Regulation and standards experts gathered in New York City to discuss and debate the ongoing challenges of managing regulatory requirements in an industry that is working on many different platforms using multiple data formats.
The second Regulation & Standards event hosted by the SWIFT Institute and SWIFT’s Standards Forum (the first was held March 2013 in London) was co-hosted by MIT’s Center for Finance and Policy. The day provided a lively discussion about regulatory reporting and the increasing data challenges these requirements pose for the global industry. With a unique mix of academics, financial practitioners, market experts and regulators, the stage was set for a great discussion to better understand regulatory challenges and identify ways to work together, leading towards a common goal for improved implementation of regulatory requirements.
International data harmonisation and coordination topped the agenda with a very attentive audience interested in finding better ways to facilitate consistent reporting for the marketplace. With trade and transaction reporting requirements in about 26 jurisdictions (countries), the lack of consistency makes the reporting effort expensive and difficult for market participants to comply. It also complicates the ability of the regulators to aggregate and share data at international level. IOSCO and the industry in general are making progress through some global harmonisation efforts but there remains a long way to go. It was highlighted that the wheel does not have to be reinvented; standard methodologies exist and can be utilised.
Implementing regulations: are we still lost in translation?
The financial crisis underscored the need for additional transparency and regulation in the financial markets. Regulators around the world have been challenged to conduct systemic risk analysis in order to understand the aggregate risks of entities and their counterparties across asset classes and markets. Precise and accurate identification of legal entities engaged in financial transactions as well as reporting certain aspects of financial transactions is critically important to both financial practitioners and regulators. As a result, regulators are asking for more data, challenging the financial institutions to fulfill multiple data requirements across multiple jurisdictions. For any financial institution this is a massive amount of data to collect and manage for compliance purposes, and it comes with the burden of doing it responsibly and effectively.
Discussion around these data issues highlighted the pain points within financial institutions. A common thread was data quality and the importance of having good data that is understood across the organisation. If an institution does not understand the data, technology will not help and complying with the regulations will not be effective.
Other pain points included the lack of regulatory consolidation, lack of clarity in the type of data required and the ambiguous approach to data definition, which all participants agreed was broken across the entire process.
However, all is not lost as some panellists highlighted the recent progress that has been made. Notably, the efforts started by the Financial Stability Board in the harmonisation of trade reporting in over-the-counter (OTC) derivative markets was seen as a step in the right direction. There was also the idea of giving regulators the ability to innovate, within a legislative framework. And it was noted that since the industry has already automated several key business processes, using standards like ISO 20022 has made the data collection process easier. The industry needs to build on what has already been accomplished using ISO 20022 as the baseline.
Aligning regulatory intent with implementation
Discussions moved on to how the industry could better align regulatory intent with implementation. Regulators need to regulate to prevent future crises, identifying all threats to market security such as anti-money laundering, automated trading, and counterparty risk. There was a general consensus on the growing need for the industry to enforce the idea of using standards for regulations because standards could translate the intent. ISO 20022 surfaced again as a potential solution to help ease implementation requirements. However, this approach comes with its own challenges; ISO 20022 is a flexible standard and can do the job, but multiple versions of the same standard are being adopted at different speeds across the world. Furthermore, a key challenge is managing paper-based requirements from regulators. Not all processes are automated or electronic and nor are some of the requests. Standards bodies should be involved in the development of global regulations. The potential exists for standards to translate the regulatory intent.
Building on harmonization of global standards, a new word was introduced to the audience; ‘communitarian’, or one who regularly engages the community to get things done. In this case the community is not just financial institutions, but key players that include regulators, industry associations and the vendor community. Building within the community was deemed to be a critical factor for success. The other key factor needed to align regulatory intent with implementation is getting regulators to talk to one another. This is difficult as regulators want and need to protect their own jurisdictions, but building out regulations by milestones using a flexible standard might deliver better results. It was suggested that standards bodies and industry groups could play a significant role liaising between regulatory bodies and should be involved earlier in the process. Creating utilities as an information sharing hub was discussed as another approach that could streamline the implementation process for practitioners. Collaboration is key. There is no competitive edge in regulatory reporting. Financial institutions need to speak to one another and understand how they are managing these requirements.
The idea of engaging more with the lawyers that set the rules was explored. There is a big difference between those building the regulations and those supervising financial institutions to make sure they are in compliance. The key seems to be engaging with the regulators earlier in the regulation development process, but it can be difficult as it is very rare for regulators to participate in forums and workshops. There are some recent cases of success with new regulations, such as the Legal Entity Identifier (LEI). In this case a large part of the LEI’s success has to do with the fact that both sides – market authorities and market participants – had the same requirements. It was a partnership with both sides working together to figure out exactly what was needed at both the national and global level. It was, however, pointed out that as much as the LEI is being used for reporting purposes; it is not yet being used to its fullest extent. The LEI is a tool that enables financial institutions or regulators to quickly and accurately identify a counterparty to a transaction. However, most of the market is only using it for reporting and not its intended use of identifying a counterparty at the start of the process. If the LEI is deployed across the enterprise, then financial institutions can track customers across divisions, increasing the ability to manage profitability or exposure.
In the end it seems that currently forced adoption is the main way standards get implemented and adopted across financial institutions. However, there is a role that the industry can play in helping to drive more adoption and the use of regulations across institutions, particularly when standards are involved. To advance this, it requires a level of commitment and volunteerism that management may not understand or support. We can all work together as an industry, but we also need the company-wide engagement.
ISO 20022 as a vehicle for regulatory implementation
The value of standards, and specifically ISO 20022, was discussed in great detail as a vehicle to support regulation. There was a desire for regulatory requirements to be written into something that can be coded, as it would enable greater standardisation of reporting requirements. It was noted that ISO 20022 is progressing very well with a lot of take up in Europe, as well as in both Asia and the US where efforts are ramping up. With the new wave of Market Infrastructures adopting ISO 20022, the standard is on its way to becoming the natural language of financial transaction processing. It has taken a long time to get this point, but ISO 20022 is now the common language of the Market Infrastructure community.
Building the roadmap
To close out the day’s discussions, focus shifted to try and determine the necessary next steps to build a roadmap effecting action and change in the current regulatory process.
The big question was asked: Are we (the industry experts) doing enough for market participants to support their data needs? Especially with respect to payment message formats. In a content, data rich world what can we be doing better to support the needs of our end users. Again, standards stood out as a crucial element in response to support tools and one area that keeps consuming greater attention across financial market infrastructures in the US and globally.
We all know we need to do the right thing, so it is more about figuring out how to get the right people around the table to achieve the efficiencies we need to achieve. We need to find better ways to address the issues of market efficiencies to take risk out of the system. What are the right things market experts should be doing for the industry as a whole and how can we cooperate better with customers and regulators to bring greater transparency to the marketplace?
The maxim of collaboration is important. It is not all on the regulators, but early and direct involvement of both the public and private sectors to move forward is important to realise the promise standards can provide. The dialogue industry are having with regulators is paying dividends and much less adversarial these days. As an industry we need to understand that regulators have issues too and are under constraints. It is only when we start working together and talking that we can fully understand and appreciate each other’s issues and begin define common solutions.
Delegates were left with the following conclusions at the end of an extraordinarily interesting day:
- Standards, namely ISO 20022, is a well-placed tool for regulators and practitioners to manage and facilitate regulatory requirements;
- Collaboration is key;
- Early and direct involvement from both practitioners and regulators could eliminate a lot of confusion;
- Market experts can act as a bridge between regulators and practitioners to help interpret and translate regulations into meaningful requirements;
- Academia has a big role to play; to help train up the next generation of young graduates in data standards and identify ways regulators could use standards as a vehicle to define regulatory requirements; and
- We’re all in this together!
The concept of data standardisation is not new, but the vast amount of data to manage seems to be the real challenge. You know you are in trouble when you hear the word “quadrillion” mentioned twice in one discussion with regard to the quantity of data. Stay nimble and recognise that we are all in this together.