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What's Next In Trade Reporting
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.
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