need to be filled in according to that logic, the process of which has parallels with the data driven process of transaction reporting. Errors in transaction reports can have significant repercussions that become more challenging and time consuming to rectify as time passes. The regulatory response becomes more robust, and the amount of management time and remediation work can grow exponentially.

Firms should undertake a holistic review of their transaction reporting processes to identify errors and fix them as soon as possible. They should also ensure that the individuals engaging with transaction reports have the right training. Approaching the risks associated with transaction reporting proactively can save the firm time, money and resources in the future.

*Matthew Chapman and Charlotte Longman are co-leads of ACA’s Regulatory Reporting & Assurance Service.

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