Large financial institutions are seeking strategies to retool regulatory reporting systems to enhance resilience and interoperability and reduce costs, amid concerns legacy systems will not stand the test of time.
London-based think-tank JWG, which interviewed senior managers at 12 financial services firms for its recent report, Regulatory Reporting: Time for a Rethink?, also found firms to be more open to collaborating on utilities to mutualise certain aspects of the regulatory reporting process.
“We found that trade and transaction reporting to regulators is a thorn in senior management’s side that is getting bigger and bigger as both costs and execution risk continue to grow. It’s something that has become a driver for thinking about how RegTech can enable new target operating models for both the firms and the regulators. The conundrum is how to you get your people, processes and technology better tuned to handle not only the legacy reporting we’re doing today, but also adapt to the new reporting being put in place now,” said PJ Di Giammarino, JWG’s chief executive, during a webinar discussing the report’s findings.
If firms do not seek to disrupt the regulatory reporting status quo, their costs will only go up, Di Giammarino said.
“We are stuck thinking in the old ways. Looking at MiFID reporting and the concept of reporting to a local regulator via an ARM, it’s been around since the 1990’s. It’s not a new concept. Technology has moved on massively in the last 20-30 years, but we are stuck with a clunky, batch-driven, highly centralised reporting procedure which is baked into level one of the regulation.
It would be nice if, as we evolve the regulation further and further still, the advances in technology could be absorbed or that the regulators become less prescriptive about the technicalities of the delivery methods.” said webinar panelist Chad Giussani, head of operations and transaction reporting for financial markets compliance at Standard Chartered in London.
Desire for harmonisation
When it comes to “inflight” reporting requirements, some trade or transaction data must be reported as many as three or four times through different channels, such as an approved reporting mechanism or a trade repository, increasing the risk of non-compliance, according to JWG. Firms are increasingly seeking to harmonise their regulatory reporting activities globally to save money and increase accuracy.
“For all the regulations firms need to comply with there is no standard design across regimes. That creates the usual problems of data silos and fragmentation. There’s minimal transparency in core data lineage. With the more complex regulations like SFTR and MiFID that leads to more complex technology requirements. The cost of meeting obligations and implementing regulatory change has increased, and while there’s a report that says spending will increase to £76 billion in 2019 it’s mainly that budgets are decreasing. People don’t want to spend any more on regulation. They’re looking at in-house solutions and multiple vendor solutions and trying to consolidate those into a single approach so they have a centralised area for reporting — all the eligibility rules, the determination, the validation — instead of having it spread throughout the firm,” said Phil Flood, a solutions architect at Birmingham-based Inforalgo, during the same webinar.
Harmonisation, done right, would allow firms to adapt to new requirements more easily. Inflight reporting requirements change constantly. New European Market Infrastructure Regulation (EMIR) requirements for foreign exchange swaps and forwards require one derivative product to be reported as two transactions, for example.
Firms continually develop new strategies and new products to trade with their client base. Firms need to manage reporting day-to-day and keep it accurate when they have a moving internal stack of systems, reporting specialists have said. The change in those existing regulations is wide-ranging. The U.S. Commodity Futures Trading Commission (CFTC) is doing a rewrite of Dodd-Frank.
In Europe, EMIR is subject to a refit on top of the changes introduced by Q&A last year. There is also a European Commission regulatory fitness check which could result in a rewrite of up to 50 reporting rules. The Markets in Financial Instruments Directive II (MiFID II/MiFIR), which has just had its one-year anniversary, is going to change as well, another webinar participant said.
In addition, there are new reporting regimes coming online between now and 2020. The Securities Financing Transactions Regulation (SFTR) and the Central Securities Depositories Regulation (CSDR), as well as new Swiss, South African and South Korean reporting requirements, are all coming soon, to name but a few.
“There is so much to do. Data quality is constantly evolving and moving. I expect something like the level one and level two validations that came after EMIR go live for MiFID II. It would improve the quality and harmonisation of reports around Europe. There’s a cross-border harmonisation that the MiFIR part brings, but there may well remain some local ambiguity around the interpretation of some of the fields,” Giussani said.
Regulators’ ideas of what good reporting looks like is also evolving constantly, he said. What might be acceptable today, might be unacceptable tomorrow.
Forward-thinking firms are trying to harmonise regulatory reporting internally, in part to economise but also to improve data quality. Some firms are seeking to create data reservoirs to draw upon when populating the many and varied reports regulators require. That is seen as preferable to siloing data by asset class or geography, which leads of duplication of efforts and concerns about quality control.
Firms should be seeking to create synergies, but not dependencies, however, because regulations are not the same and can change quickly. Too much dependency would then force firms to unpick systems when changes come. One thing firms would like to develop is centralised data hubs. JWG describes a centralised data hub as “an object store that could scale beyond the limitations of existing systems, ingest data from different sources, cleanse that data, provide secure multi-tenancy, and be able to provide an audit trail across private and public clouds”.
Regulatory reporting harmonisation is slowly coming through at the supranational level, with the Financial Stability Board (FSB) and the Committee on Payments and Market Infrastructures (CPMI) and the International Organisation of Securities Commissions (IOSCO) working on several initiatives to create standards for unique product identifiers (UPI) and unique transaction identifiers (UTI). An FSB committee is also exploring something called the critical data element dictionary (CDED) — an international data dictionary to be used to describe products.
Industry more open to utilities
Firms are starting to think more positively and seriously about the potential for utilities linked to regulatory reporting, JWG has found. Last year, the Association for Financial Markets in Europe (AFME) published a white paper on the opportunities its members saw in utilities. Some firms have taken that thinking further and would like an approach whereby a network of utilities that specialised in specific elements of regulatory reporting, such as eligibility or data, might supply firms with the “parts” needed to complete the regulatory reporting process.