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3 trends that will impact trade reporting in 2021 and
beyond
This has been an extraordinary year for the financial services
industry. As participants work through legislative, regulatory,
enforcement, legal and political fallout of the 2008 financial
collapse, the regulatory reporting requirements placed on
derivatives market participants continue to evolve, with
substantive changes to existing regulations on the horizon across
Dodd-Frank, EMIR, MiFID, CSA, Singapore and Japan. At the same
time, the industry is navigating increased uncertainty as the
deadline for Brexit looms. As if that isn't enough, the world is in
the midst of a pandemic that has impacted the economy more
profoundly than the events of 2008 and relocated the infrastructure
of brick-and-mortar organizations into employees' home
environments.
These rapid-fire events are causing financial services firms to
re-assess their operating models, identify new efficiencies and
improve data quality and accuracy to support management and
regulatory decision-making in an increasingly complex and
changeable world.
IHS Markit recently engaged with a group of global experts in
regulatory technology, compliance, data and reporting, and
derivative operations to find out which trends they see impacting
the industry in 2021 and beyond. Topping the list were three
overarching trends:
1. Regulatory activity is intensifying rapidly
2. The industry is closing in on harmonization
3. Firms need to start preparing—now
REGULATORY ACTIVITY IS INTENSIFYING RAPIDLY
While the pandemic has temporarily slowed the pace of
regulations, this brief moment of calm won't last long.
Regulatory activity and enforcement actions will continue to
accelerate, and 2021 and 2022 will be pivotal years for reg
reporting. After an expansion of the SEC rules taking effect in
2021 and buy-side reporting requirements in Singapore, we'll see
the CFTC rewrite, JFSA rewrite and an EMIR REFIT sometime in
2022.
Regulators will also be getting more prescriptive, with CFTC,
ESMA and other regulators all working toward refining and
clarifying areas of ambiguity. Overall, the industry is seeing an
evolution from principal-based rules that are left largely open to
interpretation to more granular requirements around the fields,
formats and other minutiae. Regulators have come a long way since
the days of Dodd-Frank in terms of their ability to ingest,
analyze, and act on the data they collect, which has enabled them
to bring more clarity to the requirements they impose on the
industry. In some ways, this will make it easier to interpret and
send data to the trade repositories, but organizations will need to
have the capacity to support the collection and submission of a
wider range of data according to defined specifications.
THE INDUSTRY IS CLOSING IN ON HARMONIZATION
The non-standardization of data is one of the industry's biggest
challenges, consuming significant resources and leading to
reconciliation failures and, in some cases, fines due to lapses in
reporting. The industry is desperate for help in harmonizing the
data, and some stakeholders are holding out hope that the solution
will come, at least in part, from the regulators and industry
bodies such as the FSB, LEI ROC and CPMI-IOSCO.
The good news is that establishing a clearer baseline for the
data that needs to be collected and reported on is taking the
industry closer to harmonization. Firms are asking regulators to be
more intentional about the data they're asking for, and regulators
are recognizing the challenges of a piecemeal approach and seeking
out ways to harmonize reporting and simplify it across multiple
jurisdictions.
Harmonization as a concept holds tremendous appeal to all
stakeholders, and while we have yet to reach the goal, the
consensus is that the industry as a whole is directionally correct
and getting closer year by year. The industry is genuinely working
together to understand booking practices and other shared pain
points and engage regulators collectively with potential solutions.
The future is likely to see more participation from the regulators,
including sandboxes and industry collaborations to understand and
trial new approaches and technologies.
FIRMS NEED TO START PREPARING—NOW
With big changes impacting the entire ecosystem of derivative
trading in the US and around the world, this is an ideal time for
firms to revisit and re-evaluate their existing reporting systems,
architecture, governance and staffing. MiFID II, for example,
supported a surge of reg tech that leveraged AI, machine learning
and even blockchain to ease the compliance burden. Faced with major
regulatory changes alongside the rapid shift to remote work, the
industry is once again examining its systems and processes and
taking a fresh look at the technologies available in the
marketplace.
Preparing for the future of regulatory compliance means shifting
from a "one-and-done" approach to a continuous cycle. Market
participants need to be ready to support continuous improvement and
reconciliation between their books and records and the trade
repositories using the information they get from vendors,
counterparties and execution agents.
Preparations also need to include establishing stronger quality
control, which will not only improve reporting accuracy but reduce
the overall running costs of reg reporting. Being able to look at
the reconciliation to not only rectify the breaks but track the
issue back to the root cause and remediate it is a key
capability.
Firms are prioritizing holistic solutions that cover a wider
range of stakeholders and regulatory requirements. While reg tech
was initially limited to transaction reporting, it has expanded to
include the front, middle and back office and a wider range of
client bases and counterparties. Similarly, platforms that offer
broader reporting capabilities rather than one-off regulatory
reporting are replacing legacy internal solutions. In general,
there is a recognition that to deliver optimal value, technologies
must be capable of connecting all participants, including trade
repositories, counterparties, market infrastructure providers
(CCPs, SEFs, etc.) and third-party service vendors.
Blockchain is another technology with the potential to
revolutionize the post-trade space as a means to enhance trust
between the growing number of players involved in trading and
drastically reduce the time to complete a trade. Here, again,
success will depend on the implementation of technology that is
capable of sharing the data across blockchains and maintaining the
network across every chain.
Most importantly, the time to prepare a plan of action is now.
Post Brexit, there will be a short lull in new reg implementations
for a few months, and with remote operations creating the potential
for disruption and delay, the earlier firms can examine the
requirements, explore technologies, determine a budget and begin
the analysis, the better.
Ultimately, the next few years are shaping up to be some of the
most eventful in the history of regulatory reporting. Along with
some of its toughest regulatory challenges, the industry is likely
to see some of the greatest advancements due to digital
transformation, the standardization of data, and closer
collaboration among regulators and financial participants.
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
