A Summary of Transaction Reporting User Pack (TRUP 3)

Transcription

1 A Summary of Transaction Reporting User Pack (TRUP 3)

2 Contents Page 1. Background 3 2. Reportable Instruments 3 3. Obligation to Report 4 4. Field Content Guidelines 4 5. Guidelines for Reporting Derivatives 5 6. Special Trading Scenarios 5 7. Summary 5 2

3 The long-awaited third version of the FSA s Transaction Reporting User Pack (TRUP 3) was published last week.mark Kelly, Director of Transaction Reporting Limited, summarises some of the most significant changes and what they may mean for users of UnaVista s Transaction Reporting service. Background Long before the public consultation period for TRUP 3 began in October of 2011, soundings were taken with all of the main industry bodies and special interest groups, many of whom were privileged to see early copies of the draft. Significant changes were made as a result of this private consultative period and still more were introduced following the public consultation, which concluded in November What is not so widely known is that the FSA took the further step of contacting respondents individually to explain which of their suggestions had been incorporated and, just as importantly, the reasons why others had not. This collaborative and open approach is sure to be welcomed by the industry. The document itself represents the latest point in the evolution of the guidance which started with TRUP 1 in 2007, advising firms as to the practicalities of complying with the FSA s implementation of the MiFID transaction reporting regime. But that first document contained 32 pages, TRUP 2, published in 2009 had 48 pages and the current version runs to 53 pages. The FSA Handbook rules themselves, contained in Chapter 17 of the Supervision Manual (SUP 17) now look positively skeletal by comparison and no-one who needs to gain a full understanding of the UK transaction reporting regime can do so without studying the TRUP in some detail. Direct (and frequent) consultation of the whole document is therefore recommended to everyone with responsibilities for transaction reporting within regulated firms. Below I have sought to highlight only the most significant changes and clarifications, in order for readers to gain an immediate idea of where they may need to adjust their current approach. Reportable Instruments (p8) There is still no golden list of every financial instrument which must be reported, and there is unlikely ever to be such a list, but some helpful clarifications have been introduced to aid firms in their analysis of reportability.for example: Secondary listings on regulated markets qualify trading in the primary market to be reportable, provided the ISIN is identical in both, which has been explicitly recognised for the first time (see footnote 10). So for instance if a UK firm is transacting in a Koreanlisted stock which also has a listing on one of the German regulated markets, that transaction will be reportable to the FSA (who will then probably pass it to the German regulator to fulfil their obligations under MiFID). London Stock Exchange s ARM, UnaVista, can also assist clients in this area through the provision of a MiFID Eligibility report which highlights transactions that were reported against an ISIN which the London Stock Exchange s SEDOL Masterfile does not include as listed or traded on an eligible European market. Exchange-traded commodities (ETC s) are to be treated in the same way as equities or other cash instruments, provided they are admitted to trading on a regulated market. In other words, these products do not benefit from the reporting exemption available for OTC and listed commodity derivatives. The same logic should be applied to any securitised listed instruments which track interest rate or foreign exchange movements. Excluded from reportability are: primary market issuance, allotment or subscription, including placements initial allotments of new shares following rights issues the creation and redemption of exchange traded funds. Securities financing transactions such as repos and stock borrows and loans, as well as the exercise of options and covered warrants. 3

4 Obligation to Report (p10) Order passing chain One of the hardest scenarios to understand within transaction reporting has always been where there is an extended orderpassing chain, as reporting obligations can depend on how much information is passed along the chain regarding the ultimate underlying client.this has been clarified to indicate that Inter- Dealer Brokers, or other introducing brokers who pass on sufficient details to enable the executing broker to make a full report, identifying the underlying client, can then effectively step back from the order chain for transaction reporting purposes. This will be welcome news for some smaller brokers, who introduce their clients to the Direct Market Access facilities of the larger players, though less welcomed by the executing brokers themselves, who would prefer only to report the transaction as being undertaken with the intermediary. Portfolio Manager exemption The refinement of the guidance on the Portfolio Manager exemption (contained in paragraph G of SUP 17), will be seen as particularly helpful to those wealth management firms who operate discretionary accounts for their private clients. In the past the guidance could be read in two ways, either as applying only to larger asset and fund managers, or as extending also to private client brokers.in TRUP 3, portfolio managers (though still an undefined term) are recognised as dealing with individual clients as well as funds.it is also made clear that in relying on this exemption portfolio managers should not expect their counterparties to make a separate and additional report from the portfolio manager s perspective. The reliance is merely upon the broker or other counterparty fulfilling its own obligations, including reporting of the portfolio manager as the broker s counterparty in the transaction. There is now a clearer distinction between firms who have this exemption available to them and those non-exempt firms who may have outsourced their transaction reporting (where a much higher level of due diligence is expected to ensure that full and accurate reports are being submitted). Field Content Guidelines (p14) The heart of the TRUP, and the bible of transaction reporting system developers, is the guidance relating to how individual fields should be populated. Here, more than anywhere, very precise language and explanation is called for if regulated firms are to achieve consistent and compliant reporting.fortunately, earlier versions of TRUP did a very good job of describing the field content requirements, so that TRUP 3 s task has been mainly one of teasing out edge conditions and grey areas. A selection of the more interesting clarifications is given below: Trading time.it is now recognised that the time at which a trade was booked, while not being as useful as the actual trade time, may be more useful than the regular default value of 00:01:00.Booking time has therefore been acknowledged as an acceptable next best entry where trade time cannot be supplied. Underlying Instrument Type. This was never a required field where the main instrument identifier was already populated, but this has now been clearly stated for the sake of clarity and consistency.spread betting and CFD providers will be delighted to find that the requirement for reporting OTC contracts based on bond futures has been considerably simplified.where they previously had to determine the ISIN of the cheapest to deliver bond into the relevant future (which very few firms were in a position to ascertain), they can now use the ISIN of any bond from the relevant issuer, for example any long-dated gilt will serve as the underlying for a spread bet on the long gilt future. Instrument Type. This field is now only required for OTC instruments, so really should be called Underlying Instrument Type, as it indicates the ultimate underlying instrument for the OTC contract being traded.in most cases the only valid values for this field will be blank, A (for Equity) or B (for Bond), with the very occasional exception of I (Index) where the index or basket is made up of instruments from the same issuer.the new text states that instrument types of X, F and O, which were originally available, must not now be used (and this should by now have been incorporated into the Zen validation). Maturity Date. Although spread bets are still among the list of products for which a maturity date is required, a footnote in this section and further detail elsewhere make it clear (in line with European guidance) that this need not be included in the case of rolling daily spread bets (which make up the majority of reportable spread bet volumes). Price Multiplier. The description of this field again contains additional advice for those involved in the spread betting industry.it should be noted that the later section dedicated to derivatives includes the helpful advice that for both spread bets and CFD s based on options on equities, the price multiplier should be based on the characteristics of the spread bet or CFD rather than on the immediate underlying option.therefore the TMU would normally expect to see a price multiplier value of 100 for spread bets on options on equities (derivative type Q) and of 1 for CFDs on options on equities (derivative type Y). Price and Quantity. For spread betting providers, the requirement to adjust the quantity field in cases where the stake was in a different currency than the underlying asset has been dropped.in all cases the currency of the stake rather than the asset is used, simplifying what could be a tricky requirement to accommodate. 4

5 Client/Counterparty Two Field. A simple rule of thumb has been added, in line with the validation applied by the Zen system which accepts transaction reports, to state that while this field must be blank for transactions conducted with a capacity of Principal, it must be populated for all other capacities. BIC codes. It is now acceptable to supply any BIC code available for the counterparty, simplifying the process of identifying a suitable BIC when dealing with larger, more complex organisations.when a transaction is dealt on exchange, the BIC of the exchange s Central Clearing Counterparty (CCP) must be used. Use of the INTERNAL account.while excellent examples have been provided of the use of the INTERNAL mechanism in accommodating average priced transactions and bulk purchases for multiple clients, a preference has been expressed that this should not be used for the single purchase of an instrument for a single underlying client.this represents a softening of the original mandatory application of the guidance, which was due to come into force from 31 March Venue ID. Off-order-book transactions which are subsequently brought on-exchange should show the agreed exchange s Market Identifier Code (MIC) in the venue field.these will never be confused with normal onexchange transactions, since the counterparty reported will be the dealing counterparty rather than the exchange s CCP. Where it is not clear whether a counterparty is acting as a Systematic Internaliser, the venue id may be populated with XOFF rather than the counterparty s BIC. Cancellation Flag. The four fields which uniquely identify a transaction to the FSA are named for the first time as the reporting firm id, trade date, time and transaction reference number.the reason for listing these fields is to explain why a change to any one of them cannot be accommodated by an Update submission, but requires a Cancellation followed by a New trade with the amended values. Guidelines for Reporting Derivatives (p27) A whole separate section has been added to provide consolidated guidance on the reporting of derivatives transactions, which reporting firms will undoubtedly find to be a significant improvement.however, little of what is contained is completely new.what the section accomplishes is to pull together all of the guidance which has been issued in previous publications, including the most recent Market Watch newsletters, and present it in a coherent manner. Special Trading Scenarios (p35) As in TRUP 2, a separate section gives guidance on the treatment of those trading scenarios which are most likely to give rise to confusion.while the areas covered remain largely unchanged, the subsections on receipt and transmission of orders and on the portfolio manager exemption have been extensively re-written, to expand on the basic guidance given in the earlier Obligation to Report section.i have already discussed the thrust of these clarifications, which will probably generate more debate than any other topics covered, as executing brokers get to grips with reporting the underlying client and portfolio managers navigate their way through the varied and numerous exceptions to their exemption. Summary TRUP 3 as a whole can be seen as a product of evolution rather than revolution. All of the tweaking of guidance achieved by successive Market Watch newsletters, as well as much of the specific guidance provided to individual firms, has now been incorporated into this central document and made readily available to all. It provides clearer guidance for developers trying to construct systems, compliance officers attempting to monitor their firms adherence to the rules and to the operations staff charged with monitoring and correcting rejected transactions. What s not to like? 5

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