Tier 1 FX dealer stung for reporting failures – when will they learn (from OTC brokers!)

Regulators should come to FX and CFD brokerages, prime of primes and FX industry technology providers to get banks to learn from them. Gone are the days when FX firms should be subservient to Tier 1 banks. The boot is on the other foot these days.

It would be clearly far too obvious to consider that large Tier 1 banks which have for many years utilized the services of vast onsite infrastructure and technological support and R&D teams would know how to comply with reporting regulations.

If logical thinking were to be applied, the largest institutions would be the most able and would lead the way with internal reporting systems that keep the regulatory wolf from the door.

Recent years have shown otherwise, and in a distinct contrast to how one would expect, it is the large Tier 1 FX dealers that are often receiving the stern punishments from the authorities, and not the far newer, less well capitalized and much more constrained OTC derivatives sector.

Indeed, banks are the top level of liquidity provision, market making and dealing. They have the ability to create the currency market, handle its entire order flow at top level and can perform quite legitimate trading methods, such as last look execution or b-booking at top level, that would land any entity lower than Tier 1 level in front of the regulator for unfair execution.

With all the advantages banks have, they are the ones with often large fines and censuring actions from the authorities.

Since the unprecedented court action by Swiss, American and British authorities seven years ago for collaborations between different dealing desks in banks to manipulate benchmark rates, there has been endless government action.

This week is no exception, and this time it is Morgan Stanley at the end of the extended finger of the men in suits, for data reporting failures.

So what? They are always in the news for something, surely?

Yes, however this particular issue is pertinent to the FX and CFD industry for two main reasons. The first reason is rather anodyne, in that we should not be tolerating this behavior from our Tier 1 liquidity providers, especially given the disdain with which they treat FX brokerages and prime of prime brokerages when it comes to counterparty credit agreement criteria and constant disallowing of order flow they consider ‘toxic’ – meaning they want to cherry pick.

The second is more important. This particular regulatory censuring was pointed out by highly experienced senior FX and CFD industry executive Ron Finberg of regulatory reporting technology company Cappitech.

This morning, Mr Finberg stated “The CFTC announced that it had issued a $5 million fine to Morgan Stanley yesterday for the companies failures in its Swap Data Reporting (SDR). According to the CFTC, since SDR went into effect in December 2012, the investment bank inaccurately reported information for at least 3 million swaps.”

“The regulator specified that 29 different violations were found across various sections of SDR Part 43 and 45 which encompass the both real time trade and transaction reporting sections of the regulation. Errors singled out by the CFTC include failing to accurately report data in the LEI, USI, notional amount and venue fields. In addition, the regulator noted that almost half of Morgan Stanley submissions in a specific asset class and required to be reported under real time trade reporting of Part 43 were submitted late” explained Mr Finberg.

“In addition to the fine, the CFTC required Morgan Stanley to retain outside assistance to help with the correction process and determining root causes of the errors” he stated.

In the past, FinanceFeeds has spoken at length with Mr Finberg about the subject of legacy systems being the Achilles Heel of many banks.

This is no exception. In the podcast in which this was discussed, it was deduced that banks build new on top of old, and do not have the ability or risk appetite for developing new systems quickly that are able to resolve ever changing technological aspects of regulation.

Banks are often hampered by large corporate structures which do not allow the existing IT teams to switch quickly to new systems

The OTC sector is quite the opposite. We are the most innovative and fast moving sector in the financial services industry. FX and CFD firms can literally adapt overnight to anything and the seasoned geniuses in the entire support industry that surrounds brokerages is relatively new and is cutting edge. There is an API connection for everything, nothing is hardware dependent anymore and adaptation to circumstance is rapid, as we saw during the implementation of MiFID II which required all firms to entirely change their method of operation, infrastructure, reporting and execution methodology. This was all done and complied with by even the smallest white label.

Thus, Morgan Stanley and its peers can learn from us, rather than us having to be subservient to the Tier 1 dealers.

Perhaps one example of how the OTC sector is now voting with its feet and looking for more urbane and relevant solutions at the top level is the dominance by XTX Markets of the Tier 1 FX order flow market share globally for the past year.

XTX Markets is a non-bank market maker, and the first one to make it to the top of the market share tree in this industry. Flexibility and ergonomics is key – something XTX Markets would be able to understand, and that the procedural and bureaucratic old school banks cannot grasp.

Mr Finberg continued today “It’s worth noting that the CFTC’s SDR data quality focus is similar to reviews being taken by other global regulators for similar derivative reporting obligation. In the EU, in preparation for Brexit, ESMA along with local NCAs underwent a large EMIR data quality review in 2018 and 2019. This led to directives for improved data sharing between Trade Repositories (TR). In addition, many firms have been contacted by their respective TR or local NCAs about report errors such as UTI breaks, explaining the status longstanding open positions and late reporting.”

His perspective is that Cappitech, one of a few specialist firms in this industry for regulatory reporting, that major regulator APAC has explained to Cappitech that their local regulators have communicated to them about audits on their reconciliation and control functions for derivative reporting and increasing frequency of valuation update submissions from weekly or monthly to daily. In addition, with the exit of the CME Group TR in Europe and Australia, regulators are reviewing the migration of data between TRs.

If the regulators were so quick to crack down on the OTC sector during the end of the last decade, surely it is time they came to the OTC FX and CFD industry in this decade to work with our technology providers, brokers and prime of primes to set the standards, as clearly ours are somewhat higher than those of the plodding, dated Tier 1 banks

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