Increased regulatory reporting has been a major focus since the financial crisis, as authorities seek to enhance customer protection and get a better grip on systemic risks. That movement shows no sign of slowing, with a series of trade and transaction reporting initiatives coming down the pike through 2018 and beyond.
Inevitably these initiatives will have significant operational impacts on affected firms, especially around the sourcing, management, processing and reporting of data. But three developments, highlighted in a recent JWG RegTechFS article, caught our eye in particular:
Standardization and harmonization of key data elements such as the derivative type, underlying assets and counter-parties to a transaction are critical to global regulators’ ability to aggregate the data on OTC derivatives transactions reported to trade repositories, and thus get a clear picture of market activity and the potential build-up of systemic risk.
Guidance on the definition, format and usage of the data elements reported to the repositories, notably the Unique Transaction Identifier (UTI) and Unique Product Identifier (UPI), has already been published. The latest CPMI-IOSCO technical guidance Harmonisation of critical OTC derivatives data elements (other than UTI and UPI) sets out the definition, format and allowable values of other critical data elements that are important to aggregation. A consultative report on governance arrangements for critical OTC data elements was published on August 16.
While the CPMI-IOSCO have not prescribed rules on the data format and content market participants must follow (that is up to the relevant authorities), the technical guidance highlights the need for firms to get their data in order so they can continue to comply with their OTC regulatory reporting obligations with the minimum amount of pain.
In April, the Commodity Futures Trading Commission (CFTC) published a white paper recommending a range of improvements to its existing swaps reform implementation.
A major challenge highlighted by the paper is the need to complete the process of data standardization and cross-border harmonization for swaps trade reporting. The emphasis is on:
That requires further dialogue with industry participants à la the CFTC’s “Roadmap to Achieve High Quality Swaps Data,” initiated in July 2017.
It also means examining “opportunities to utilize emerging digital technologies, such as cloud computing, automated ‘big data analysis’ and, ultimately, distributed ledger technology, to make trade data reporting more accurate, reliable and automated.”
The FCA is exploring how technology can make its regulation more efficient by:
Many financial institutions currently struggle to understand what information the regulator needs and when. They must then manually implement and codify these interpretations into their in-house regulatory reporting systems, “creating the risk of different interpretations and inconsistent reporting.”
Earlier this year, the FCA issued a Call for Input asking for the industry’s views on a ‘proof of concept’ that was developed to turn a set of reporting rules into a machine-readable language.
Machines can subsequently use the language to automatically assess the information required and execute the rules, without the need for human interpretation. This would make it easier for firms to carry out their regulatory reporting obligations. The regulator is also seeking feedback on some of the broader issues surrounding the role technology can play in regulatory reporting.
During Q3, the FCA is expected to issue a feedback statement based on its Call for Input and various “Roundtable” events and other industry discussions that will set out its findings and recommendations on the role technological innovations can play, and any associated legal and regulatory issues.
Each of the above initiatives underscores the wider data and operations processing challenges investment management firms face in the current climate. Not only do these reporting challenges place a strain on hedge fund, asset and wealth managers’ middle- and back-office processes, but any failings can result in significant financial penalties and reputational damage.
Faced with these high and growing costs and risks, institutions can no longer afford an error-prone, manually-intensive and inefficient middle- and back-office set up.
Thankfully, nor do they have to.
As we’ve long argued, robust and sophisticated outsourcing options now exist to take on the operational strain and remove the pain … pains that are only becoming more pronounced in today’s highly regulated, increasingly competitive and margin-compressed world. And by shifting those operational burdens, buy-side institutions will be free to focus their resources on those activities where they can hone a true competitive advantage.
As Adam Smith observed in The Wealth of Nations, huge efficiencies can be achieved by a more effective division of labor. More than 200 years later, outsourcing is embodying that idea. The capabilities have been proven, and the opportunities are compelling.
Ultimately, those firms that recognize the benefits and take advantage of them will be better-placed to prosper in today’s marketplace.