What is Transaction Reporting

A transaction report is a data set submitted to the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) which contains information relating to a transaction. Every transaction report contains relevant data about the financial instrument dealt with, the firm commissioning the trade, the person on whose behalf the firm has dealt (where applicable), the trade counter party and the time and date of the trade.

The legislation of MiFID (Markets in Financial Instruments Directive) in 2007 (EU) looked to achieve stricter compliance with regulations in financial practices through more rigorous monitoring of those firms, bringing forth the demand for transaction reporting. Under EU law, it is compulsory for firms to prepare financial transaction reports to aid government bodies in tracking money laundering and tax evasion, and failure to comply with these norms is tantamount to committing a criminal offence. Transaction reporting lends much needed clarity into fiscal operations, transactions, incomes and expenses. There are quite a number of specifics associated with this, namely with regard to the compilation of these reports and the authority responsible for monitoring and verifying the firms’ compliance to regulations.

Considering the former, the validation of company transaction reports is compiled by an Approved Reporting Mechanism (ARM), from which point it is forwarded to the respective reporting authority in that country. Pitfalls in reporting, either over or under reporting, are spotted or corrected at this phase along with any inherent errors. Secondly, the curated content is forwarded to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), wherein only the Banks, insurance companies, credit unions, investment firms and building realtors report specifically to the PRA while the FCA reviews only the stock markets.
In the UK, compliance to transaction reporting regulations is monitored by the Transaction Monitoring Unit (TMU), which is also the unit that heads the supervision of the markets in the country.

In 2018, MiFID II is going to take over from its predecessor.  MiFID II’s purpose is to retain the original objectives of MiFID I and augment it to include “Market Integrity”—what this entails is identifying waivers for larger orders and tethered financial instruments, mandates on selling-short and monitoring how commodity derivatives are utilized. Subsequently, the transaction reporting breaks down into the extent of scope. For companies in the hands of managers who only conduct collective portfolio management of UCITS (Undertakings for Collective Investment in Transferable Securities) and AIF (Alternative Investment Funds), it does not apply— but it does for CPMI (Committee on Payments and Market Infrastructures firms), although in terms of only its managed account activities.

According to the MiFID definition, all transaction reports pertain to the “acquisition, disposal or modification” of a reportable financial instrument, including but not limited to:

• A purchase or sale (this is the current MiFID I definition);

• A concurrent disposal and acquisition where an obligation to publish post-trade exists, despite there being no change in beneficial ownership (e.g. when options are exercised)

• The entering into or closing out of such an instrument.

Exclusions from the definition of transactions include:

• Securities financial transactions (e.g. lending stock, repurchase agreements);

• Post-trade assignments and notations in derivatives

• Compression of portfolios

• The expiration, creation, or redemption of financial instruments that result from pre-stipulated contracts or obligatory events where investment decisions are not occurring

• Any variance in the structuring of an index after the transaction has been performed.

In retrospect, UCITS and AIFMs managers in the UK need to adhere to MiFID I transaction reporting for now, but this will be extended by the FCA (and other national regulators) to wholly include both of these categories in MiFID II.