Leo Labeis, CEO at REGnosys offers an explainer of the Digital Regulatory Reporting initiative which aims to mutualise the cost of interpreting and implementing reporting rules.
What is Digital Regulatory Reporting?
Digital Regulatory Reporting (DRR) is an industry-wide initiative to mutualise the cost of interpreting and implementing reporting rules. Initially championed by ISDA, the project now involves over 40 organisations including major financial institutions, service providers, technology vendors and other trade bodies.
Over the last decade, regulatory compliance has been a dominant theme for financial institutions. Regulatory reporting has proved increasingly difficult due to the sheer volume of data requirements embedded in often conflicting and ambiguous rules, resulting in fragmented approaches globally.
Upcoming changes to trade reporting regulations across the G20, starting with this year’s CFTC Rewrite, offer firms the chance to adopt a more strategic approach to regulatory data management. DRR emerges as a key driving force behind a new collaborative approach, enabling regulated entities to build and automatically execute a single, open-source interpretation of the amended reporting rules.
What are the trends shaping the implementation of the DRR?
- The move to standardisation – Financial institutions have increasingly faced overlapping requirements across jurisdictions, creating additional costs, complexity and operational risk. This has led to an industry push to develop common standards, exemplified by the CPMI-IOSCO’s Critical Data Elements (CDE) recommendations and standardised identifiers such as the Legal Entity Identifier (LEI), Unique Trade Identifier (UTI) and Unique Product Identifier (UPI). 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 common rules for re-use across regimes.
- The transition to “integrated” reporting – 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 more cost effective for regulated firms to comply ensures that firms’ reporting investments are better targeted at serving the public interest. DRR is an enabler of this by processing data consistently as many times and in as many formats as necessary.
- Prioritising 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. DRR helps firms avoid fines by delivering a “crowd-sourced”, peer-reviewed set of rules with embedded data quality checks.
- Embedding reporting into data strategies – Reporting is a massive exercise in data management, so it is becoming an integral part of a firm’s data strategy. As a result, banks are under more pressure to turn data into a strategic advantage and unlock additional cost-efficiency or revenue. DRR enables this by leveraging the Common Domain Model (CDM), anchoring derivatives reporting into a broader push to radically streamline the entire trade lifecycle management.
- Wider deployment of maturing technologies – The adoption of emerging technologies – such as open source, cloud and distributed ledger technology (DLT) – will play a major role in establishing more efficient, streamlined and cost-effective reporting processes. DRR is poised to be a key enabler of this transition, allowing firms to build a standardised expression of the reporting rules that may even be encoded on a blockchain.
How can firms best implement DRR?
With the components in place, the focus now shifts to implementation. The key for firms to leverage DRR – and more broadly the CDM that underpins it – is first to take a more strategic approach to data management. This could mean making some fundamental changes across the organisation regarding data governance, technology budgets and involvement in industry initiatives.
- Have a cohesive data management strategy
In the decade leading up to the 2008 financial crisis, firms’ investment in source systems, say for trade or collateral data, was largely driven by the needs of individual business units – but often at the expense of having proper organisation-wide governance underpinning the data.
More than a decade since the global financial reform began, the industry looks very different. The challenge of complying with complex data requirements has exposed gaps and inconsistencies in firms’ processes along the adage of “garbage in, garbage out”. Revenues have shrunk and cost pressures have risen, driving the demand for greater efficiency. The problem is that this efficiency is proving elusive, given the fragmented data foundations of so many organisations.
Firms are now turning their sights to a deeper information management strategy that puts data governance first. The CDM embodies this approach, by focusing on normalising and governing data at source, before using it in specific applications such as DRR.
- Prioritise long-term investment
For better or worse, regulatory updates serve to focus the industry. This year’s CFTC Rewrite and next year’s EMIR Refit are only the first US and EU instalments of the G20 trade reporting regimes. Future updates are expected from ASIC (Australia), MAS (Singapore) and HKMA (Hong Kong), among others.
These changes are ultimately positive and incorporate a much-needed harmonisation of global data requirements, largely driven by the recommendations of the CPMI-IOSCO. Although there are still delayed deadlines to contend with, regulators have laid out clear roadmaps, which make it easier to budget accordingly and justify long-term spend.
Firms must capitalise on these trends and develop a long-term investment plan that looks at reporting in this holistic context, rather than one based around a succession of specific directives. DRR fully supports this long-term approach, by developing and leveraging the commonalities, such as the UPI, UTI or CDEs, that will be rolled out globally.
- Traceability is vital
The technology that compliance teams operate to collect, compute, and aggregate data submissions is the product of several translation steps – from the legal interpretation of the regulations to a set of business requirements to technical specifications – eventually involving coding into software. Historically, many firms have carried out these steps manually, which makes it hard to retrace any steps should a regulator enquire about the interpretation of data in a report, or should a data mismatch occur between reporting parties.
Answering those questions requires business staff to have more visibility into the origin of the data and through every stage of its processing. Only then can they move away from labour-intensive forensic investigations and towards an exceptions management and data reconciliation approach that is fully automated.
This is where the approach taken in DRR has been instrumental. With greater transparency, tying data to a specific piece of logic and in turn tying this logic to regulatory provisions, or their specific interpretation, it is possible to prove how each report was completed from start to finish.
Will DRR pave the way for a new digital era across the post-trade landscape?
For years, firms have been complying with the same set of obligations and trying to report the same set of data but in slightly different ways, because of the fragmented nature of their systems and siloed approaches.
DRR enables collaboration in regulatory reporting, allowing firms to mutualise their implementation costs by building machine-executable rules in an open-source environment. It delivers strength in numbers, through a peer review process that produces the industry’s best-practice interpretation of each specific rule.
For financial institutions, looming regulatory deadlines present a timely opportunity to review their regulatory operations. The adoption of technology-driven solutions will be key in helping firms adapt to these changes and prepare for future updates more effectively.
Regulatory reporting is at an important juncture in its evolution. Compliance can be complex, time consuming and expensive for financial institutions. DRR is changing this and, coupled with the CDM, is poised to play a central role in a more strategic approach to data management. Together, they are enabling firms to apply new, more efficient and standardised approaches to every aspect of their post-trade processes.