Regulatory reporting “only going to intensify”, Securities Finance Technology Symposium panellist says
09 May 2023 US
Image: Minerva Studio/stock.adobe.com
Regulatory reporting is a “critical” aspect of business that firms need to be paying attention to, speakers on the ‘Regulatory Reporting: Rewrite, reform, refit’ panel at this year’s Securities Finance Technology Symposium in Boston agreed.
Moderator Vinod Jain, senior analyst for capital markets at Aite-Novarica Group, stressed the fact that regulatory reporting “is not a one-time activity”.
“It’s very much an iterative process,” agreed Igor Kaplun, global head of business development at S&P Global Market Intelligence Cappitech. Once a regulation goes live, the industry needs to “do its best” to meet requirements and remain compliant. Over time, practices will improve as both the regulator and industry adjust to the regulation.
Jain drew attention to the fact that operating in a global environment necessitates constant repetition of reporting and compliance. There’s no “single view”, rather an amalgamation of overlapping reports catering to different regulators. In addition to this, Kaplun added that a large number of major jurisdictions are currently undergoing reporting regulation changes. This puts international firms under further pressure; “it’s challenging to get it right in every place on the first try,” he remarked.
As with any regulation, clarity remains an issue. “Once we have clarity we can provide platforms for our clients,” said Nancy Steiker, senior director of global securities finance product management at FIS Trading and Processing, but vendors require time to put these into place. Without fields and formats clearly explained, incorrect data will be reported and lead to confusion, she affirmed.
This lack of clarity was recognised by all of the speakers, with one panellist warning that industry uncertainty around what is being asked of them could have unintended negative consequences including investors leaving funds.
Regulators providing clarity on reporting is “critical,” Kaplun affirmed, adding that successful regulatory implementations thus far have seen cross-industry collaboration, with firms and regulators working together to go live on time, establish standardised data formats and resolve any “grey areas” that may come to light.
Increased transparency is the main demand of investors, one speaker said, and is a demand that the market is “very supportive” of. However, it “needs to be done right”, with the correct data and education provided to investors for them to correctly interpret reports.
Kaplun used US over-the-counter derivatives markets as an example of where transparency is important, but highlighted the need for data published to be of high quality in order for both institutional and retail users to understand what they are looking at. In these markets, reporting occurs in real-time and is published to the general public. “There’s a lot of noise,” Kaplun observed, and the majority of those receiving the data can’t make sense of it. While transparency is important, so is education and comprehension, he affirmed.
“The best ultimate outcome for reporters is that they are able to integrate regulatory reporting into their production flows, use industry standards and best practices, cut the number of manual touch points, generate better settlement efficiency, and lower costs,” outlined Jonathan Lee, senior regulatory reporting specialist at Kaizen Reporting. Better access to a rich seam of data aids risk functions, controls, analytics and trading strategy, potentially boosting returns for the firm and their clients, he added.
“Any new regulation is going to be a cost,” Kaplun accepted. He observed that firms are assigning notable amounts of their budgets to regulatory compliance. This level of investment is unavoidable — regulators are asking for more, and so firms are spending more time and money meeting their obligations. However, he added that projects around regulatory change can reap benefits in other areas of the business.
Currently, US regulation is “fairly fragmented,” Lee maintained. He considered the risk of regulatory arbitrage that could result from this, with concerns about post-trade transparency disclosures for securities lending transactions potentially encouraging firms to restructure their transactions as repos to avoid further reporting.
Reporting processes need to be controlled “from the get-go,” he urged, with standard booking models and best practices established early on. Independently validating reporting will be important, he went on, advising firms to consider outsourcing. “Don’t mark your own homework”; instead, turn to the expertise of third-party vendors. This can also have considerable economic benefits.
Looking to the future, one panellist declared that while clarity and definitions are the priority, this should be followed by technology. Partnering with vendors can help with this, she said, allowing for agile systems with strong processing, capable of dealing with future changes in a field that is “only going to intensify”.
Lee predicted that common domain models will be an area of focus for the industry in the future, with standard trade messages able to be taken directly from blockchain. This would remove the “onerous and expensive commitment” of manual regulatory reporting, he said, but expects this change to be some time away.
“We know that these [reporting] regulations will happen, but we don’t know exactly when and we don’t know their full scope,” Kaplun said. When the time comes, the panel made it clear that collaboration, clarity and consistency will be essential to success.
Moderator Vinod Jain, senior analyst for capital markets at Aite-Novarica Group, stressed the fact that regulatory reporting “is not a one-time activity”.
“It’s very much an iterative process,” agreed Igor Kaplun, global head of business development at S&P Global Market Intelligence Cappitech. Once a regulation goes live, the industry needs to “do its best” to meet requirements and remain compliant. Over time, practices will improve as both the regulator and industry adjust to the regulation.
Jain drew attention to the fact that operating in a global environment necessitates constant repetition of reporting and compliance. There’s no “single view”, rather an amalgamation of overlapping reports catering to different regulators. In addition to this, Kaplun added that a large number of major jurisdictions are currently undergoing reporting regulation changes. This puts international firms under further pressure; “it’s challenging to get it right in every place on the first try,” he remarked.
As with any regulation, clarity remains an issue. “Once we have clarity we can provide platforms for our clients,” said Nancy Steiker, senior director of global securities finance product management at FIS Trading and Processing, but vendors require time to put these into place. Without fields and formats clearly explained, incorrect data will be reported and lead to confusion, she affirmed.
This lack of clarity was recognised by all of the speakers, with one panellist warning that industry uncertainty around what is being asked of them could have unintended negative consequences including investors leaving funds.
Regulators providing clarity on reporting is “critical,” Kaplun affirmed, adding that successful regulatory implementations thus far have seen cross-industry collaboration, with firms and regulators working together to go live on time, establish standardised data formats and resolve any “grey areas” that may come to light.
Increased transparency is the main demand of investors, one speaker said, and is a demand that the market is “very supportive” of. However, it “needs to be done right”, with the correct data and education provided to investors for them to correctly interpret reports.
Kaplun used US over-the-counter derivatives markets as an example of where transparency is important, but highlighted the need for data published to be of high quality in order for both institutional and retail users to understand what they are looking at. In these markets, reporting occurs in real-time and is published to the general public. “There’s a lot of noise,” Kaplun observed, and the majority of those receiving the data can’t make sense of it. While transparency is important, so is education and comprehension, he affirmed.
“The best ultimate outcome for reporters is that they are able to integrate regulatory reporting into their production flows, use industry standards and best practices, cut the number of manual touch points, generate better settlement efficiency, and lower costs,” outlined Jonathan Lee, senior regulatory reporting specialist at Kaizen Reporting. Better access to a rich seam of data aids risk functions, controls, analytics and trading strategy, potentially boosting returns for the firm and their clients, he added.
“Any new regulation is going to be a cost,” Kaplun accepted. He observed that firms are assigning notable amounts of their budgets to regulatory compliance. This level of investment is unavoidable — regulators are asking for more, and so firms are spending more time and money meeting their obligations. However, he added that projects around regulatory change can reap benefits in other areas of the business.
Currently, US regulation is “fairly fragmented,” Lee maintained. He considered the risk of regulatory arbitrage that could result from this, with concerns about post-trade transparency disclosures for securities lending transactions potentially encouraging firms to restructure their transactions as repos to avoid further reporting.
Reporting processes need to be controlled “from the get-go,” he urged, with standard booking models and best practices established early on. Independently validating reporting will be important, he went on, advising firms to consider outsourcing. “Don’t mark your own homework”; instead, turn to the expertise of third-party vendors. This can also have considerable economic benefits.
Looking to the future, one panellist declared that while clarity and definitions are the priority, this should be followed by technology. Partnering with vendors can help with this, she said, allowing for agile systems with strong processing, capable of dealing with future changes in a field that is “only going to intensify”.
Lee predicted that common domain models will be an area of focus for the industry in the future, with standard trade messages able to be taken directly from blockchain. This would remove the “onerous and expensive commitment” of manual regulatory reporting, he said, but expects this change to be some time away.
“We know that these [reporting] regulations will happen, but we don’t know exactly when and we don’t know their full scope,” Kaplun said. When the time comes, the panel made it clear that collaboration, clarity and consistency will be essential to success.
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