ASIC has recently been in contact with a number of trade reporting service providers after evidently having done a large-scale analysis of their trade reporting data which has been reported.
There have mainly been 6 issues or themes that TRAction has seen raised by ASIC across the industry including many reporting entities using various trade reporting service providers and also members of industry bodies. These issues concern compression position reporting, realised profit & loss in the unwinding of trades, unusual times reported for event timestamps, unique client IDs, incorrect valuation of CFDs and inconsistent UPI usage. Some items listed are specific to CFD providers, however they have implications for all firms and therefore should not be overlooked by other firms trading in derivatives.
ASIC found that overall, the industry implementation of the ASIC Rules 2024 has been ‘good’ but stated that they ‘wonder why the weaknesses are not identified and addressed by entities’ own compliance arrangements.’ Some interesting statistics that came out of ASIC’s findings include the below:
- Non-compliance of re-reported reporting entity – Counterparty 1 combinations were mainly from the buy-side (at 23.9% of the market); and
- The retail OTC derivatives sector were predominantly high offenders of (i) having abnormally large notionals across all asset classes (equating to 9.7% of reporting entities); (ii) non-compliance of non-LEI counterparty 2 information; (iii) incorrect UPI usage or error; (iv) non-compliance with direction of the buyer/seller vs make/take; and (v) having issues with post-trade collateral related information.
Below we list the issues that ASIC has raised and TRAction’s approach to rectifying them.
| Issue | TRAction’s Approach to Rectification |
|---|---|
| 1. Compressed position reporting ASIC has observed that some CFD brokers generally report transactions over a given underlier and have noted the following patterns of reporting: • The COMP event type refers to a ‘compression or post-trade risk reduction exercise’. It is an event that occurs on at least two open trades. If multiple trades over fungible underliers are consolidated into a single position, reporting entities in the Retail OTC CFD market commonly use the event type: ‘INCP’ (i.e. the inclusion of a trade into a position, where an existing trade is terminated and there is either a new position created or the modification of the notional amount or total notional quantity of an existing trade.) • Compression is inconsistent with flawed reporting as identified by reporting entities when a single open position is terminated before the trade closes. • It is incorrect for a position message to be reported at the same time as an opening trade – this leads to the same trade being reported twice. | TRAction will discontinue the use of the compression event type and each transaction will be terminated individually. At such point, the termination time will reflect the actual close time of the trade, instead of defaulting to the time at the end of day when the trades are rolled into a position. Further, a unique UTI will be assigned to each trade – suffixes will no longer need to be applied given that compression will not be part of the reporting workflow. |
| 2. Realised profit and loss (P&L) in UWIN (Unwind) – Payments made upon derivatives being terminated When the termination or modification of a Reportable Transaction consists of a payment that is not a payment of an option premium, notional amount or standard fees, taxes or commissions, the reporting of other payment information of type UWIN is required (ASIC Rules: Items 74-79 of Table S1.1(1) and ASIC Technical Guidance: Paragraphs 453-455). UWIN means ‘unwind’ or ‘full termination’ (being the final settlement payment made when a transaction is unwound before its end date or where payments may arise from a full termination of derivative transaction(s)). This leads to reporting entities having to list the P&L realised due to the closing trade. | Since compression will be redundant (as mentioned in Issue 1), the unrealised P&L of each individual trade when closed will be reported in the “OtherPayment” (UWIN (Unwind)) field. |
| 3. Unusual times reported for Event Timestamp 22:00:00.000 has been observed as being the most common time of the date-time value reported for (i) Event Timestamp and (ii) Reportable Transactions of Action Type and Event Type TERM-ETRM. | TRAction will implement new lifecycle logic in which trades will no longer be rolled into a COMP (Compression) position at 22:00:00.000. The outcome will be that the trades will reflect their actual individual close time. |
| 4. Unique client IDs / Duplicate Counterparty 2 Identifiers Some reporting entities have reported multiple Counterparty 2 identifiers for the same legal entity e.g. their clients have been allowed to trade with multiple accounts (logins). In essence, they are allowing for a duplicate of the identifier of their counterparties i.e. for the same Counterparty2name, there are multiple Counterparty 2 identifiers available. The ASIC Rules require Counterparty 2 identifiers to be unique such that each legal entity that is subject to a reporting entity’s reports is represented by only one identifier. | TRAction will provide its clients with a template which will link the back-office account (at the individual/entity level) with all of the individual/entity’s trading accounts. This template will likely be populated by firms exporting from their back-office system. This should also fix the issue where there are non-named data being reported in the name field like ‘ACC#2(USD)’ as this information wouldn’t be present in the back-office account level record for the person. |
| 5. Valuation of CFD should be unrealised profit not underlying notational Valuation Information reported by some CFD brokers for OTC Derivatives includes Valuation Amounts that are significantly higher than expected. ASIC suspects that certain brokers may be reporting the current Notional Value of the quote leg as the Valuation Amount as opposed to the price paid to terminate (refer to Item 6 of Table S1.1(2) of the ASIC Rules). ASIC expects this to be the value of the position to the licensee which should be the amount that the client would pay to its broker if the position were terminated at the time the Valuation was performed. | The Valuation Amount is to be the unadjusted value of the trade, calculated as the amount that would be paid to terminate the trade in an orderly market on the valuation date. ASIC has found that Notional Values of CFD trades are currently reported by some brokers, as the Valuation Amount, causing discrepancies. These discrepancies are occurring because the notional value represents the total value of the underlying asset and not the current market value or termination value of the CFD. Such data values would normally come from the unrealised profit on a trade that has been transacted over platforms like MT4 or MT5. TRAction suggests that CFD brokers, in particular, review the definition of Valuation Amount and ensure valuations are being calculated correctly. |
| 6. Different UPI, same underlier Example 1 UPIs of varying product types, over the same underlying asset classes are being reported. However, the most appropriate UPI for the reportable transaction is to be reported, being the UPI with attributes that most closely correspond to the OTC derivative which is the subject of the report. If such UPIs are not available for the given underlier, but a more appropriate one can be created, reporting entities are expected to create one. ASIC has thus requested reporting entities to: (i) account for the varying UPIs within asset classes; (ii) undertake a review of all UPIs reported across all asset classes; and (iii) correct any erroneous UPIs identified, and subsequently, advise ASIC of this along with the corresponding replacement. Example 2 There have been observations of a Mismatch of UPI Asset Class/Instrument Type to ASIC Asset Class/Contract Type. For example, reported ASIC ‘Asset Class’ field is CURR, but reported UPI Asset Class is ‘Commodities’. Example 3 There have been several inappropriate choices of UPIs being used. The ASIC Rules require the most appropriate UPI is to be given depending on the kind of OTC derivative to be reported. For FX transactions, for example, some reporting entities have been using several UPIs of product type ‘Non_Standard’, where UPIs are available or may be created for the product type ‘Contract_For_Difference’. | OTC Derivatives can have two UPIs but one ISIN. This can occur where the OTC derivative has different settlement methods – one settled in cash and one physically settled. TRAction provides its clients a symbols table listing all their OTC derivatives and their associated pre-populated UPI. Our clients can review on a weekly basis their symbols tables to identify any anomalies. TRAction can also assist in identifying the trades associated with erroneous UPIs and backload corrections where necessary. |
