Making the right use of regtech has the potential to grow the industry exponentially, says ISLA panellist
17 June 2022 Vienna
Image: CasanoWa Stutio
Regulation technology experts, who make the right uses of technology, have the potential to grow the industry exponentially, said Ian Sloyan, senior advisor, data and digital solutions of the International Swaps and Derivatives Association (ISDA) at the 29th Securities 麻豆影视传媒 & Collateral Management Conference in Vienna.
The conference, organised by the International Securities Lending Association (ISLA), held a regulation-focused panel, entitled 鈥淏eyond Acks & Nacks: The End of Regulatory Reporting as We Know it?鈥�, in which Sloyan made the comment.
The panel, moderated by Miles Barker of Credit Suisse, saw industry experts discuss whether regulatory reporting as the industry knows it has reached a new cycle.
Barker questioned the panel on what lessons they and their businesses had learned from being in the industry for more than 10 years, and what they thought would help the industry to move forward in terms of regulation.
Pierre Khemdoudi, senior vice president 鈥� network and regulatory solutions at S&P, said: 鈥淚 am generally very optimistic. The search for quality and for scalability in the regulatory reporting space is moving fast. It is at the centre of strategy for both large and small clients. This optimism is powered by technology adoption. Cloud is at the centre of scalability.
鈥淕enerally, there have been many lessons learned along the way. We feel we have come to the end of the cycle after a series of global reporting initiatives that has been deployed over the last decade. Globally, we are now rebuilding to make sure that models are scalable and sustainable as well as cheap to maintain for many years to come.鈥�
Barker discussed how in the early days of regulation, reporting was sometimes seen as a burden. He then asked DTCC鈥檚 Valentino Wotton, managing director, product development and strategy, repository and derivatives services, his view on burden versus benefit.
To which Wotton answered: 鈥淔irms still mainly see it as a burden because it is not tied to the upstream. We are moving toward the point where firms are looking towards the same data for those flows because it is far more efficient from a data management perspective 鈥� it is about having common data models.
He went on to say: 鈥淭hough, the real crux when it comes to derivatives, is the implementation of standards. Of fundamental importance is the implementation of the common data elements 鈥� if the majority of those are adopted, across jurisdictions and in a standardised way, that is going to be critical. The trouble is that 110 fields under the Securities Financing Transactions Regulation (SFTR), is not realistic. In reality, there are 50 to 60 key economic fields that are needed.
鈥淚f we can get to a stage where we can coalesce all standards 鈥� including ISO 20022 鈥� consistently and across the globe, the ability to aggregate data becomes far more viable, and if this can be done in a timely manner, rather than only after a crisis, then we will definitely be moving in the right direction.鈥�
He added: 鈥淲e need to continue collaboration across the industry to get the right output. The industry has made significant investment in delivering high levels of data and it is envisaged that value will be derived from the aggregation of that data.鈥�
Barker then asked for a vendor鈥檚 point of view, to which Jonathan Lee, senior regulatory reporting specialist at Kaizen Reporting, outlined: 鈥淭here is a strong need for a thorough restructuring-type project to have full back-to-back flows in a common standard. It is important to keep things simple 鈥� in terms of a common domain model 鈥� to create a model front-to-back within organisations, which is proven to be a fully functioning product, and then to represent it to the regulators who are generally very conservative and very legally-driven. When we achieve that, we will have very good prospects as a means to push away from push reporting.鈥�
Barker went on to ask Khemdoudi how he viewed the standardisation of operational data, to which Khemdoudi answered: 鈥淚 have been working with financial data for a very long time. Every single time there is a new format, we are being asked to translate into that format. Very rarely do financial institutions natively adopt the format because the upstream challenges of that are often too complex and expensive. In addition, the timescale for adoption is long, often taking decades, unless it is mandatory.
鈥淭he work that ISLA is doing for global standards is amazing, but that does not take away from the complexity of standardising operational data.鈥�
Barker went on to ask the panellists if the buy-versus-build landscape is changing. Kaizen鈥檚 Jonathan Lee said: 鈥淚 think in many cases there has been a move away from build versus buy. The whole concept of having a Fort Knox data warehouse within the bank, in which nothing ever exits the door, and everything needs to be internalised, is an emerging trend, but it has not necessarily changed us as an industry yet. It has been very much about how we limit our operational overhead, and cut costs as much as possible.鈥�
Khemoudi added: 鈥淎s much as we would like to have complete certainty from the regulators on when they update regulation, I do not think we will ever get there. That is the reality, these are highly technical reports and highly technical transactions and they are trying to find a one- size-fits-all for this when it is very complex.
鈥淭here will always be areas of interpretation and that is where it is interesting to have this mutualisation aspect because using a mutualised solution gives you an industry view. For example, if you look at the Securities Financing Transactions Regulation and work done by ISLA or the International Capital Market Association to create standards for interpretation, it is huge work. At least have the same interpretation as your peers 鈥� that is the idea.鈥�
Lee outlined: 鈥淲e need to be evangelical here 鈥� we need to prove that this is not super complex. It is complex because people have tried to present it that way. There is a lot of data, but I do not agree that it is hugely complex.鈥�
Addressing Lee鈥檚 comments, Khemoudi鈥檚 said: 鈥淭he reporting is complex, but it should not be that complex. However, the reality is that the financial markets are complex and when you report you have to reflect on all the different models 鈥� which is where it gets complicated. I understand why clients want to make sure that they report in the same way. If they report with the same interpretation as their peers, that means safety is in numbers.鈥�
Khemoudi added: 鈥淲here we see greater implementation of standards is when there is a data strategy at bank level. When there is a true strategy around controlling data 鈥� making use of the data to have better control, where regulatory reporting is one pillar of it 鈥� we see huge success in clean reporting and clean implementation and having a scalable model.鈥�
In his closing comments, DTCC鈥檚 Wotton made the point that 鈥渃ollaboration and being invested collectively as an industry is the way forward鈥�. But he urged the industry to be realistic about time to market and the challenges that it faces.
Khemoudi highlighted: 鈥淓very single market participant can do better, but what really matters is that any new reporting regime or update that comes along is in line with what has come previously. It would be awesome to see similarities in regions and globally 鈥� some reuse from what we have been building, it makes both vendors and client鈥檚 lives much easier.鈥�
Lee said: 鈥淵ou should be adopting the best practices that have been advised by the trade associations. Follow those best practices to adopt the corresponding market standards and always make sure you abide by the contract.鈥� He highlighted too many instances where firms are basically terminating a contract for operational reasons, and then booking a new one, rather than modifying the original transaction which was contractually agreed.
鈥淚 recommend going with the standards and best practices and making sure you follow the contracts that you have traded,鈥� he added.
Sloyan concluded the panel by saying: 鈥淲e want to evolve to see regulators ask for the particular view they would like of a particular activity or market, or data field and we can layer over that view for them on the underlying systems鈥� data 鈥� that can be on any technology requested, whether it is on the cloud, distributed ledger technology or an old-fashioned mainframe.
鈥淚t is all about the complexities of the technical standards and attempts by regulators in good spirit, and at rapid speed, to build an infrastructure which, in reality, we probably just need to simplify.鈥�
The conference, organised by the International Securities Lending Association (ISLA), held a regulation-focused panel, entitled 鈥淏eyond Acks & Nacks: The End of Regulatory Reporting as We Know it?鈥�, in which Sloyan made the comment.
The panel, moderated by Miles Barker of Credit Suisse, saw industry experts discuss whether regulatory reporting as the industry knows it has reached a new cycle.
Barker questioned the panel on what lessons they and their businesses had learned from being in the industry for more than 10 years, and what they thought would help the industry to move forward in terms of regulation.
Pierre Khemdoudi, senior vice president 鈥� network and regulatory solutions at S&P, said: 鈥淚 am generally very optimistic. The search for quality and for scalability in the regulatory reporting space is moving fast. It is at the centre of strategy for both large and small clients. This optimism is powered by technology adoption. Cloud is at the centre of scalability.
鈥淕enerally, there have been many lessons learned along the way. We feel we have come to the end of the cycle after a series of global reporting initiatives that has been deployed over the last decade. Globally, we are now rebuilding to make sure that models are scalable and sustainable as well as cheap to maintain for many years to come.鈥�
Barker discussed how in the early days of regulation, reporting was sometimes seen as a burden. He then asked DTCC鈥檚 Valentino Wotton, managing director, product development and strategy, repository and derivatives services, his view on burden versus benefit.
To which Wotton answered: 鈥淔irms still mainly see it as a burden because it is not tied to the upstream. We are moving toward the point where firms are looking towards the same data for those flows because it is far more efficient from a data management perspective 鈥� it is about having common data models.
He went on to say: 鈥淭hough, the real crux when it comes to derivatives, is the implementation of standards. Of fundamental importance is the implementation of the common data elements 鈥� if the majority of those are adopted, across jurisdictions and in a standardised way, that is going to be critical. The trouble is that 110 fields under the Securities Financing Transactions Regulation (SFTR), is not realistic. In reality, there are 50 to 60 key economic fields that are needed.
鈥淚f we can get to a stage where we can coalesce all standards 鈥� including ISO 20022 鈥� consistently and across the globe, the ability to aggregate data becomes far more viable, and if this can be done in a timely manner, rather than only after a crisis, then we will definitely be moving in the right direction.鈥�
He added: 鈥淲e need to continue collaboration across the industry to get the right output. The industry has made significant investment in delivering high levels of data and it is envisaged that value will be derived from the aggregation of that data.鈥�
Barker then asked for a vendor鈥檚 point of view, to which Jonathan Lee, senior regulatory reporting specialist at Kaizen Reporting, outlined: 鈥淭here is a strong need for a thorough restructuring-type project to have full back-to-back flows in a common standard. It is important to keep things simple 鈥� in terms of a common domain model 鈥� to create a model front-to-back within organisations, which is proven to be a fully functioning product, and then to represent it to the regulators who are generally very conservative and very legally-driven. When we achieve that, we will have very good prospects as a means to push away from push reporting.鈥�
Barker went on to ask Khemdoudi how he viewed the standardisation of operational data, to which Khemdoudi answered: 鈥淚 have been working with financial data for a very long time. Every single time there is a new format, we are being asked to translate into that format. Very rarely do financial institutions natively adopt the format because the upstream challenges of that are often too complex and expensive. In addition, the timescale for adoption is long, often taking decades, unless it is mandatory.
鈥淭he work that ISLA is doing for global standards is amazing, but that does not take away from the complexity of standardising operational data.鈥�
Barker went on to ask the panellists if the buy-versus-build landscape is changing. Kaizen鈥檚 Jonathan Lee said: 鈥淚 think in many cases there has been a move away from build versus buy. The whole concept of having a Fort Knox data warehouse within the bank, in which nothing ever exits the door, and everything needs to be internalised, is an emerging trend, but it has not necessarily changed us as an industry yet. It has been very much about how we limit our operational overhead, and cut costs as much as possible.鈥�
Khemoudi added: 鈥淎s much as we would like to have complete certainty from the regulators on when they update regulation, I do not think we will ever get there. That is the reality, these are highly technical reports and highly technical transactions and they are trying to find a one- size-fits-all for this when it is very complex.
鈥淭here will always be areas of interpretation and that is where it is interesting to have this mutualisation aspect because using a mutualised solution gives you an industry view. For example, if you look at the Securities Financing Transactions Regulation and work done by ISLA or the International Capital Market Association to create standards for interpretation, it is huge work. At least have the same interpretation as your peers 鈥� that is the idea.鈥�
Lee outlined: 鈥淲e need to be evangelical here 鈥� we need to prove that this is not super complex. It is complex because people have tried to present it that way. There is a lot of data, but I do not agree that it is hugely complex.鈥�
Addressing Lee鈥檚 comments, Khemoudi鈥檚 said: 鈥淭he reporting is complex, but it should not be that complex. However, the reality is that the financial markets are complex and when you report you have to reflect on all the different models 鈥� which is where it gets complicated. I understand why clients want to make sure that they report in the same way. If they report with the same interpretation as their peers, that means safety is in numbers.鈥�
Khemoudi added: 鈥淲here we see greater implementation of standards is when there is a data strategy at bank level. When there is a true strategy around controlling data 鈥� making use of the data to have better control, where regulatory reporting is one pillar of it 鈥� we see huge success in clean reporting and clean implementation and having a scalable model.鈥�
In his closing comments, DTCC鈥檚 Wotton made the point that 鈥渃ollaboration and being invested collectively as an industry is the way forward鈥�. But he urged the industry to be realistic about time to market and the challenges that it faces.
Khemoudi highlighted: 鈥淓very single market participant can do better, but what really matters is that any new reporting regime or update that comes along is in line with what has come previously. It would be awesome to see similarities in regions and globally 鈥� some reuse from what we have been building, it makes both vendors and client鈥檚 lives much easier.鈥�
Lee said: 鈥淵ou should be adopting the best practices that have been advised by the trade associations. Follow those best practices to adopt the corresponding market standards and always make sure you abide by the contract.鈥� He highlighted too many instances where firms are basically terminating a contract for operational reasons, and then booking a new one, rather than modifying the original transaction which was contractually agreed.
鈥淚 recommend going with the standards and best practices and making sure you follow the contracts that you have traded,鈥� he added.
Sloyan concluded the panel by saying: 鈥淲e want to evolve to see regulators ask for the particular view they would like of a particular activity or market, or data field and we can layer over that view for them on the underlying systems鈥� data 鈥� that can be on any technology requested, whether it is on the cloud, distributed ledger technology or an old-fashioned mainframe.
鈥淚t is all about the complexities of the technical standards and attempts by regulators in good spirit, and at rapid speed, to build an infrastructure which, in reality, we probably just need to simplify.鈥�
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