S&P’s Igor Kaplun and Ron Finberg highlight the current challenges surrounding reporting obligations and the regulatory road the financial services industry will have to travel down in the years to come
Trade and transaction reporting, as part of the G20 regulatory mandate, has been a market feature for 10 years now. No one could have predicted the complexity, cost and resources that would be required by the financial services industry to meet trade and transaction reporting obligations. Though the industry is certainly better prepared, better organised, and has more resources focused on regulatory change, it is still chasing the next new wave of regulatory change that is always just around the corner. Over the next three years, it will see significant changes to reporting requirements in the US, Canada, Europe, Singapore, Australia and Japan.
In the US, the Commodity Futures Trading Commission (CFTC) rewrite is just five months out, due to be implemented by 5 December 2022, with the second phase of the CFTC rewrite due for implementation in Q4 2023.
Australian authorities have issued consultation on changes to their reporting rules, with a target to go-live in two phases – October 2023 and April 2024. Similarly, Canadian and Japanese regulators have changes targeted for H1 2024, while updated technical standards for the European Market Infrastructure Regulation (EMIR) REFIT are expected to go live in H1 2024.
Needless to say, the industry will be busy for the next three years! But why all the changes? Ultimately, it is all about data harmonisation and data quality. Due to the fact that each regulator initially came up with their own rules, technical specifications and data formats, the same trade is currently reported in different ways, depending on the jurisdiction.
There has finally been the realisation that there has to be a better way: standardise the critical data elements (CDE) globally, ensure there is a standard unique product identifier (UPI), and have a common submission format (ISO 20022 XML).
These consultations and rule changes are the result of that realisation with global regulators adopting similar standards across regimes. Regulators are also speaking with various industry working groups to better understand how they are capturing transaction and lifecycle events in their books and records, and how this information fits into schemas for reporting. In addition, work has been done to adopt similar practices to the logic creation and distribution of unique trade identifiers (UTI) among participants.
However, while the proposed changes mean the unification of transaction reporting formats and processes, it also presents the industry with a massive problem: how to resource for all these regulatory projects, particularly when it appears there is no end in sight.
For example, it is one thing to say that replacing the multiple existing comma-separated values submissions with a more standardised extensible mark-up language format will improve efficiency and data quality, but it is another to uproot how trades are currently being reported and then put in place new systems to support the changes.
Similarly, there are years of bilateral agreements in place that cover responsibilities for delegated reporting and UTI sharing that may need to be updated and agreed upon between counterparties, particularly to comply with new UTI waterfall standards being introduced across multiple derivative reporting regimes such as EMIR.
Down the path
As the industry stares down the runway of projects for the next three years, and the three years after that, many firms are asking the same questions about how to stay compliant and how to manage costs.
Importantly, with numerous costs and requirements the industry needs to meet, there is a growing realisation that now more than ever it may not make sense for individual firms to own every aspect of regulatory reporting processes themselves. Does a firm really need to build its own eligibility and determination engine to know which trades have to be reported to where and why? Does it make sense to manage infrastructure and connectivity to multiple endpoints? Should each company have its own specific interpretations of regulations? The short answer is: “No”.
Industry-wide challenges need industry-wide solutions, through a mutualised cost structure that allows a critical mass of clients to satisfy their reporting obligations through the same solution. This model works in trade processing, confirmations, clearing, payments and in many other corners of the capital markets. Trade and transaction reporting is certainly an area where this has been proven to work and it can help to drive reduced costs and lower long-term costs of ownership.
A great example of where this model of industry wide solutions can be effective is with UTI enrichment under Securities Financing Transactions Regulation (SFTR). As a new regulation, many of the largest securities lending and repo dealers worked with IHS Markit (now S&P Global) and other solution providers to create systems to share and match UTIs between counterparties.
Using these matching systems, reporting firms were able to have UTIs automatically enriched to their reports, greatly reducing the time spent populating UTIs and increasing the overall quality of UTI pairing rates. The 2021 EMIR and SFTR data quality report published by European Securities and Markets Authority shows the EMIR pairing rates at 60 per cent after eight years of reporting. However, SFTR has achieved around 64 per cent after two years of reporting.
The SFTR reconciliation rates for loans, which is the next stage of matching after pairing, ended at 50 per cent, but there is no mention of this for EMIR. Similarly, shared data can be used across EMIR to allow companies to automatically enrich UTIs. Shared industry platforms can also be used to generate consensus opinions on the correct formatting of new lifecycle event fields and enriching UPIs.
In the last 10 years, the industry has worked tirelessly to keep up with the wave of regulatory reforms across all major financial jurisdictions. It is difficult to say what the next 10 years will hold, but certainly in the next three years, we will see an extremely busy regulatory agenda through rewrites and refits as well as new reporting requirement proposals such as the US Securities and Exchange Commission securities reporting requirements (10c-1), and the swap-based position reporting (10b-1).
Firms are starting to seriously consider whether they should continue operating as they have been doing — building for every new regulation/managing all the regulatory changes in-house — or whether to partner with proven industry solutions providers to help reduce cost and manage regulatory change, allowing them to focus on their core business activities.
