Bank-led consortium takes aim at position reporting

Interpreting regulatory requirements is often challenging. Even for regulations that are similar in nature—say, rules for position reporting disclosures—more than 100 jurisdictions have different ways of presenting their requirements. And often, how they’re interpreted is left to the complying institution. 

This presents a risk to those institutions, says Pete Chisholm, head of regulatory management and entity solutions at Goldman Sachs. He says regulators’ function is to regulate the markets, not create high barriers to entry or expensive barriers for compliance. However, these things are often a by-product of how the rules are written, which doesn’t consider the use of technology in compliance.

“If the rules are written in a way that is open to interpretation, and not clearly codified, is there not a risk that these disclosures are being made using a different baseline? And that’s an unacceptable risk to the industry. The risk sits on not just the market participants who are trying very hard to be accurate; the risk then transfers to the investing public,” Chisholm says. 

For these areas of non-competition, can we sit around the table sensibly, talk about what our interpretations look like, and come together to agree to a logic?

Pete Chisholm, Goldman Sachs

It is this challenge that Endoxa—a consortium made up of five banks including Barclays, BNP Paribas, Goldman Sachs and HSBC—aims to solve by helping to improve the quality of disclosures and mitigate interpretation and implementation errors.

In September 2023, Endoxa announced it will develop a position reporting utility using Droit as the technology provider. 

“In general, regulatory compliance opens up areas for industry cooperation. We’re not trying to be more compliant than each other. For these areas of non-competition, can we sit around the table sensibly, talk about what our interpretations look like, and come together to agree to a logic?” Chisholm asks. 

Position reporting rules require market participants to report securities holdings to regulatory bodies. This process is often complex, time consuming, and represents a duplicative effort in the industry. 

“Headlines are written because somebody is buying up shares of a particular issuer in a particular country, and those headlines are written because of what they’ve read—the disclosures that are made. But does anybody dig into the interpretation that led to that disclosure? It’s not common, and we would like it to be,” Chisholm says. 

Endoxa will use Droit’s Adept platform and position reporting solution, which can automate the decision-making process and provide an audit trail of every position evaluated for both the buy and sell side. 

Brock Arnason, CEO and founder of Droit, says the process starts with Droit’s knowledge engineering team, which builds logic models that are then annotated according to each jurisdiction’s source text. These models are supplemented with legal interpretations and jurisdictional positioned memos from Aosphere, an affiliate of the law firm Allen & Overy, to create a baseline.

The baseline is reviewed by Endoxa’s team of industry practitioners and experts from its executive committee, who then look for edge cases that the model didn’t account for or identify areas that could still use more clarity. After feedback is taken, a new model is created and is put to a vote by group members to certify it as an official Endoxa model, unless they deem it necessary to go back to a regulator directly to ask more questions.

Arnason explains that the underlying logic is viewable as a tree. “It’s a logic diagram, and the actual implementation of it is just math. That math can be evaluated in almost any language—it almost doesn’t matter,” he says.

Firms have been talking a big game in artificial intelligence (AI), and lately that talk has turned to generative AI, which provides answers to queries only after being trained on huge data samples and then fine tuned. But Arnason says the problem with applying that type of AI in the regulatory space is that it is unable to provide repeatable results over time. 

“Because the model itself adjusts its weights, it doesn’t have repeatable decision-making, and it doesn’t have explainable decision-making—which, as you might imagine, is a bit of a deal-breaker when it comes to compliance decisions,” he says. 

Goldman Sachs’s Chisholm adds that there are many new upcoming rules, such as those for ESG reporting, that start from laws and need to be interpreted, codified, tested, deployed, and ultimately complied with. With that in mind, the consortium aims to serve as a product generation engine for other compliance woes.

“It’s areas like that, probably, rather than your classic trade and transaction reporting, that will be the focus next,” he says. 

Earlier this week, Droit announced a partnership with Finbourne Technology, a provider of investment management software, that will yield a new, joint solution incorporating Endoxa’s consensus interpretations of requirements, for managing disclosure obligations for long, short, and takeover panel reporting.

Banks are really tired of being audited, or it always being found that something is not as sufficient as it should be, and it seriously is a very expensive task

Senior analyst at a research an advisory firm

According to a senior analyst at a research and advisory firm, this consortium is a “natural progression” for large banks. Partly owing to the Covid pandemic, they say, banks are reviewing all their processes and identifying ways to streamline them.  

And perhaps the most logical place to start is the regulatory space. 

“Regulations are an unstoppable process, and the projects banks had for any existing and upcoming regulations have always been costly, patchy, and very manual. While they’ve been top priority, the way banks have been tackling them has been suboptimal, because they would employ something using their own processes but will usually run into problems when it comes to audit trails and incomplete data. That’s in part due to the data being in siloes,” the senior analyst says. 

So, particularly when it comes to non-competitive processes such as compliance with regulatory disclosures, banks are waking up and asking how they can work smarter, not harder. And that smarter way is through collaboration. 

“Endoxa is a sort of natural consequence. It’s one where the banks are saying, ‘Well, we don’t compete with each other when it comes to responding to regulatory obligations; all of us have to do it, so it’s something we can cooperate on,’” they say. 

As for Endoxa’s prospects of success, the senior analyst says it’s a wait-and-see game. But they add that in its current early stage, it’s a better approach to take than having individual banks run their own patchy, manual reporting processes involving different formats. 

“Banks are really tired of being audited, or it always being found that something is not as sufficient as it should be, and it seriously is a very expensive task. They already employ many compliance people, yet every time regulators come up with something—like, say, a change in position reporting disclosures—they have to respond.”