IT Advances Insufficient to Beat Compliance Challenges

Data quality remains a problem for the complex trade and transaction reporting requirements written into the plethora of new financial regulations, but some industry executives are seeing positive outcomes from reference data identifier systems. 

According to a JWG whitepaper, Regulatory reporting: time for a rethink, firms have progressed from the days of merely going through the motions when implementing compliance projects to now recognizing the benefits of upgrading legacy systems and creating centralized data sources.

A survey of 12 global financial institutions conducted by the regulatory advisory firm and regtech solutions provider revealed that more firms are seeing the value of creating a centralized data hub that provides data visibility, transparency, and automation. Meanwhile, in EY’s annual Bank regulatory outlook for 2019, the consulting and accounting giant noted that the financial industry has made significant strides in data storage and accessibility but still needs to improve data governance.

“Data architecture must be designed to harness data not just for regulatory and risk-control purposes, but also to create increased analytical capabilities,” states the EY report. “The key steps to push through now are risk alignment, standardization of processes and aggregation of data from multiple sources.”

Despite careful planning and efforts to improve the resources required to handle the influx of data, the scope of the Securities Financing Transaction Regulation (SFTR) and the substantial data fields it requires differ between one jurisdiction and the next. For instance, the primary transaction reporting methods in the US are mandated by the Trade Reporting and Compliance Engine (Trace), the Dodd-Frank Act, and the Consolidated Audit Trail (CAT), which have different data and reporting demands compared to European regulations. Once all of these regulations—including Europe’s largest, in the form of the revised Markets in Financial Instruments Directive and the European Market Infrastructure Regulation—have taken effect, all financial instruments executed between counterparties will have to be reported to designated authorities within 24 hours.

Some trade and transaction data must be reported three to four times through different channels, with the result that “misaligned interpretations across several layers of regulatory obligations ultimately leads to a reduction in the quality of data for systemic risk monitoring purposes, negating the fundamental intent behind the rules,” according to JWG.

With the implementation deadlines for more regulations fast approaching, firms need to integrate complex technologies to address transparency and data lineage problems, said Phil Flood, a solutions architect at data automation platform provider Inforalgo, in a JWG webinar on January 15.

“There are certainly a lot of regulations that people need to comply with, and there’s no standard design across regimes, which creates the usual problems of data silos and data fragmentation,” such as with SFTR, he added.

Firms are at risk of accruing huge fines if they fail to report, or report incorrect data. The UK’s Financial Conduct Authority (FCA), for example, charges around £1.50 ($1.94) per line of incorrect or missing data. Some of the biggest financial firms process millions of transactions every day, reported by hundreds of trading entities spread across different jurisdictions, which makes accurate reporting tricky. Merrill Lynch was the biggest offender in 2017, according to JWG, racking up almost £34.5 million in fines for inaccurate data fields.

Offloaded Technology

Many firms are implementing third-party solutions designed specifically to address regulatory requirements and reporting. During the JWG webinar, Chad Giussani, head of operations transaction reporting compliance at Standard Chartered Bank, said it is reasonable for some firms—particularly buy-side firms outsourcing back-office functions—to offload technology demands to solutions providers that possess the technical skills to create the software, rather than allocating resources to build it in-house.

According to EY, although third-party vendors can help with reporting, the onus is on financial firms to ensure the data is accurate, which means a third-party risk management framework is essential to ensure firms perform appropriate due diligence on providers.

“Consequently, regulators are becoming concerned about financial institutions’ increasing reliance on service providers to support some of their critical infrastructure, the use of the same providers by too many financial institutions, and the widespread use of the cloud. This is a new systemic concentration risk, which supervisors have yet to fully address,” the EY report states. 

Dawd Haque, global lead for regulatory market initiatives, transformation and strategy at Deutsche Bank, said in the JWG webinar that it is important for firms to achieve synergy and efficiency without creating dependencies.

Haque said firms trying to centralize data sources and create front-to-back trading systems in-house may find the platforms are hard to change when regulations are adjusted or amended. “Regulations could diverge at any time, and if you create too much dependency then you have to untick all of your systems,” he said.

Haque added that these dependencies are hard to measure, making it difficult to calculate costs, but creating agile systems where data fields can be altered when regulations change is key.