Monitoring the quality of transaction reports received under Article 26 of MiFIR

This press release relates to the obligation for credit institutions and investment firms to report transactions in financial instruments as set out in Article 26 of Regulation (EU) N° 600/2014 (“MiFIR”). It informs on the number of reporting entities as well as the number of reports received by the CSSF in 2020 and aims more particularly to inform all reporting entities on the quality and completeness campaigns that the CSSF conducted during the year 2020 as well as to announce the topics that will be the subject of dedicated campaigns during the year 2021. The press release also introduces the new template that should be used to notify the CSSF of any errors, omissions or failures with respect to the reporting obligation as required under Article 15(2) of Commission Delegated Regulation (EU) 2017/590 (“RTS 22”). The last part of the press release includes a list of topics that have already been subject of a specific campaign and for which details are available in previous communications.

In this press release, references to a specific “Field” refer to the fields in Table 2 of Annex I of RTS 22.

With regard to the importance of monitoring data quality, the CSSF would like to point out that ESMA has chosen the monitoring of data quality as one of the two Union Strategic Supervisory Priorities for 2021, with a particular focus on the quality of transparency data reported under MiFIR. Given the close links between post-trade transparency data and the transaction reports submitted under Article 26 of MiFIR, all efforts made in monitoring the reporting obligation and the quality of the submitted data under Article 26 of MiFIR will also have a positive effect on the quality of post-trade transparency data. Striving for the highest level of transaction reporting quality is important to the CSSF as reliable and timely data is a vital component of regulators’ markets supervision in order to detect and investigate potential market abuse and to monitor the fair and orderly functioning of the markets.

In accordance with Article 1(2) of MiFIR, the obligation to report transactions in financial instruments to the CSSF applies to credit institutions and investment firms incorporated under Luxembourg law as well as to branches of third country firms authorised in Luxembourg (together referred to hereunder as “Investment Firms”).

As of 1 January 2021, the CSSF has registered 134 Investment Firms that submit transaction reports to the CSSF either directly or via an approved reporting mechanism (“ARM”). During 2020, 30.346.915 reports (including cancellations and corrections) have been submitted by the aforementioned Investment Firms to the CSSF via the system set up to this end.

Since the entry into force on 3 January 2018 of the new reporting format under MiFIR, the CSSF is monitoring the quality of the transaction reporting data. During the last year, the CSSF not only carried out the standardised quality tests developed together with the other competent authorities and ESMA, but also conducted a series of data completeness and quality enhancement campaigns with a focus on the different topics listed below.

Following Article 3(2) of RTS 22, an Investment Firm shall not be deemed to have executed a transaction where it has transmitted an order in accordance with Article 4 of RTS 22 and is therefore no longer required to submit a transaction report under Article 26 of MiFIR. The conditions to be met for transmitting orders pursuant to Article 4 of RTS 22 are outlined in the first paragraph, points (a) – (c) of said Article.

For the review, special focus has been put on Investment Firms which have confirmed to the CSSF that they are not subject to the obligation to report transactions either because they do not execute transactions in financial instruments or because they make use of the possibility of transmission pursuant to Article 4 of RTS 22, but whose Legal Entity Identifier (“LEI”) could be found within the buyer or seller field (field 7 or 16 respectively) of another Investment Firm’s transaction reports.

In this context, several sources of error and inconsistencies have been detected:

• Overly broad interpretation of the exemption in Article 2(5)(m) of RTS 22;
• Confusion between a delegation of the reporting obligation and an order transmission in accordance with Article 4 of RTS 22. The CSSF would like to recall that its MiFID II/MiFIR – Questions and Answers document requires that both counterparties intending to take advantage of the order transmission possibility must document it in a contract that refers to Article 4 of RTS 22;
• Transmission agreements with companies which do not fall within the scope of Article 26 of MiFIR (in particular entities from third countries) and which are therefore not in line with Article 4(1)(c) of RTS 22 are thus not acceptable for the CSSF.

Since several competent authorities have noticed that there are problems with the trading venue transaction identification codes (“TVTIC”) indicated in the transaction reports they receive, the competent authorities have consulted each other and have analysed for a specific period the transaction reports citing in field 36 a trading venue falling under their jurisdiction. As part of this analysis, it was verified firstly whether the reporting entity citing the particular trading venue as an execution venue is indeed a member of that market and secondly whether the TVTIC reported by the entity in question is in line with the TVTIC structure as set up by that specific trading venue. Subsequently, the results were exchanged between the competent authorities so that each of them could contact the concerned reporting entities. The CSSF participated in this campaign and contacted the Investment Firms for which inconsistencies were detected.

As already stated in the CSSF press release 20/05 under the campaign “Execution of a transaction on a trading venue (Field 36 “Venue”)”, only direct market facing entities should quote the MIC Code of the execution venue in field 36. As regards the TVTIC, Investment Firms should use the codes as transmitted by the trading venues in question or respect the logic of creation of the codes as communicated by the latter in order to report TVTICs that comply with the methodology applied by that trading venue.

On this particular point, the CSSF would like to draw the attention to the fact that UK venues are, as from 1 January 2021, classified as trading platforms outside of the Union. From then on, TVTICs shall no longer be populated within reports pertaining to transactions executed on a UK trading venue and transaction reports not respecting this provision will be rejected with error code CON-030.

In the course of its daily monitoring of transaction reports received by Investment Firms, the CSSF has noticed that some entities have incorrectly filled in field 5 with “false” meaning that they would not fall under the definition of investment firm as given by Article 4(1) of Directive 2014/65/EU.  Apart from the transaction reports that an operator of a trading venue must submit to the CSSF in relation to transactions executed by its members not falling within the scope of MiFIR, all other transaction reports submitted to the CSSF by Investment Firms must include “true” in field 5.

Pursuant to Article 26(1) of MiFIR, Investment Firms shall submit transaction reports to the CSSF as soon as possible and no later than the close of the working day following the transaction execution day. Considering that the IT systems set up under MiFIR should be stabilised three years after their implementation, the CSSF requires submissions that meet the deadlines set by MiFIR. As part of this campaign the CSSF contacted all the Investment Firms and provided them with statistics on the delays in their reporting flow. In addition, the CSSF has asked entities that didn’t meet these legal requirements to review their processes.

The CSSF plans to review this specific point on a regular basis and expects Investment Firms to constantly improve their respective situation in order to fully comply with this legal requirement.

Within the framework of this campaign, the CSSF contacted Investment Firms in whose transaction reports field 4 (Executing entity identification code) and field 7 (Buyer identification code) or field 16 (Seller identification code) respectively were populated with the same LEI whereas field 29 (Trading capacity) was not populated with DEAL (dealing on own account). This means that an executing entity would not have interposed its own account in a transaction where it has acted as a buyer or seller. According to all the available reporting instructions, such a constellation does not seem coherent.

Changing from MTCH (matched principal) to AOTC (any other capacity) or vice versa does not solve the problem. The CSSF wants to stress that interposing the own account (and thus quoting “dealing on own account” as trading capacity) may have consequences on other provisions of MiFID II/MiFIR, such as the systematic internaliser regime for which Investment Firms must apply if they exceed a certain threshold of transactions that are executed on own account in a given financial instrument.

The vast majority of issues were related to transactions executed with a broker on the one side and the respective allocation of financial instruments into clients’ accounts on the other side, both done in two separate IT systems. As a consequence, Investment Firms were of the opinion that interposing their LEI code to link the two transaction reports would result in the same information for the regulator, which is however not in line with the regulation. Therefore, the CSSF has asked the Investment Firms concerned to adjust their IT infrastructure in order to allow complete and adequate reporting in a single transaction report quoting on the one hand the final client and on the other hand the counterparty from which the Investment Firms bought or sold the instruments in question.

In this context, the CSSF wants to stress that Investment Firms shall not knowingly submit transaction reports that are not in line with the ESMA Guidelines on transaction reporting (ESMA/2016/1452 – “ESMA Guidelines”), transposed into the Luxembourg regulatory framework via Circular CSSF 17/674 or the Q&As published by ESMA in order to circumvent the limits of their IT systems. The CSSF also urges reporting entities to request prior confirmation from the CSSF in case of doubt as to a specific constellation for which there is no clear answer in the aforementioned documents.

Based on the LEIs in fields 4 (Executing entity identification code), 7 (Buyer identification code) and 16 (Seller identification code), the ISIN code in field 41 (Instrument identification code), the trading date in field 28 (Trading date and time) and the sum of the quantity traded with a specific counterparty during a specific day on a certain financial instrument, the CSSF flagged transaction reports submitted by Investment Firms where the number of reports submitted by one reporting entity differed from the number of reports submitted by its counterparty for the same traded quantity (in aggregate) of the same instrument at the same date.

The identified Investment Firms were contacted and asked to justify these discrepancies. Having not yet received and analysed all responses at present the CSSF cannot draw a final conclusion yet, but from the responses received so far it appears that there are a number of cases where executing firms transmit details regarding the partial executions as well as grouped confirmations with regard to the entire order to their counterparties without specifying the information they have put in their own transaction reports. Based on this initial feedback, it seems really important for the two entities to exchange views on how they report transactions so that the transaction reports received by both are consistent for regulators. In this sense, there is an increased responsibility at the level of the executing entity which must ensure a consistent approach between its own transaction reports and the confirmations it sends to its counterparties in order to avoid that the latter, based on the confirmations received, submit transaction reports that cannot be linked to those received from the executing entity.

The quality campaign for the year 2021 will follow an approach similar to the ones of the preceding three years. In order to continuously enhance the quality of submitted transaction reports, the CSSF will continue to perform the quality tests as defined by ESMA, check the general quality of the reports submitted by certain selected Investment Firms and put a particular focus on the following specific aspects:

The ESMA Guidelines introduce the possibility to use the aggregated client account “INTC” but limit its use to very specific situations.  It should not be used for reporting an order for one client executed in a single execution or for an order for one client executed in multiple executions. Where there is a transfer into the aggregate client account (‘INTC’) there should be a corresponding transfer out of the aggregate client account within the same business day of the executing entity in the transaction report such that the aggregate client account is flat.

As part of this campaign the CSSF will ensure that the aggregate client account is used in accordance with the aforementioned provisions.

Article 6 of RTS 22 and its Annex II provide guidance on how natural persons shall be identified in the context of transaction reports.

In particular, the CSSF will check that concatenated codes are only used for natural persons of nationalities for which a concatenated code is possible in accordance with the Annex II of RTS 22. In addition, the CSSF will verify that the code provided is consistent with other information pertaining to the same natural person (date of birth, first name and surname) found in the reports in question.  As part of this verification, the CSSF will check that the fields containing the names of individuals are filled in as required by RTS 22 and that the concatenated code created by the reporting entity complies with the methodology described in the guidelines (suppression of prefixes and titles, upper cases, use of the first first name only, transliteration, etc). With regard to the dates of birth a focus will be put on clients presumably over 100 years of age. As regards the fields related to surnames and first names, the CSSF will check that the provided information complies with the specifications provided by RTS 22.

Finally, the CSSF would like to stress that as from 1 January 2021, natural persons with British nationality have to be identified primarily by their national passport number, as provided in RTS 22 for natural person of nationality of “all other countries”.

With regard to prices, the CSSF will check whether the way in which prices are included (monetary value, percentage, yield or basis points) in the reports is consistent with the categorisation of the traded financial instruments. In addition, the CSSF plans to search for outliers with regard to reported prices. Given that the market surveillance systems of the regulators react very sensitively to outliers, it is very important that the transaction reports submitted by the entities are correct at this level in order to limit or even eliminate false positive alerts related to data quality problems.

As far as the quantities reported (number of units, monetary or nominal value) are concerned, the approach of the analysis will be very close to that of prices. The CSSF will focus on the consistency of the transaction reports between the categorisation, the financial instrument, the way the transaction price was communicated to it and the quantity negotiated. In line with the campaign on the price field, the CSSF will also analyse potential outliers on the level of the quantity field.

For some of the 2020 campaigns documented above, only a limited number of Investment Firms were contacted. Investment Firms should not assume a transaction report was accurate because it was accepted by the CSSF, as the validation rules are not intended to identify all potential errors and omissions. Therefore, the CSSF asks all Investment Firms to review without delay whether their systems are in compliance with the points raised in Section 1 above and listed in Section 5 below. If in that context an Investment Firm notices that its reporting system does not comply with one of these points, it shall contact the CSSF as soon as possible in order to define a reasonable timeframe to bring its system into compliance. As far as the points announced for 2021 are concerned, the CSSF strongly encourages Investment Firms to review straight away whether their systems comply with the rules and to notify the CSSF without delay if any errors are detected. Such a proactive approach by Investment Firms will be considered as a positive element in the assessment of each individual case and in the decision of the enforcement actions that may be taken by the CSSF.

If an Investment Firm identifies errors in its transaction reports or fails to submit some or all of its transaction reports a notification should be emailed to: transactionreporting@cssf.lu

In order to standardise such information, the CSSF asks Investment Firms to use from now on the following form, which will also be made available on its website under the section on transaction reports in the forms tab: Error notification form 

Notification should be made as soon as the problem has been detected and Investment Firms should not wait for the resolution and correction of the problems detected before informing the CSSF.

The CSSF reminds Investment Firms that the periodic reconciliation of their transaction reports with front office records is a requirement in Article 15(3) of RTS 22. The CSSF recommends Investment Firms to consult the MiFID II/MiFIR – Questions and Answers document published on its website for further information on the data extract requests that they can address to the CSSF.

• Entities in scope
• Completeness of reporting
• Missing LEI codes
• UTC (Coordinated Universal Time)
• Execution of a transaction on a trading venue (Field 36 “Venue”)

Further explanations on these campaigns can be found in the CSSF press release 20/05.