Post-financial crisis regulations—the US Dodd Frank Act (DFA) and the European Market Infrastructure Regulation (EMIR)—have dramatically increased the trade-reporting burden for financial services firms across the globe. Robert van Doorn, Partner at Capital Edge shares lessons learned from his experiences around centralising data and building an operational infrastructure to support initially the regulatory trade reporting requirements.
Trade reporting requirements have become exponentially more complex for financial services firms over the last few years. Regulators want more information than ever before, their demands are constantly evolving, and there is inconsistency between what different regulators around the world want. One way to handle this is to create a centralised trade data repository that can be used to support the various reporting requirements today’s firms face.
Managing and reporting trade data is a huge challenge, thanks to significant inconsistencies between trading systems, which tend to feature their own models and booking methods for different products. Hedging products, such as interest rate swaps or FX swaps, are tied across businesses, requiring data to be drawn from different systems. Firms can start by standardising their products first before doing regulatory specific changes or enrichments.
Creating a single source of data—or golden copy—ideally leads to much greater transparency and efficiency, and significantly reduces operational costs. It also enables departments outside of trade reporting to leverage that data to support revenue-generating opportunities. Sales departments rarely have the budget to get proper market intelligence on their own data. A central repository makes that a lot more achievable for a fraction of the cost, and with fewer reconciliations required between point-to-point interfaces which reduces operational risk.
Reference data challenges
However, there are a number of obstacles. Reference data—in particular counterparty data—represents an on-going challenge. While the industry is moving towards more standardised processes, and data quality is improving, the quality of data continues to present problems both internally and externally, and there are challenges around validation, especially with regard to EMIR Level 2.
Clarient and KYC.com are two Utility offerings, which serve as utilities firms can use to source clean and verified client data across the industry. This aids consistency because every firm has access to the same data. It also helps reduce cost by mutualizing the data verification process across the industry—all firms spend a large amount on Know Your Customer (KYC) processes every year.
Cross-border data issues
Internal compliance rules and international data transfer restrictions further hamper the creation of a globally centralised data repository. The US Patriot Act has made a number of international firms wary about having their data pass through US-based servers. And many jurisdictions, such as Korea, Singapore and Taiwan, have their own restrictions to leave data across their borders. There are exemptions for certain risk scenarios—and trade reporting is arguably risk related, so firms can use centralised data for that. But those exemptions are no longer valid if firms want to use the same data for finance or sales in those jurisdictions—something that can help firms get greater bang for their data buck.
Traceability of trades
When it comes to traceability, there needs to be transparency as to what is going through a firm’s rules engines and why. To determine how compliant a particular business is, firms need to understand and be able to demonstrate why a certain trade is reportable or not. That means providing transparency on which rules were triggered and their outcomes against each trade.
Firms must be able to trace requirements end to end, from regulations down to production defects. While most institutions have traceability within their development cycles, it is the upstream to business requirements and actual regulatory directive text where a lot of work is still required. There are market initiatives to address this, such as semantics research and supportive technology developed by the GRCTC (Governance Risk & Compliance Technology Centre) consortia of Academics, Fintecs, Financial services firms and Legal firms in Cork Ireland. Capital Edge is part of the consortium and actively participating in the research.
Correcting issues
Correcting issues following fixes can be very complex. Say a firm finds an issue in trade reporting and fixes the code. They then have to replay thousands, or sometimes even tens of thousands of trades. Most firms have replay tools in place, but it is always difficult to republish from the original sources without impacting other departments such as finance, risk or settlement processes, which are usually not interested in the replayed trades but are part of the same flows as trade reporting.
Improving reconciliations
In addition to making reporting more consistent and efficient, centralising trade data and making it available to other departments can actually help improve data quality. In the past, firms mostly focused on receiving data from internal front office trading systems, and making sure that data was reported to the regulator. But it is also important to make sure the data being sent is accurate—do you have the right trade population, are the actual values of the attributes correct? By building a central repository used by all departments, firms can create consistency across regulatory reporting, finance, risk and sales departments. All eyes are focused on the same data, and each department will clean some of the attributes, so overall the whole repository gets cleaner—making trade reporting more accurate—and costs are reduced.
In this budget-constrained era, all firms are asking how they can make their regulatory spend work harder and support revenue-generating opportunities. The financial services industry is spending a lot of money on trade reporting, but if firms build a scalable architecture, the investment can be reused for other non-regulatory purposes to great effect.
For more information, please contact Robert van Doorn at : Robert.vanDoorn@capital-edge.co.uk
To learn more about this topic, please watch the on demand webinar entitled “Regulatory Trade Reporting – Major Data Issues Persist, and More on the Way!“
