Regulatory Transaction Reporting

Regulatory transaction reporting is the requirement for investment firms, brokers, banks and some other market participants to report the details of each securities or derivatives transaction they execute to a market regulator, usually by the end of the next working day. A report typically identifies the instrument, price, quantity, time, trading venue, the firm, its client and the individuals or algorithms that made the decision. Regulators use the data mainly to detect and investigate market abuse, such as insider trading and manipulation.

The term is most closely associated with the European regime under MiFID II and the accompanying regulation, MiFIR. It should be distinguished from trade repository reporting of derivatives, which focuses on systemic risk and positions, and from anti-money laundering reports such as the currency transaction report, which concern customers' cash dealings rather than market trades.

Think of a big shopping centre where every shop must send security a list of each sale: what was sold, when, at what price and to whom. On its own, one list says little. But if security staff see that the same person bought large amounts of something just before its price jumped, they have reason to look closer.

Transaction reporting gives market regulators that list for financial markets. Every firm that buys or sells shares, bonds or derivatives for itself or its clients tells the regulator the details. The regulator puts millions of reports together and uses computers to look for suspicious patterns that might show cheating.

Article 26 of MiFIR, which applied from January 2018, requires investment firms that execute transactions in financial instruments admitted to trading or traded on a trading venue, or whose underlying is, to report complete and accurate details to their competent authority no later than the close of the following working day. Commission Delegated Regulation (EU) 2017/590, known as RTS 22, sets out 65 data fields and the rules for filling them in. Key features include:

• Identifiers. Legal entities must be identified by a Legal Entity Identifier (LEI), and individual clients and decision-makers by national identifiers.
• Decision and execution fields. Reports identify the person or algorithm responsible for the investment decision and for execution.
• Reporting channels. Firms can report directly, through a trading venue or through an approved reporting mechanism.
• Accuracy duties. Firms must reconcile their reports with their records and correct errors.
• Chains of firms. A firm that only passes a client order to another firm can avoid reporting if it transmits the required details under the conditions set in RTS 22; otherwise each firm in the chain reports its own part of the transaction.

The United Kingdom kept the regime after Brexit as UK MiFIR, with reports going to the Financial Conduct Authority, and both the EU and UK have since been reviewing the fields and scope.

In the United States, equity and options activity is captured by the Consolidated Audit Trail, created under SEC Rule 613, which tracks orders as well as executions through their life across brokers and exchanges. Bond trades are reported to FINRA's Trade Reporting and Compliance Engine (TRACE), and certain other markets have their own reporting systems. Swap transactions are reported to swap data repositories under CFTC rules, which is closer to trade repository reporting than to transaction reporting in the European sense.

Transaction reporting is data-intensive and errors are common. Firms must decide which transactions are reportable, map data from trading, client and reference systems into the required fields, obtain identifiers for clients and staff, and report on time every day. Frequent problems include missing or invalid LEIs, wrong buyer or seller identification, incorrect flags for short selling or for algorithmic decisions, and over-reporting of instruments not in scope. Supervisors expect regular reconciliations, testing and governance, and look closely at how firms supervise third-party reporting providers.

Regulators in the EU and UK have fined firms for failing to report transactions, or for reporting inaccurately over long periods, and require firms to back-report corrected data. Transaction reports are central to market surveillance: regulators combine them with order book data to detect spoofing, layering, wash trades and insider dealing, and to support investigations. The reports also help firms meet related obligations, such as controls under best execution policies and monitoring of algorithmic trading, and give authorities a view of trading activity that complements reporting by trading venues and stock exchanges.