The largest looming issue to affect firms is Brexit, says Cappitech’s regulatory expert
08 December 2020
The new Cappitech industry survey reveals that most companies are battling with elements of their reporting. Ron Finberg, regulatory specialist at Cappitech, highlights inefficiencies and errors as a reason to change reporting, with new and changing regulations, Brexit and coronavirus as key concerns
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Your survey mentions new or changing regulations as a key issue, including, of course, SFTR. What does this look like in the next 12 months?
At the moment, the largest looming issue to affect firms isn’t, per se, a change in regulation, but Brexit. Brexit requires firms to keep in mind how they will adapt to reporting under two similar but split regimes. Areas affected are maintaining dual lists of in-scope products, tagging counterparties as EU or UK based and submission changes applicable to delegated reporting under European Market Infrastructure Regulation (EMIR) and Securities Financing Transactions Regulation (SFTR).
How will things change for vendors? Do you see changes in your business?
For vendors, any change in regulation means being prepared not only for a new framework but also for any challenges clients are having. At Cappitech we have contracts and connectivity with approved reporting mechanisms (ARM) and trade repositories (TRs) in place to ensure we can seamlessly report client information to the correct destination without clients needing to make changes on their end. Due to the challenges of delegated reporting under Brexit that some of our clients are experiencing we have also added features in our technology to best support these needs.
For SFTR in particular, respondents have commented on this as a specific challenge, what does this look like over the next 12-18 months?
SFTR was the first EU reporting regulation to move to the XML ISO 20022 standard for submissions. This is a major hurdle for the bulk of companies to adapt to since you need technical expertise to convert data to this format, and manual submissions are nearly impossible to maintain now. We believe that the next 12 months or so will be focused on ensuring report formats and data capture is correct.
If expertise is a problem with SFTR, and presumably other new regulations, what is the solution?
For us, this trend has made us focus on being up to date on regulation and how best to assist clients with questions. While in the past we may have been able to focus more on the ‘tech’ in regtech, now every vendor in this space needs to also be equipped with the ‘reg’ know-how.
On an investment firm side, we believe that companies can pick up a lot of knowledge from joining industry associations such as the Alternative Investment Management Association, the International Capital Market Association and International Securities Lending Association as well as speaking with peers from other firms to learn what they are doing.
Unsurprisingly, COVID-19 has been a real issue. Where have you seen firms doing well during the crisis and what have been the biggest challenges?
Aside from the first two months or so, which was a new experience for everyone, companies are now reporting that they have adapted to the ‘new normal’. After seeing a pause on new initiatives, we now rarely encounter firms that aren’t back to business as usual for handling new deployments. I believe part of the success to handling COVID-19 has been the high-level adoption of remote group settings and the way teams have got comfortable with presenting ideas and troubleshooting in this environment.
If Coronavirus means that there are reduced budgets and resources, but there’s still plenty to do in terms of maintaining and adapting for regulatory reporting, how are firms managing this? Are they focusing on certain issues over others or coming up with innovative solutions to manage the problem?
In relation to transaction reporting, the overall theme of 2020 has been: if it’s working, don’t touch it. This means there are companies that have manual processes in place that don’t want to make changes due a preference for not overburdening staff during the pandemic. As such, the focus is purely on handling imminent issues such moving repositories if they are affected by the CME regulatory reporting business closure in Europe, complying with the new SFTR deadlines or preparing for Brexit.
Firms say they want to continue improving their reporting, what will this entail? What are most firms thinking about and are there any gaps where they’re missing opportunities?
At the very least, firms should be cross referencing their reports with common errors raised by regulators such as those found in Market Watch’s published by the UK’s Financial Conduct Authority. Also, companies can apply periodic reconciliations between their front and back end systems to ensure trades that are under scope are being captured by their transaction reports of EMIR, SFTR and Markets in Financial Instruments Regulation.
What about Brexit? Firms seem to be ready or mostly ready but where are there still likely to be challenges?
For the most part, a big question mark regarding Brexit for firms that aren’t operating dual entities is around reverse solicitation. This affects how they are legally allowed to market to existing customers while decreasing outward messaging to new prospects out of their jurisdiction.
Is delegated reporting a specific issue following Brexit?
One of the changes of Brexit is that EU reports need to be submitted to an EU TR or ARM and vice versa for UK reports. Therefore, firms providing delegation for their clients need to apply a system to identify their customers’ country and relevant EU or UK entity for submitting reports under EMIR and SFTR.
CME and Deutsche Borse’s exit are both flagged up as having had an impact on the market, how do you see the market consolidating in 2021?
At the moment, there doesn’t appear to be any imminent threat of further market consolidation expected in 2021 among TRs and ARMs.
At the moment, the largest looming issue to affect firms isn’t, per se, a change in regulation, but Brexit. Brexit requires firms to keep in mind how they will adapt to reporting under two similar but split regimes. Areas affected are maintaining dual lists of in-scope products, tagging counterparties as EU or UK based and submission changes applicable to delegated reporting under European Market Infrastructure Regulation (EMIR) and Securities Financing Transactions Regulation (SFTR).
How will things change for vendors? Do you see changes in your business?
For vendors, any change in regulation means being prepared not only for a new framework but also for any challenges clients are having. At Cappitech we have contracts and connectivity with approved reporting mechanisms (ARM) and trade repositories (TRs) in place to ensure we can seamlessly report client information to the correct destination without clients needing to make changes on their end. Due to the challenges of delegated reporting under Brexit that some of our clients are experiencing we have also added features in our technology to best support these needs.
For SFTR in particular, respondents have commented on this as a specific challenge, what does this look like over the next 12-18 months?
SFTR was the first EU reporting regulation to move to the XML ISO 20022 standard for submissions. This is a major hurdle for the bulk of companies to adapt to since you need technical expertise to convert data to this format, and manual submissions are nearly impossible to maintain now. We believe that the next 12 months or so will be focused on ensuring report formats and data capture is correct.
If expertise is a problem with SFTR, and presumably other new regulations, what is the solution?
For us, this trend has made us focus on being up to date on regulation and how best to assist clients with questions. While in the past we may have been able to focus more on the ‘tech’ in regtech, now every vendor in this space needs to also be equipped with the ‘reg’ know-how.
On an investment firm side, we believe that companies can pick up a lot of knowledge from joining industry associations such as the Alternative Investment Management Association, the International Capital Market Association and International Securities Lending Association as well as speaking with peers from other firms to learn what they are doing.
Unsurprisingly, COVID-19 has been a real issue. Where have you seen firms doing well during the crisis and what have been the biggest challenges?
Aside from the first two months or so, which was a new experience for everyone, companies are now reporting that they have adapted to the ‘new normal’. After seeing a pause on new initiatives, we now rarely encounter firms that aren’t back to business as usual for handling new deployments. I believe part of the success to handling COVID-19 has been the high-level adoption of remote group settings and the way teams have got comfortable with presenting ideas and troubleshooting in this environment.
If Coronavirus means that there are reduced budgets and resources, but there’s still plenty to do in terms of maintaining and adapting for regulatory reporting, how are firms managing this? Are they focusing on certain issues over others or coming up with innovative solutions to manage the problem?
In relation to transaction reporting, the overall theme of 2020 has been: if it’s working, don’t touch it. This means there are companies that have manual processes in place that don’t want to make changes due a preference for not overburdening staff during the pandemic. As such, the focus is purely on handling imminent issues such moving repositories if they are affected by the CME regulatory reporting business closure in Europe, complying with the new SFTR deadlines or preparing for Brexit.
Firms say they want to continue improving their reporting, what will this entail? What are most firms thinking about and are there any gaps where they’re missing opportunities?
At the very least, firms should be cross referencing their reports with common errors raised by regulators such as those found in Market Watch’s published by the UK’s Financial Conduct Authority. Also, companies can apply periodic reconciliations between their front and back end systems to ensure trades that are under scope are being captured by their transaction reports of EMIR, SFTR and Markets in Financial Instruments Regulation.
What about Brexit? Firms seem to be ready or mostly ready but where are there still likely to be challenges?
For the most part, a big question mark regarding Brexit for firms that aren’t operating dual entities is around reverse solicitation. This affects how they are legally allowed to market to existing customers while decreasing outward messaging to new prospects out of their jurisdiction.
Is delegated reporting a specific issue following Brexit?
One of the changes of Brexit is that EU reports need to be submitted to an EU TR or ARM and vice versa for UK reports. Therefore, firms providing delegation for their clients need to apply a system to identify their customers’ country and relevant EU or UK entity for submitting reports under EMIR and SFTR.
CME and Deutsche Borse’s exit are both flagged up as having had an impact on the market, how do you see the market consolidating in 2021?
At the moment, there doesn’t appear to be any imminent threat of further market consolidation expected in 2021 among TRs and ARMs.
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