Abide_TriO“Prepare for the worst” – key operational challenges for meeting regulatory reporting deadlines

At a recent breakfast event hosted by Abide Financial and TriOptima, NEX Group businesses, panellists and delegates discussed the challenges faced by investment firms in meeting obligations and deadlines for transaction and trade reporting. The panel, moderated by Ben Pott (NEX Group), comprised of Chris Dingley (Abide Financial), Jenny Nilsson (TriOptima), Martin Ward (Mitsubishi UFJ Securities) and Richard Craske (MAN GLG). Some 165 delegates representing buy- and sell-side institutions attended.

Setting the scene, Chris Dingley introduced the key challenges facing Abide clients and prospect network, primarily relating to the complexity of required reporting models such as splitting collateral, additional valuations and lack of product detail (e.g. for credit and rates) necessary to adequately model exposure. Interestingly, he felt that the EMIR Review received “significantly less airplay” than MiFID II, despite being slated for implementation in November 2017, ahead of the January 2018 MiFID II/R go-live date. In a show of hands, the audience concurred that they were most concerned with MiFIR implementation, with EMIR following closely behind.

In respect of MiFID, he observed that “down in the trenches there’s a data problem”, in reference to compliance with LEIs and national identifiers, the mandated shift from AII to ISIN reference data and requirement for greater management information to demonstrate ‘front to back’ compliance.

 

Key Operational Challenges

 

Managing complexity of multiple, disparate regulations across multiple asset classes

The panel agreed that meeting MiFIR, EMIR, SFTR and other regulatory reporting obligations is easier said than done; both in terms of accessing and consolidating a disparate amount of data held on multiple systems and platforms, together with the need to get it right. As one panellist noted, “it’s a massive job and very expensive” while another observed that despite the complexity of compliance with multiple reporting regulations, getting the resources to manage the task had been “a difficult sell to senior managers”.

Market confusion was cited as another challenge, because “everyone has a different view” about what their actual obligations are in respect to compliance.

 

Consolidating data held in multiple silos

A key hurdle for operations teams tasked with fulfilling new trade and transaction reporting obligations is how to bring together and ‘normalise’ data held in different places within and across bank entities.

As one panellist noted “it’s no longer just a question of capturing trade-related data – we now have to bring in data from HR to meet ‘national identifier’ requirements, we need connections with venues to receive other ID information and above all we need to be able to assure data accuracy”.

Another observed that the regulation isn’t clear on who exactly is ‘the decision maker’ of a transaction. Is it the portfolio manager? Or the credit/risk team? “Ultimately, we need to put a name on the report to the regulator”.

Similarly, the timing of trade reporting was subject to confusion. At what point, for example, does a block trade become an order and subject to reporting? When it’s allocated?

Jenny Nilsson stated that as the reporting world becomes more complex, clients were increasingly worried about data accuracy. She emphasised the importance of being able to get a holistic view of data, held across different repositories and jurisdictions.

“Validating the data accuracy of your own reporting and being able to check that you align with your counterparty is a huge challenge. Firms need a process in place that highlights the issues and helps them align the data across multiple reporting regimes” she concluded.

 

Ensuring and assuring data accuracy

The panel felt that meeting regulator expectations would lead to the creation of internal ‘data warehouses’ to house “good, clean reference data that can be reported so regulators can use it”.

However, this is, again, simple to understand, but harder to execute. Obtaining LEIs is an ongoing challenge; while it’s not difficult to get LEIs, clients don’t necessarily understand the impact of not providing them, and third country firms have no obligation to provide them. It was felt that an industry initiative to centralise the collection of static data through an LEI utility would be valuable, but wasn’t a viable solution before the EMIR Review implementation date.

Likewise, the proposal to mandate ISIN as the sole instrument identifier for MiFID II presents an enormous challenge. The industry is expecting further clarification from ESMA on how these will be generated for potential new in-scope OTC products or applied to ‘huge gamma instruments’ executed across different trading venues, particularly if they have to be obtained pre-trade.

One panellist noted “there’s a lot of issues around data protection, for example, if personal data is required from a US-based entity”. If identifying data can’t be accessed or used, firms may not be able to trade. In a similar vein, will firms have an obligation to ensure that personal data is kept up to date, for example when individual passports expire?

With regards to who is responsible for data accuracy, given the ‘constant cycle of change’ panellists felt that for the most part, this was an opportunity for vendors to ‘take up the heavy lifting’. To mitigate the risk of becoming disparate with multiple vendors, “it’s better to find a vendor that can do it all”, although the panel stressed that while the reporting process might be outsourced, the compliance obligation could not, leading to some discussion about how to ensure the accuracy and security of data reported via a third party.

It was observed, “While you might be able to reconcile what is sent by a vendor [to a TR], it won’t necessarily be obvious what hasn’t been sent”. To overcome this hurdle, it was stated that leveraging existing market infrastructure and the good work done by the industry in bilateral portfolio reconciliation can improve the reporting data quality. Regulators around the globe have noted the value of proactive reconciliation of portfolios and it is now mandated in many jurisdictions. Proactive reconciliation enables trend analysis, and if you have the tools to tag these differences firms can start understanding where they are coming from and how to fix them. “If the industry came together and bilaterally reconciled what has been reported, data quality will improve over time”.

 

Clear definition of reportable asset classes and products

The panel discussed the challenge of establishing appropriate reporting processes while the concept of ‘instruments traded on venue’ is still under discussion by ESMA. In the absence of clarity, should firms take a broad or narrow view of what’s in (and out) of reporting scope? One panellist said that while it was tempting to go with a narrower definition, it was increasingly clear that the regulator was more likely to go for the broader scope.

A question posed to the audience suggested that there remained some confusion on the buy-side about the level of granularity of reporting required. While it was accepted that the lack of a common set of reference data was frustrating, NEX Group are working on a solution to ESMA that uses the ISDA model to define ‘parameters around instruments’ rather than requiring a specific ‘code’ for every possible instrument and type of transaction.

It was felt that this issue was unlikely to be resolved by the implementation deadline, and that industry associations should determine market best practice. Overall, regulatory reporting workflows and processes must be built with the flexibility (contingency) to cover all reporting eventualities.

 

Conflicting regulatory priorities

The panel agreed that effective management of conflicting regulatory priorities and implementation dates was a major pain point for investment firms, particularly in respect of appropriate resource allocation. Ideally, operations teams would take a holistic view, scoping out and identifying overlap/crossover between different regulations to avoid duplication of effort. This isn’t always evident, particularly for firms facing multi-jurisdictional reporting obligations. As one panellist noted, “it’s bigger than EMIR and MiFID – often firms must accommodate Dodd Frank, MAS, ASIC and other regional regulations”.

Surprisingly, some firms are running regulation-specific projects, rather than taking a more holistic view of the challenge. In principal, creating an in-house reporting hub would seem to be the logical approach, but in practice there is little standardisation in respect of required reporting fields. The EMIR Review adds 43 new fields, MIFIR adds 65 and SFTR, tabled for implementation just one week after the MiFID II deadline, mandates an astonishing 143 fields to be reported.

Faced with the challenge of building effective solutions to manage the shifting sands of compliance, many firms will look to vendors like Abide and TriOptima for support to manage multi-regime regulatory reporting. Clients will benefit from their specialist knowledge and focus to meet regulatory deadlines, and from their technological expertise to maintain oversight (and accountability) for the accuracy and timing of what is reported.

 

Transitioning from the old to the new

A specific challenge of reporting, highlighted by the initial EMIR rollout in 2014, is the potential ‘back loading requirement’ which has been delayed to February 2019. This applies to trades that were no longer in effect by the reporting start date of 12 February 2014, but were in force or concluded after 16 August 2012. This is a big challenge, since it requires market participants to obtain data from before the reporting start date which may not have been stored. Similarly, it was noted that these trades were not traded with a UTI. Again, this is another aspect of reporting compliance where third party specialists like Abide and TriOptima can offer support helping clients to manage the switchover to new regimes, matching old trades and generating UTIs, supporting data governance and, through regular contact with regulators, ‘reducing the amount of interpretation required’ to understand and implement new regulations.

 

The Brexit question

As one panellist observed, Brexit was “the only possible way to complicate things further” and that investment firms would need to build in sufficient flexibility to their current solutions to accommodate potentially new legal structures post-Brexit.

In-house teams considering the impact of Brexit should ensure that trade repository (TR) connectivity was considered within any Brexit strategy and plan on the basis that TR connectivity may have to be initiated twice (i.e. in the UK and Europe). The panel anticipated no let-up in respect of regulatory reporting to support market transparency and indeed, that the Bank of England had stated that “relaxing regulations would be a big mistake”.

 

Readiness for the new rules

Overall, the panel agreed that a month into 2017, the industry’s biggest challenge is being ready in time to meet the looming EMIR Review and MiFID II/R, SFTR and other regulatory deadlines, clearly stating that “time is our enemy”.

Whether buy- or sell-side, investment firms should by now be a long way down the road to reporting compliance for EMIR and MiFID and it would be foolhardy to think that a project of this magnitude can or should be left until ‘later’. While there may have been some sense with EMIR that buy-side firms could rely on sell-side counterparties to take care of the reporting burden, things have changed and all parties must be involved and committed.

 

Introducing Abide Financial
In the run up to implementation, Abide Financial, specialists in multi-regime regulatory reporting solutions, are focused on influencing client behaviour to plan NOW rather than wait for all the finer regulatory details to be confirmed. Not just service providers, specialist vendors like Abide have an increasingly valuable role as ‘regulatory trainers’, being exceptionally well placed to explain the rules (and the obligations of different players – venues, investment firms, repositories, ARMs and so on) to market participants and to deliver ‘right first time’ solutions.

 

Introducing TriOptima
TriOptima has expanded its existing triResolve service to develop a new trade reporting validation functionality that enables firms to reconcile and verify the accuracy of data sent to trade repositories. With authorised data feeds from registered trade repositories, triResolve acts as a central hub to validate and reconcile repository data. The triResolve process identifies any discrepancies across the reported data and gives firms the tools to investigate and resolve differences so that data can align.

 

Download the slides from the event here.