By Leo Labeis, CEO, REGnosys
Over the last decade, regulatory compliance has been a dominant theme for financial institutions. Regulatory reporting has proved increasingly difficult due to the number of conflicting and ambiguous rules, resulting in fragmented approaches globally.
An industry-wide move towards greater collaboration is changing this, with the upcoming CFTC Rewrite and EMIR Refit offering firms the chance to adopt a more strategic approach to data management.
ISDA’s Digital Regulatory Reporting (DRR) – a global industry-led programme to mutualise the cost of complying with reporting requirements – is a key driving force behind these new collaborative efforts.
For firms to fully benefit from the DRR, they must first understand the trends that are shaping its implementation.
The move to standardisation
Perhaps the best illustration of the standardisation drive is the CPMI-IOSCO working group’s guidance on data harmonisation for reporting OTC derivatives. As a result of the G20 summit’s call for transparency on OTC derivatives transactions in 2009, financial institutions have faced overlapping requirements across jurisdictions, increasing cost, complexity and operational risk.
In response, the working group set about creating common data standards. This culminated in its publication of the Critical Data Elements (CDE) in 2018 and the push towards standardised identifiers such as LEI, UTI and UPI. Subsequently, regulators around the world drew up plans to integrate these into their regimes.
Not every regulator is adopting the standards in exactly the same way but the direction is clear – a move towards greater harmonisation. DRR facilitates this by focusing on building a complete set of CDE rules for use across regimes.
The transition to “integrated” reporting
Multiplying data requirements also creates a risk that regulators might collect the same data several times and get conflicting results. Worse still, that the data they collect might not be the data they need. This has prompted a move towards more integrated reporting, underpinned by standardisation.
Crucially, more data doesn’t mean better data. As regulators collect ever higher volumes of information, they need a holistic view of it and the capacity to tie every data attribute to specific policy objectives. Reducing data overlaps and making it easier and more cost effective for regulated firms to comply also ensures that firms’ reporting investments are better targeted at serving the public interest.
Again, DRR is an enabler. By rigorously defining data once at the source and at the most granular level, it can process data consistently as many times and in as many formats as necessary.
Prioritising data quality
Regulatory non-compliance has resulted in heavy fines across capital markets. However, future penalties are likely to apply not only to egregious non-compliance but also to lesser data quality failures. Gone are the days of “fire and forget”. As regulators are stepping up their efforts, they are looking to regulated firms to fulfil their role.
Thankfully, by allowing firms to collaborate on the implementation of reporting requirements, DRR delivers strength in numbers through a “crowd-sourced”, peer-reviewed set of rules with embedded data quality checks.
Embedding reporting into data strategies
Reporting is a massive exercise in data management, so it is becoming an integral part of a firm’s data strategy. Conversations previously involving regulatory reporting operations and technology teams now include others responsible for data governance.
This move to redefine data strategies is also vital in addressing the industry’s sluggish return on equity. As well as reducing costs, banks are under more pressure to turn data into a strategic advantage and unlock additional revenue.
While data is not a new challenge, 2022 will see a marked shift in gear. Banks are embracing a strategic investment into data management – and DRR embodies that approach. By leveraging ISDA’s Common Domain Model, it anchors derivatives reporting into a broader push to radically streamline the entire trade lifecycle management.
Wider deployment of maturing technologies
Technology has always been an essential engine of transformation of the financial industry. Three trends that promise to radically change the industry are also making a mark on its regulatory landscape: open source, cloud and blockchain.
Open source, once viewed with caution in financial services, is becoming a central component of firms’ technology strategies. DRR embraces this trend, allowing firms to collaborate to build a standardised, open-source expression of the reporting rules.
Like open source, cloud is not exactly emerging but banks are now active in its adoption. The market has consolidated around a few large providers, establishing standards for security and resilience. This makes it possible for banks to deploy cloud-based services for regulatory reporting with greater confidence.
Blockchain, distributed ledger technology and smart contracts are also gaining traction in regulatory reporting and authorities are taking note. The real opportunity here is for embedded compliance. If all contracts become self-executing “smart contracts” on a blockchain, firms and regulators can also encode compliance and reporting requirements into those contracts. Again, DRR paves the way for that potentially not-too-distant, game-changing reality by delivering a machine-executable expression of the reporting rules – ready to be encoded on a blockchain.
Collaboration is key to moving the industry forward
Although many financial institutions have been struggling with the volume and complexity of reporting requirements, greater collaboration is facilitating firms’ response to the compliance challenges. DRR is instrumental to this evolution, helping to deliver an open source, standardised and machine-executable interpretation of rules.
These trends are likely to transform the industry gradually rather than in one ‘big bang’, but the move towards a more efficient operating model is clear. Crucially, collaboration is bringing regulatory reporting and innovation closer together, enabling firms to adopt more consistent and cost-effective processes in the long run.
