Reporting and Governance

Financial institutions are under pressure to meet new regulatory demands this year – but this also presents an opportunity. By reviewing their reporting and embracing greater collaboration across the industry, they can adopt a more strategic approach to data management. By Leo Labeis, CEO at REGnosys

Enabling this shift is the International Swaps and Derivatives Association’s (ISDA) Digital Regulatory Reporting (DRR) – a global industry-led programme to mutualise the cost of complying with reporting requirements, with an initial focus on the Commodity Futures Trading Commission (CFTC) Rewrite and the European Market Infrastructure Regulation (EMIR) Refit. DRR is born out of five trends reshaping the regulatory landscape and understanding them is key if firms are to benefit from its implementation.  

Shift to standardisation   

Perhaps the best illustration of the standardisation drive is the Committee Payments and Market Infrastructures-The International Organization of Securities Commissions (CPMI-IOSCO) working group’s guidance on data harmonisation for reporting over-the-counter (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 the Legal Entity Identifier (LEI), Unique Transaction Identifier (UT) and Unique Product Identifier (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.  

“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.  

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.  

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.  

Emerging 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.   

The road ahead  

Regulatory reporting and innovation have not always gone hand-in-hand but these trends will bring them closer as firms embrace new solutions.   

DRR fully aligns with those trends, helping to deliver greater standardisation, integration and data quality. As firms collaborate in DRR to build an open source, standardised and machine-executable interpretation of rules, they not only have an opportunity to streamline reporting for the 2022 deadlines and beyond – they are also shaping the future of data and technology in the industry. 

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