Last week the FCA published a final notice against Deutsche Bank fining them just over £4.7 million (after a settlement discount). The fine was for misreporting Equity CFD trades under MiFID for several years. The full notice can be seen here.
The misreporting was inadvertent and the matter was rectified as soon as the mistake was uncovered. Never the less the fine was large. The question is, should that cause panic in the energy trading industry, where EMIR reporting has been going for just over six months? The fine was issued for getting the “buy/sell” flag the wrong way round, which is one data reporting field. In commodities, where there are so many complex fields, none of which are clear, it would seem to be easy to get something wrong and possibly incur a fine. And the notice explicitly states that Deutsche were NOT “deliberate or reckless”.
Does “Don’t Panic” still hold?
A few weeks ago I wrote this article entitled “Don’t panic”. The article argued for a pragmatic approach, where the focus should be compliance rather than fine avoidance. While this may amount to the same thing, it encompasses a different attitude. One way is a pragmatic route to compliance, taking into consideration that the rules are new, nothing is clear and that the regulators actually want you to comply, rather than fining you. Clearly the rules are there for a reason, and ignoring them will and should lead to fines. And a willfully negligent attitude is also wrong. But begin panicked into expensive and unnecessary measures just “to be sure” is likely to lead to overspend.
So, does this view still hold? It is worth looking at the judgement in more detail to understand what has happened:
Why was the fine so large?
The first thing one notices is that the fine is under MiFID. These rules have been going for several years and so the formats are by now well established and bedded down. The FCA and their predecessor have issued quite a bit of guidance on this, and the fact that they have is given as one of the reasons as to the size of the fine.
The next thing to notice is the order of magnitude. Nearly 30 million trade reports were incorrect. In the energy trading industry, that would be a lot. And so the size of the fine will reflect that too.
Also, the FCA had not only issued fines for similar offences under MiFID to others, but had also issued private notices to Deutsche on this very topic.
EMIR for Energy Traders
It is worth comparing this to the situation that those in the commodities and energy trading industry find themselves in and how it contrasts:
Firstly, EMIR is relatively new to everyone, with reporting only having started six months ago. So while we would expect reporting to be running by now, it is not as established as MiFID is.
Secondly, there is still a lack of clarity over how many of the fields should be reported, particularly in commodities. Hopefully more guidance will be available soon, but many fields are not as clear cut as the MiFID ones are (even the buy/sell flag for some trade types).
And also the order of magnitude is usually a lot less.
So while it would not be surprising if, at some point, regulators start to impose a few fines, it would be surprising if such a large fine were levied on an energy trading firm in the near future. That does not of course mean it won’t happen.
Can we relax then?
So is the message that we can relax and just leave things as they are, no matter what state they are in?
No, it isn’t. The message is that when new rules come in, there are teething troubles, and when they are unclear and confusing, things need to be cleared up. But simply looking for excuses is not enough. A pragmatic approach works both ways. On the one hand, panic is bad. On the other, continuous improvement is still necessary.
If we look at the commodity and energy trading industry there is still a struggle to report, and EMIR trade matching rates are still very low. While there are good reasons for this, it is expected that individual companies and the industry as a whole work to ensure compliance.
The message: Continuous incremental improvement
The overall message is that until reporting works to a high level of quality, one should not rest. A pragmatic way to do this is by incremental improvement. As long as one ensures that the quality of reporting is constantly improving, one can know that all reasonable avenues are being taken to comply. That is an excellent way to ensure compliance without panic or over spend.