In a recent Duco webinar, Christian Nentwich, founder and CEO of Duco joined panellists from Standard Chartered, the Canadian Imperial Bank of Commerce (CIBC), and Firebrand Research to discuss the upcoming CFTC and EMIR reporting rewrites. In a commentary article, Nentwich describes why now is the time for firms to reassess the way they handle regulatory updates.
Through the decades, financial services institutions have largely treated regulations as a vertical problem. Firms have invested heavily in building proprietary solutions for specific regulatory problems, but those systems often end up being fragile and inflexible, and making any changes to them can be very costly. As firms look to comply with the Commodity Futures Trading Commission (CFTC) Rewrite and European Market Infrastructure Regulation (EMIR) Refit, it’s time to challenge some of these longstanding assumptions about how best to tackle regulatory updates.
“Dealing with regulatory rewrites represents a giant data problem, rather than a problem with a specific regulation like EMIR or from the CFTC.”
Legacy technology systems strain under today’s data needs
Dealing with regulatory rewrites represents a giant data problem, rather than a problem with a specific regulation like EMIR or from the CFTC. The challenges firms have with data stem largely from their legacy technology stack, which may include hundreds of systems built on Oracle databases with hard-coded schemas.
The CFTC and EMIR rewrites include prescriptive changes to reportable fields. EMIR Refit introduces 89 new fields, while allowing the data to flow out over the messaging system. This is made all the more difficult by the fact that many firms try to squeeze derivatives trade reporting requirements through systems that were never built for such a task. For example, tools built for cash or securities.
All these field changes inevitably lead to massive data lineage and change projects. These projects are very difficult to get right, and some of these legacy systems are starting to reach fundamental limitations.
Rewrites require faster, better reconciliations
Reconciliations present another area of difficulty. When firms attempt to squeeze complex regulatory reconciliations into legacy systems, they often need to break them up because the data is too wide and complex for the tools to handle. For example, a single process needs to become 10 in order to fit in all the required fields.
When something goes wrong, analysts must then log in to 10 different places to perform root cause analysis. As the number of fields increases, this problem becomes more entrenched. And yet firms have a very tight timeframe for finding errors and omissions. Regulators now want to know within seven days what went wrong and what the firm plans to do about it.
Further, when running reconciliations, many firms essentially recreate the reporting rules in their system. They take data from multiple systems and combine this with the regulator’s requirements. The process involves a lot of complexity and requires subject matter expertise to get right. Yet the availability of subject matter experts (SMEs) is another key issue…
SMEs—How and where to deploy?
Firms need more and more experts as the regulatory requirements increase, yet this expertise can be in short supply, especially if all firms are looking to hire more people at the same time. It doesn’t help that the timing of big changes like the CFTC Rewrite and EMIR Refit somewhat overlap.
For example, some in-house SMEs historically would hand over their documentation to IT teams, who would then go through a lengthy build and testing cycle, writing validation rules and mapping attributes. However, these technology projects are very costly and put a significant squeeze on banks’ margins. And these systems work in a way that undermines firms’ ability to react quickly to changes, especially when they must go through multiple reconfigurations as regulations are tweaked before and after implementation.
There is a current macro trend in technology towards rethinking how best to involve SMEs in these projects at a technical level, without creating technical projects unnecessarily. Machine learning can be used to automate the mapping process, for example, while no-code solutions allow the experts themselves to build and reconfigure controls for regulatory data.
It’s no longer the case that SMEs need heavy support from their IT teams just to use the technology in front of them to perform their roles.
SaaS, no-code and machine learning enable faster and easier updates
Technology innovations in recent years have given rise to new companies in the data space, providing cloud-based Software-as-a-Service (SaaS) platforms. These flexible platforms wrap around existing architectures without requiring system change and integrate data between systems using application programming interfaces (APIs). They are data agnostic, cutting out the need for expensive and time-consuming extract-transform-load processes just to get data flowing between systems.
Those that offer no-code functionality further streamline the process of building and optimising data controls by removing the need for developers. SMEs are able to create reconciliations themselves, eliminating large handoff points and departmental bottlenecks.
Additionally, thanks to machine learning, systems can adapt faster to new data sources and, with exceptions automatically labelled and assigned, firms have a head start in spotting data quality issues. This reduces initial reporting errors and omissions and ensures that any errors that do reach the trade repository are caught well within the mandatory notification window.
Vendors can also offer an economy of scale when it comes to subject matter expertise. As expertise becomes in greater demand, vendors can embed or capture that subject matter expertise within the product, and continually evolve it as changes happen. Because multi-tenant SaaS platforms have all their clients on a single version, best practices around updates can then be pushed out to all users simultaneously.
All this offers significant advantages over the old model, where every firm had a separate installed proprietary system and had to tackle updates in-house.
Technology has changed a lot in the last five years alone—firms should seize the opportunity presented by the latest rewrites to change how they tackle regulations once and for all.