Deutsche Börse to Exit Regulatory Reporting Business

Deutsche Börse will offload its regulatory reporting businesses—Regulatory Reporting Hub, Approved Reporting Mechanism (ARM) and Approved Publication Arm (APA)—in the coming months, WatersTechnology has learned.

“The Regulatory Reporting Hub will not be part of our core portfolio in the medium term, and we are currently evaluating different options,” a spokesperson for Deutsche Börse says.

The Hub is a compliance platform that enables sell-side and buy-side clients, corporates, regulated markets, multi-lateral trading firms and organized trading facilities to meet their reporting obligations under the Markets in Financial Instruments Directive and Regulation. It also offers delegated reporting for the European Market Infrastructure Regulation (Emir).

WatersTechnology spoke to several sources who say the exchange group has sought buyers for the businesses over the past few months.

The spokesperson could not confirm whether the bourse will look to unwind the regulatory reporting business if no buyer comes forward.

The move follows CME’s decision to scale back its Abide Financial and NEX Regulatory Reporting businesses, as well as its European and Australian trade repositories, by November 2020.

Sources say a pricing war has made it difficult to turn a profit from these services.

“Competing on price in the regulatory reporting space is a bad idea, but firms continue to pursue this route,” says Brian Lynch, global head of regulatory reporting services at Bloomberg. “Indeed, we have seen this approach from competitors who are trying to win this Abide business. It is a race to the bottom and I believe unless something changes, we will see more firms exit this space due to an unsustainable business model.”

Other regulatory reporting experts echoed these views, saying many providers have priced their services too aggressively.

“So much cost goes into this stuff,” says Matt Smith, CEO of SteelEye, a regulatory reporting vendor. “What ended up happening was that anywhere you could do something like this for cheaper, you would go, ‘Why wouldn’t you?’ As long as it’s an accredited reporting body, you would take the best price. That started driving behaviors where people would be going to try to undercut their competition and they would go to the cheapest one. It got to the point where it just economically wasn’t worth the risk and the overhead.” 

Smith says regulatory reporting is hugely demanding, time-consuming and prone to risk, because poor reporting can damage a regulated firm’s reputation. Regulated providers, such as Deutsche Börse, must manage regulators, stay on top of constantly changing regulatory standards and sustain a viable service model.

“If you speak to any of the CEOs of these businesses, one of their big burdens is the effort it takes to manage the regulators, like the European Securities and Markets Authority; that takes a lot of time. They’re highly demanding, and being a regulated entity comes with an enormous amount of reputational risk, especially if it’s tied to an exchange, which wants to be squeaky clean. And at some point, is it worth doing?” Smith adds.

One product head at a global market structure firm says non-regulated regtech vendors’ competitive pricing has made it increasingly difficult for regulated entities to provide regulatory services and be commercially viable. The argument is that smaller vendors can provide cheaper services, taking away market share from providers that offer regulated services such as trade reconciliations for Emir. 

“What’s really hurting the regulated industry now is that non-regulated space,” says the product head. “It’s a bit of a conundrum, because those firms are ‘fintechy’—they have good ideas and good technology, they drive innovation and they provide a good service to the industry – but they’re kind of undercutting the regulated firms that are bound and shackled by the regulators to provide this standardized and somewhat expensive and non-flexible service.”

Warning Signs

Deutsche Börse had made an aggressive push into the regulatory reporting space with its Hub, which was launched in 2017. Prior to that, in 2014, it had bought Impendium, a UK firm that operated a private cloud for regulatory reporting called Elements. The bourse integrated Elements into its existing data offerings to help clients with the whole lifecycle of Emir reporting, from initial data consumption, to reporting to trade repositories.

When the Hub was launched after a series of pilots, it brought together all the bourse’s compliance solutions onto one platform for all clients, reporting to 25 NCAs and covering multiple regulations.

But there were some signs of Deutsche Börse’s decision to pull out of regulatory reporting late last year.

In December 2019, the exchange group confirmed it was pulling its plans to offer reporting services for the incoming Securities Financing Transactions Regulation (SFTR), after finding there wasn’t much appetite for it.

In its 2019 financial statement, Deutsche Börse recorded a predicted loss value after impairment tests for the Regulatory Reporting Hub of €1.8 million (about $2 million). “The impairment was due to the discontinuation of the SFTR services, which led to a significant downgrade of revenue projections in line with preliminary customer feedback,” the company said in its annual report.