TCO of Trade Reporting– Time For a Re-Think?

With many of the initiatives now in place to improve market transparency through trade reporting of OTC derivatives, market participants are taking stock, assessing the quality of their solutions and trying to understand what the annual running costs will be.
By Soapbox

Cian Ó Braonáin is the global lead of Sapient Global Markets’ Regulatory Reporting practice

With many of the initiatives now in place to improve market transparency through trade reporting of OTC derivatives, market participants are taking stock, assessing the quality of their solutions and trying to understand what the annual running costs will be.

The first step in the process is estimating the costs incurred by trade reporting; no easy task due to the variety of approaches taken to get compliant. Despite sizable initial investments, many institutions are still grappling with data management challenges and inefficient trade reporting processes and governance. Tight timelines resulted in many shortcuts and reduced features, particularly related to data mapping, data ingestion and operational management information reports.

When examining the ‘cost’ of trade reporting , firms must also take in to account the time, money and effort required by their internal teams to deliver more efficient tracking, reconciliation and remediation of trade data. Institutions often do not factor in these additional operating costs beyond the initial capital expenditure and need to question whether there’s a strong business case for taking a spend-to-save approach to reducing their true total cost of ownership (TCO).

An additional concern should also be increasing regulatory scrutiny. What regulators find will likely be fraught with quality and governance issues. For some this will mean assessing the financial trade-off between the cost of fixing the problem and the potential regulatory censure they could face by doing nothing.

There is also clear cost implication for reporting failures. Taking Deutsche Bank’s recent fine regarding transaction reporting, or Barclays for failing to provide accurate transaction reports under MiFID 1, as a precedent, fines could range between £2 and £4million. Scrutiny on senior management for their methodology to regulatory reporting, and the reasons for any failures, is also likely to increase, given the recent PRU/FCA consultation on strengthening board level accountability. The notion that they don’t know or it is too complex to find out how and what their firm is reporting will no longer be an acceptable response.

As a result, transparency and auditability will become two critical aspects to trade reporting. Where a firm delegates reporting to a third party it cannot delegate the responsibility for being compliant. Buy side firms must demonstrate to regulators that they are validating the delegated reporting against their own records and provide assurance to regulators and their own management teams that reporting data is accurate, timely and complete.

With firms being challenged to improve reporting while also being constrained by change budgets, how can they respond? One option could be managed services that can deliver a number of significant benefits:

• Minimized Business Risk: Actively monitoring reporting data to identify and remediate issues to minimize so the business risk associated with non-compliance.
• Improved Match Rates: Best-in-class providers are able to deliver higher match rates; a significant gain for banks reporting out for clients.
• Easier Integration: Connecting source systems to work in conjunction with other reconciliation applications, allowing easy integration with all trade repositories, counterparties and vendors.
• Improved Reconciliation: Taking reports from TR/SDRs, TriOptima and other sources, and reconciling them to an internal database to meet portfolio reconciliation requirements, identify discrepancies, and enhance dispute resolution as well as reporting.
• Reduced Compliance Risk: Support for reporting to all global TRs for all asset classes and all message types, and updated to reflect any rule changes.
• Improved Data Usability: Aggregating data from multiple sources to deliver enhanced analytical capabilities and utilizing the reporting solution as a decision support system.
• Auditability: Providing management with the ability to trace and track the data being reported throughout the compliance reporting life cycle and, when required, present to the regulator.
• Lower Total Cost of Ownership (TCO): A managed solution helps minimize capital outlay and also significantly reduces ongoing cost.

Creating a business case to replace an existing system that has already seen significant investment over a number of years, can be a challenge. While IT cost savings are relatively easy to model and track, the cost reduction alone may not give an organization a fast enough payback.

However, managed services offer both operational cost reduction and the ability to demonstrate to regulators that firms have kept pace with changes to reporting rules. Compared to the cost of continuing with large internal teams and a far more compelling business case emerges. Factor in an increased risk of reporting failure, inability to provide complete and accurate information to senior management, and the heightened risk of regulatory censure and it becomes apparent why many firms are examining managed services to improve trade reporting efficiency and lower their TCO.