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 2021 and aims more particularly to inform all reporting entities on the quality and completeness campaigns that the CSSF conducted during the year 2021 as well as to announce the topics that will be the subject of dedicated campaigns during the year 2022. 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 Commission Delegated Regulation (EU) 2017/590 (“RTS 22”).

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 2022, the CSSF has registered 128 Investment Firms that submit transaction reports to the CSSF either directly or via an approved reporting mechanism (“ARM”). During 2021, 36,918,765 reports (including cancellations and corrections) have been submitted by the aforementioned Investment Firms to the CSSF via the system set up to this end.

The CSSF continuously monitors 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.

According to the description of Fields 7/16 – Buyer/Seller Identification Code of RTS 22, the aggregate client account (“INTC account”) “shall be used to designate an aggregate client account within the investment firm in order to report a transfer into or out of that account with an associated allocation to the individual client(s) out of or into that account respectively”. In addition to this provision, the ESMA Guidelines on transaction reporting (ESMA/2016/1452), transposed in Luxembourg via Circular CSSF 17/674 (“the Guidelines”), provide additional guidance towards the correct usage of the INTC account under paragraph 5.23 Grouping Orders.

In this context, the CSSF identified inconsistent transaction reports based on the following tests:

• Where a transfer into the aggregate client account on a given business day for a particular financial instrument and the corresponding transfer out of the aggregate client account for that same financial instrument are not matching in terms of quantity whereas the Guidelines explicitly state that the INTC account shall be flat at the end of every business day;
• Where on a given business day there has only been one transfer into the aggregate client account for a particular financial instrument and one transfer out of the INTC account for that same financial instrument, whereas the Guidelines explicitly state that the INTC account “[…] should not be used for reporting an order for one client executed in a single execution”;
• Where for the same financial instrument and on a given business day, the transfers into and out of the INTC account only involve one distinct counterparty as for the buyer or for the seller. In return, the Guidelines state that the INTC account “[…] should not be used […] for an order for one client executed in multiple executions.” Hence, by making use of the INTC account, one should distribute the quantity stored in the aggregate account over at least two distinct clients.

In June 2020, national competent authorities (“NCAs”), in collaboration with ESMA, performed a data quality control aiming at verifying the correctness of the trading venue transaction identification codes (“TVTIC”) populated in Field 3 of RTS 22. In order to continuously improve the quality of TVTICs provided in transaction reports, ESMA, together with the NCAs, decided to rerun this test in July 2021.

Concerning the applied methodology, each NCA focused, for a specific period, on transaction reports citing in Field 36 a MIC code pertaining to a trading venue under its supervision. As part of this analysis, it was verified firstly whether the investment firm citing a particular MIC code within its transaction reports is indeed a member of that trading venue (only direct market facing entities should quote the MIC Code of the trading venue in Field 36) and secondly whether the TVTIC reported by the investment firm in question is in line with the TVTIC structure as set up by that specific trading venue operator. Subsequently, ESMA compiled and shared the results with the NCAs. Based on these results, the CSSF requested corrections from 11 Investment Firms.

In accordance with Article 6(1) of RTS 22, a natural person shall be identified in a transaction report using the designation resulting from the concatenation of the ISO 3166-1 alpha-2 (2 letter country code) of the nationality of the person, followed by the national client identifier listed in Annex II to RTS 22 based on the nationality of the person and assigned in accordance with the specified prioritisation.

In light of the above, the CSSF performed a data quality control aiming at verifying that Field 7-Buyer identification code, Field 12-Buyer decision maker code, Field 16-Seller identification code and Field 21-Seller decision maker code of RTS 22, in which a natural person has been reported, have been correctly populated. In this context, the CSSF has identified the following inconsistencies:

• Use of CONCAT code for nationals where this code is not foreseen;
• The CONCAT code was not used for nationals where it is the only possible identifier;
• Use of an identifier for non-EEA nationals other than the National Passport Number or CONCAT code;
• The CONCAT code is not compliant compared to the natural person’s related data provided in the transaction report;
• The national identifiers provided in the transaction reports do not comply with the format as described in ESMA’s Q&A on MiFIR data reporting.

Based on the received feedback, the CSSF concludes that erroneous computation of client identifiers, the usage of the wrong XML tag in order to populate client identifiers within transaction reports and the non-respect of the client identifier prioritisation level pursuant to Annex II to RTS 22 were among the main identified sources of errors.

This data quality control aimed at identifying transaction reports where Field 30 – Quantity, Field 33 – Price, Field 34 – Price currency or Field 35 – Net amount of RTS 22 was potentially erroneously completed either with an inaccurate value or by having used the wrong XML tag for the relevant field. In particular, the following tests were performed:

• Net amount populated whereas the reported instrument is not a debt instrument;
• Net amount populated without accrued interests;
• Net amount is out of range;
• Negative price whereas the transaction relates to common/ordinary shares;
• Price equals quantity;
• Price not expressed in % for bonds (limited to prices ranging between 80 and 120);
• Price is out of range in relation to market price;
• Price outliers;
• Quantity outliers;
• Inconsistent price currency.

With regard to the different tests above, it should however be noted that some of them follow an outlier detection logic, which means that not all of the results shared with the Investment Firms necessarily point towards erroneous transaction reports. In fact, flagged transaction reports might appear to be false positives.

The CSSF is still in the process of analysing the feedback received from this campaign.

The CSSF plans to provide Investment Firms with an overview of erroneous transaction reports on a quarterly basis. In particular, the CSSF intends to compute analytical summaries that are, among other things, based on the scripts used for the previous campaigns. These overviews should induce Investment Firms to identify and fix potential flaws within their reporting tool(s) and to correct the relevant erroneous transaction reports.

In accordance with article 26(1) of MiFIR, Investment Firms which execute transactions in financial instruments shall report complete and accurate details of such transactions to the CSSF. Therefore, the CSSF expects Investment Firms to analyse these quarterly analytical summaries as soon as possible, to identify the concerned transaction reports and to take appropriate remedial actions, if necessary. As the vast majority of fields have been subject to a specific review in recent years and considering that these quality campaigns have improved the overall quality of transaction reports, the number of issues revealed by these quarterly reports will likely remain limited and the CSSF therefore does not intend to set fixed deadlines for the review and correction of errors by Investment Firms as has been the case in recent years. However, Investment Firms whose indicators point towards clear data quality concerns will be closely followed-up by the CSSF.

The CSSF will more closely monitor the error messages that are generated by its reporting system upon processing the received transaction reports. As the majority of such messages require subsequent correction, the CSSF will particularly focus on rejected transaction reports for which a corrected version remains outstanding. In this context, the CSSF would like to remind that Investment Firms shall have procedures and mechanisms in place for identifying unreported transactions where the relevant transaction reports were rejected by the CSSF and that have not been successfully re-submitted in accordance with article 15(1)(h) of RTS 22.

A prompt follow-up by the Investment Firms of the received error messages is necessary in order to comply with the obligation to report complete and accurate details of transactions to the CSSF as soon as possible and no later than the close of the following working day pursuant to article 26(1) of MiFIR.

In reference to the above, the CSSF believes that a daily follow-up of the error messages is required.

The CSSF reiterates that a high quality in transaction reports is a prerequisite for the CSSF’s monitoring tools to be able to automatically detect anomalies on the market that may be indicative of potential market abuse cases. In this sense, poor data quality may lead to the triggering of false positives which may have a negative impact on the efficiency and costs of the CSSF. In addition, it is important to note that a low level of data quality (e.g. incomplete or missing transaction reports) will not be considered as negligible offense, but may constitute a serious infringement of professional obligations under MiFIR, in particular if such omissions lead to the concealment of potential cases of market abuse. In that respect, the CSSF wants to recall article 47 of the Law of 30 May 2018 on markets in financial instruments which determines the administrative sanctions and measures that may be imposed against Investment Firms that do not comply with the obligations stemming from article 26 of MiFIR.

The CSSF draws the attention of the Investment Firms to the amended transaction reporting validation rules which will become applicable as of Q2 2022. However, ESMA is still to communicate their exact implementation date.

In this regard, Investment Firms are asked to prepare the adjustment of their reporting systems as soon as possible and to have their systems ready once the amended validation rules will become applicable.

• Entities in scope
• Completeness of reporting
• Missing LEI codes
• UTC (Coordinated Universal Time)
• Execution of a transaction on a trading venue (Field 36 “Venue”)
• Transmission of an order pursuant to Article 4 of RTS 22
• TVTIC
• Field 5 Investment firm
• Late reporting
• Trading capacity (Field 29)
• Partial executions