The global financial crisis that began in 2007 and peaked in 2008 and 2009 was the greatest blow to the financial world, creating global shockwaves. The economic situation has created a need for financial services firms to accurately scale required levels of regulatory compliance and economic capital to support business strategy and risk appetite. Subhasis Bandyopadhyay, head capital markets CoE at Mindtree, writes
It also requires firms to minimise systemic risk, enhance capability of firms to handle stressful economic and financial market conditions and restore confidence of investors in the markets.
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New regulations are evolving to monitor and manage transparency, robust and comprehensive risk management, regulatory compliance and efficient governance for multiple business units and across multiple geographies. Addressing programs individually through silo compliance systems for each jurisdiction does not provide an enterprise-wide view and results in procedure replication along with an increase in cost and complexity.
Major Market Regulations
Dodd Frank Act Title VII, EMIR and other OTC derivatives market regulation require reporting of daily trades to mitigate systemic risk. Basel III, DFAST and CCAR aim at ensuring capital adequacy while MiFIR tracks events of market abuse. Failure to comply doesn’t only result in considerable fines but also involves reputation loss for the firm.
Technological Challenges Faced by Financial Firms in the Regulatory area
Collectively, these regulations have a huge impact on the IT landscape of a financial firm as they involve extensive data integration, encompassing multiple business units and geographical entities. Some of the key challenges include:
Challenge 1. Identifying the source systems to rely on for obtaining complete and accurate trade and positions related data for regulatory reporting.
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By GlobalDataChallenge 2. Enhancing IT infrastructure and communication lines to enable acceptance of data from multiple sources and ensure enough flexibility to handle the business rules and data elements.
Challenge 3. Achieving a golden copy of reference data accurately capturing all the required counterparty identifiers (like LEI, BIC codes and other interim and internal codes), product identifiers (coming from markets or 3rd party data provides) and Market codes (for regulated markets, MTFs and OTFs in Europe and SEFs in the US).
Challenge 4. Integration of business rules for identifying and defining exception workflows for processing poor quality data.
Challenge 5. Handling significant changes to the architectural framework to meet the current and future regulatory landscape.
Challenge 6. The absence of a centralised database to integrate compliance systems with enterprise-wide views. Due to a silo approach, financial firms are facing difficulties in making comparisons and conducting analysis and at times even find it impossible to aggregate data. This means that they are unable to gain an enterprise-wide view of risk and instead are faced with a fragmented approach to risk, with different departments in a financial firm focusing on their own activity only, thus creating a false sense of security.
Challenge 7. A lack of identifying any commonality among regulatory chattels building efficient reporting infrastructure.
Challenge 8. A lack of smart routing systems to handle the large scale market execution data.
Challenge 9. Storing and maintaining large volumes of orders and execution data, while efficiently retrieving data in real time. This demands IT to develop specialised data marts and develop trading compliance and strategy validation solutions.
Considering the above challenges makes it necessary to put adequate IT controls and process controls in place to make the regulatory compliance future proof and able to tackle new changes in the business landscape. Automating and managing regulatory processes from trade validations to tracking will enable financial institutions to reduce operational risks and avoid penalties levied for inaccurate reporting. Regulatory project implementations involve frequently changing requirements and very stringent timelines, and the financial firms would benefit from being able to rely on experienced technology partners to achieve regulatory compliance in a timely, accurate and cost effective manner.
The complexity in asset classes and the rapid growth in trade volumes have made transaction reporting challenging for financial institutions. Inefficient management of regulatory reports results in non-compliance penalty and increased operation risk. Financial institutions best response to manage these arduous reporting is a with robust software framework to automate and manage regulatory processes from trade validations to tracking; and provide a dashboard view to the risk officers of trade submissions, exceptions and re-submissions across multiple regulations.
