New research by independent financial regulatory think-tank JWG, in partnership with Inforalgo, confirms that financial institutions are struggling to cope with their international trade reporting obligations, as regulatory requirements grow and diverge. Costs are escalating, and the risks of non-compliance too - and firms simply don’t have the budgets to keep investing in project after project.
Between the substantial demands of Mifid II; Emir, which is currently being re-written; Dodd-Frank; FINRA TRACE which is increasing the scope of reportable instruments; CAT and SFTR, which are due to go live in 2019; and MAS, due to be upgraded in 2020, there is no let-up for trading firms keen to capitalise on global trading opportunities.
JWG’s in-depth research, with senior executives from 12 global financial institutions in October 2018, highlighted firms’ growing frustration as the burden - and cost - grows. “(The) business is fed up with investing in regulation! Instead, we need to slash costs,” said one project manager from a major German bank currently grappling with Mifid and MAS (Singapore authority) reporting.
It, like other major financial institutions, is now rethinking its approach to transaction data management, and wants to find a new, more sustainable approach to regulatory compliance.
It isn’t only the risk of non-compliance and potential fines and reputational damage that’s prompting a rethink. Firms are also increasingly aware of how much information repetition and duplicated effort goes into collating, preparing and transmitting trade data for each authority.
Time pressures are a big contributor too. If firms have to wait until the end of the day to reconcile all of their transaction data and file reports, this can cause bottlenecks – especially if exception/query resolution needs input from another time zone. How transformational it would be if trading teams could reconcile and validate transaction details as they went along, in real time.
Automation: the smart approach
Whatever the primary driver for change (and it’s usually cost), relying on manual processes and spreadsheets to track and report on transaction activity is impractical, burdensome, inefficient and fraught with risk. It prevents a clear line of sight across trade activity, and hinders potential useful insights – for example, into the relative cost of transactions, or where common errors are concentrated.
In the JWG research, a senior technology leader at a North American bank admitted that, because his organisation still had a lot of manual reference data maintained in spreadsheets, and had many, varied data sources - six in Singapore for trading source data; three for reference data; and 20 connection points in Ireland – it’s reporting activities were highly complicated and protracted.
And because different regulators demand different data, it isn’t a simple case of being able to prepare fields once to meet multiple needs. To avoid having to start from scratch for each different purpose, firms are now looking to rules-driven workflow to automate reporting according to each authority’s respective eligibility rules – ie the specific detail they expect to see included.
As an IT manager at a European investment bank put it, if he had spare budget to spend on regulatory reporting, he would spend it all on central eligibility rules. “Enrichment and transformation of data is easy, once the rules are defined, known, agreed and accessible,” he said, during his research interview.
These parameters can be met with intelligent workflow automation, something that piqued the interested of JWG’s interviewees – in particular the prospect of being able to complete each set of reporting fields automatically, with the precise information required under each set of regulations.
Having a rules engine capable of assessing data’s fit, accuracy and completeness, without writing or embedding code each time requirements are revised or added to, was high on financial institutions’ wish lists – as was being able to re-use rules for other regulations, where there is overlap.
From routine data to strategic insight
In parallel to evolving regulatory drivers, the research also found that firms are beginning to take a more holistic look at automation of transaction data management. The need to control costs more broadly, and maximise revenues, is turning attention to the concept of a ‘centralised data hub’ – one that can support multiple trading-related process requirements, and increase visibility of transaction data and activity with scope to reduce the cost of trading and improve yields.
Encouragingly, most firms are beginning to allocate some resources to this kind of strategy, in recognition that a more comprehensive data automation approach could give them a financial and competitive advantage.
The full JWG research analysis: Regulatory reporting: time for a rethink? Capital markets best practice for 2019, can be downloaded from Inforalgo’s website.