A Fine Climate

In September, UK regulator the Financial Services Authority (FSA) fined Barclays Capital £2.45 million for transaction reporting errors. Some of the errors listed in the FSA report were related to reference data, making this case one of the first reference data-focused fines in the industry. The question now is whether this is the start of a new era of fines for failure to meet requirements for identification.

The general consensus is that the FSA will continue to push for more seriousness and robustness. "We have worked constructively and in full co-operation with the FSA throughout the investigation. The regulatory reporting errors were caused by inaccuracies in our data feeds to the FSA. No counterparties, clients, or financial reports were affected in any way," according to a statement from Barclays.

But few expect the Barclays case to be an isolated incident. In fact, one data consumer says Barclays is well-regarded for having good systems in place. Where does that leave the rest of the market? "It's quite possible that this isn't the last one. This fine could well be just the first in a series of statements about the importance of getting FSA reporting right," says London-based PJ Di Giammarino, chief executive at regulatory think-tank JWG-IT.

The FSA requirements for transaction reporting, defined in SUP 17 of the FSA Handbook, include correct identification of counterparties/clients and, according to an FSA spokesperson, "since this element is particularly important in our surveillance activities, we police it accordingly. Fines and public censure help to increase awareness of the need to comply with our rules."

In 2005 and 2006, the FSA took enforcement action against HSBC, Merrill Lynch, Bear Stearns and UBS for transaction reporting rules breaches, but the cases did not focus on incorrect counterparty identification.

Following the Barclays fine, market participants have said they are concerned that identifiers will be subject to increased scrutiny by regulators going forward. "We don't comment on possible enforcement action but do require adherence with our requirements of SUP 17. However, accurate transaction reporting is a pre-requisite for efficient surveillance, and we will examine all options to ensure firms meet their transaction reporting obligations," says a spokesperson at the FSA.

MiFID Breaches

At a Financial Services Club meeting on the topic, delegates said there had been few UK fines related to Europe's Markets in Financial Instruments Directive (Mifid), which became law in Europe in November 2007, and the Barclays fine is one of the first. MiFID introduced changes to the list of products in which transactions have to be reported and standardization of the list of fields required in the reports.

But this is not just about MiFID. It is about a general regulatory focus on ensuring firms have the necessary systems and processes in place to ensure high-quality data. "There have been fines and there have been fines tied to bad operational practises, but I'm not sure I've heard anybody be fined because of identification codes and instrument identifiers," says Washington, DC-based Mike Atkin, managing director at the EDM Council. He adds that this fine could not be more timely, as it is exactly what everybody is talking about right now.

The impression now is that senior management is starting to look at this problem. Market participants say the regulatory focus on correct identification of counterparties and instruments is slowly percolating up to senior management. London-based Meredith Gibson, senior vice-president and counsel, IP and O&T Law Group, at Citi, says: "I think it is very likely regulators are going to focus on this - why wouldn't they?"

In fact, market participants suggest it may even be an easy win for regulators. Correct identification is a constant struggle for firms, and the standards community is still discussing the best strategies for solving the counterparty identification issue. "It comes back to people's inability to correctly identify all these sorts of things," she says.

Although bad data is not a new problem, it is at least an issue that is yet to be fixed, no matter how many years data managers have been talking about the problems. London-based Kevin Wooldridge, chairman of the UK Securities Standards Committee, the UK shadow group of the ISO committee TC68/SC4, says there are organizations with records on their securities master file that were delisted 10 years ago. "That type of practise is not sustainable," he says.

According to the FSA report on BarCap, the incorrect code to identify the relevant counterparty and/or client for whom it had acted in relation to had been used in 7 million transactions, and there had been a failure to identify the underlying instrument for 2.2 million transactions. "If you took the 9.2 million errors as representative, bad data accounts for 16% of the overall reporting problem," says Di Giammarino, adding that this is the first time he has found a case where the bad reference data impact is so easily quantified.

On an industry-wide level, few are surprised by this figure. The figure is seen as probably being a good representation of the market. "We have bad data in 16% of BarCap's transaction reports," says Di Giammarino. If this applies to all firms, it could have a real impact on the ability to control macro prudential risk - particularly the quantity and quality of capital that is required. "If the banks cannot be trusted to have an accurate view of their assets and counterparties, there will be a massive impact on the liquid asset buffers assigned by the FSA," he comments.

If the 16% of bad data is quite common, it may not be a surprise that the rest of the Street is also concerned about potential future fines. According to one data consumer, everybody feels a bit nervous, as reputational risk is a major issue.

But the £2.45 million fine is not seen as that big. At the Financial Services Club, it was noted that it sounds like a lot on a personal level, but delegates raised concerns about whether the punishment was fit considering some bankers' huge bonuses. Even though the fines have increased significantly, there is a real question about whether they are material. "The costs of changing the bank's infrastructure are massive, and there is a real argument that they are still not significant enough to command significant attention in the budget process," says Di Giammarino.

Yet, the entire concept of penalties for bad data is seen as a new development. New York-based John Mulholland, director, global head, reference data, capital markets and securities operations at RBC Capital Markets, says there has typically been significant regulatory focus on processes related to anti-money laundering and risk, but not on standard identification. "There is a fundamental requirement for better internal control, which is what firms want, and that is going to result in good data quality and consistent data," he says.

The hope now is that firms are not out of time. Regulators may be able to shift their focus overnight, but putting processes in place to implement standards to adhere to regulatory requirements has never been deemed a typical quick-fix. This is the message that needs to continue percolating up to senior management.