Five trends reshaping regulatory reporting

Regulatory reporting has been a persistent challenge for financial institutions but impending compliance deadlines in 2022 are creating a new impetus for change. Firms have an opportunity to review their reporting as part of a more strategic approach to data management.

Enabling this shift is ISDA’s Digital Regulatory Reporting (DRR) – a global industry-led programme to mutualise the cost of complying with reporting requirements, with an initial focus on the CFTC Rewrite and EMIR Refit.

DRR is born out of five trends reshaping the regulatory landscape and understanding them is key if firms are to benefit from its implementation.

Perhaps the best illustration of the standardisation drive is the CPMI-IOSCO working group’s guidance on data harmonisation for reporting OTC derivatives. As a result of the G20 summit’s call for transparency on OTC derivatives transactions in 2009, financial institutions have had to contend with overlapping requirements across jurisdictions, increasing the cost, complexity and operational risk of trade reporting.

In response, the working group set about creating common data standards across all regimes. This culminated in its publication of the Critical Data Elements (CDE) in 2018 and the push towards standardised identifiers such as LEI, UTI and UPI. Subsequently, regulators around the world drew up plans to integrate these into their regimes – of which the CFTC Rewrite and EMIR Refit are the first instalments.

Not every regulator is adopting the standards in exactly the same way but the direction is clear – a move towards greater harmonisation. The upcoming reporting challenge presents firms with an opportunity, as they can amortise investment in reporting quality for the new data attributes across jurisdictions. DRR facilitates this by focusing on building a complete set of CDE rules for use across regimes.

Multiplying data requirements also creates a risk that regulators might collect the same data several times and get conflicting results. Worse still, that the data they collect might not be the data they need. This has prompted a move towards a more integrated reporting approach, underpinned by standardisation.

Crucially, more data doesn’t mean better data. 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 easier and more cost effective for regulated firms to comply also ensures that firms’ reporting investments are better targeted at serving the public interest.

This drive towards integrated reporting appears in well-publicised initiatives, most notably the Bank of England and FCA’s Transforming Data Collection strategy or the European Commission’s Strategy on supervisory data in EU financial services. Again, DRR is an enabler of this shift. By rigorously defining data once at the source and at the most granular level, it can process data consistently as many times and in as many formats as necessary.

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. Gone are the days of “fire and forget”.

As regulators are stepping up efforts to embed standardisation and simplification into their framework, they are looking to regulated firms to fulfil their role. As such, their tolerance for poor or inaccurate data is expected to reduce and having access to a deeper pool of data will give them a rich toolkit for enforcement.

Thankfully, by allowing firms to collaborate on the implementation of reporting requirements, DRR delivers strength in numbers through a “crowd-sourced”, peer-reviewed set of rules with embedded data quality checks.

Reporting is a massive exercise in data management, so it is becoming an integral part of a firm’s data strategy. Increasingly, banks see reporting as a data governance issue for which they are setting up dedicated data engineering business units. Conversations previously involving regulatory reporting operations and technology teams, often operating as stand-alone, now include Chief Data Officers and others responsible for data governance.

This move to redefine data strategies is also vital in addressing the industry’s sluggish return on equity. As well as reducing costs, banks are under more pressure to turn data into a strategic advantage and unlock additional revenue. Goldman Sachs’ partnership with AWS to deliver a Financial Cloud data service to its institutional clients is a prime example of a data strategy eyeing the top-line.

While data is not a new challenge, 2022 will see a marked shift in gear. Instead of isolating reporting into a cost centre, banks are embracing a strategic investment into data management – and DRR embodies that approach. By leveraging ISDA’s Common Domain Model, it anchors derivatives reporting into a broader push to radically streamline the entire trade lifecycle management.

Technology has always been an essential engine of transformation of the financial industry – just think of how Excel or the advent of email changed entire trading operations – and it impacts how it is being regulated too. Three technology trends that promise to radically change the industry are also making a mark on its regulatory landscape: open source, cloud and blockchain.

Open source, once viewed with caution in financial services, is s becoming a central component of firms’ technology strategies. FINOS, the open source foundation dedicated to financial technology, welcomed 19 new members and 11 new projects in 2021. It hosts a Special Interest Group focused on Regulation Innovation and working to create open source solutions for regulatory and compliance issues in financial services. DRR embraces this trend, allowing firms to collaborate to build a standardised, open-source expression of the reporting rules.

Like open source, cloud is not exactly emerging but banks are now active in its adoption. The market has consolidated around a few large providers, establishing standards for security and resilience. This makes it possible for banks to deploy cloud-based services for regulatory reporting with greater confidence.

Blockchain, distributed ledger technology and smart contracts are also gaining traction in regulatory reporting and authorities are taking note. ESMA recently launched a call for evidence on distributed ledger technology (DLT). This looks for possible ways to allow regulators to access information about securities issued, traded and recorded on DLT, and whether reporting requirements need to be amended.

The real opportunity here is for embedded compliance. If all contracts become self-executing “smart contracts” on a blockchain, firms and regulators can also encode compliance and reporting requirements into those contracts. Again, DRR paves the way for that potentially not-too-distant, game-changing reality by delivering a machine-executable expression of the reporting rules – ready to be encoded on a blockchain.

Regulatory reporting has not typically been synonymous with innovation but as these trends power the industry forward, it will move to the forefront as firms embrace new solutions.

DRR fully aligns with those trends, helping to deliver greater standardisation, integration and data quality. As firms collaborate in DRR to build an open source, standardised and machine-executable interpretation of rules, they not only have an opportunity to streamline reporting for the 2022 deadlines and beyond – they are also shaping the future of data and technology in the industry.

Please get in touch with REGnosys to see how we can help you benefit from DRR.