Transaction Monitoring Systems

Response by the Building Societies Association to the Financial Services Authority DP25: development of transaction monitoring systems

Our comments are limited to the reference in Chapter 5 of Discussion Paper 25 to the possibility of extending the current transaction reporting requirements to firms such as building societies.

SUP17 in the FSA Handbook requires certain firms authorised under the Financial Services and Markets Act 2000 to report details of their trades in equity and debt securities, and related index and derivative transactions, daily to the FSA.

Paragraph 5.3 of DP25 notes that building societies are among the categories of firm not currently covered by the transaction reporting rules in SUP17, and so the FSA does not see their transactions. The FSA considers that this creates a loophole in its monitoring efforts and that it should see transactions conducted by all UK authorised firms. The FSA is therefore considering extending the scope of its reporting requirements to all authorised firms who undertake reportable transactions (subject to certain possible exceptions).

The Association appreciates that the FSA might wish to see details of relevant transactions of all authorised firms, and notes that formal proposals (accompanied by appropriate cost benefit analysis) will be included in a future consultation paper.

At this stage we would make the following observations -

  1. No explanation is given for the indication in paragraph 5.3 that the FSA considers that building societies should be required to report transactions but that insurance companies and friendly societies might not be required to do so. If such a distinction is to be included in the consultation paper we would be interested to see the justification.
  2. We would imagine that many of the trades in debt securities and derivatives undertaken by building societies are with a counterparty that is another FSA authorised firm and, in many cases, one that is already required to report transactions to the FSA. If that expectation is correct, then would not the FSA already be receiving details of those transactions (albeit not from the building society)?
  3. Although building societies are no longer prohibited from trading in securities, the Association understands that no society has so far moved to the "trading" approach to financial risk management (under Chapter 4 of IPRU(BSOC)). Accordingly, all transactions by building societies in debt securities will be for "own account" (or perhaps on behalf of another group entity).
  4. Building societies are restricted (by section 9A of the Building Societies Act 1986) from entering into any type of derivative contract unless entered into as a transaction hedging risks arising to the society (or a subsidiary) from changes in interest rates, in exchange rates, in any index of retail prices, residential property prices or securities prices, or in the creditworthiness of any borrower (or for certain transactions effected for customers in relation to loans from, or shares or deposits in, the society).

In the light of the above it is not clear that there would be many (if any) opportunities for a building society to manipulate a market by its trades, or otherwise undertake any form of market abuse. Accordingly, we would ask the FSA to reconsider extending the scope of transaction reporting to building societies.

However, if the FSA should decide to continue with such a proposal we would ask that the timing of its introduction be considered carefully in the light of the numerous other changes to regulatory and reporting requirements affecting building societies that are due to take place from now until 2007. These include mortgage and general insurance regulation, new requirements for capital adequacy and liquidity, new reporting requirements (covered in CP197 and CP198), and further changes to reporting that will affect only building societies at some point between 2005 and 2007 (in relation to a new requirement to report detailed information direct to the Bank of England (for monetary statistics purposes) that is currently reported, in a different form, to the FSA). Building societies have limited staff and resources able to deal with such developments.