Any financial institution that is impacted by post-crisis regulation will typically have to report a number of various data points identifying key information about their business. The information is varied and may include core facts about their operations, investments, investors or accountholders, risk management, liquidity risk management and capital requirements to name just a few. Middle and back offices have not been renowned for their embrace of automation although this is gradually changing. Equally, communications between front, middle and back offices have not been that succinct until relatively recently.
The cost and resources required for implementing a successful (i.e. compliant) regulatory reporting strategy can be significant. Regulatory demands for more granular and frequent reporting is happening in tandem with market uncertainty. Interest rates are generating low or negative yields; commodity prices are recovering but valuations remain underwhelming; the Eurozone banking system is facing pressures of its own; while Brexit is likely to add significant regulatory costs, and potential dual compliance obligations for cross-border financial institutions. So how can firms best manage their reporting challenges in this frenetic market environment, and how will the traditional providers evolve?
Any attendee at Sibos this year would probably acknowledge that technology was an all pervasive topic throughout. Wandering around the exhibition centre illustrated the growing clout of technologists, who were in Geneva in abundance. Blockchain is frequently cited as a solution to many of the problems faced in operations such as regulatory reporting. Distributed ledger technology (DLT) could in theory provide an easier route by which organisations provide data to their regulators. It could also make it simpler for regulators to access the information rather than receiving huge swathes of data through bespoke linkages, email, PDF, fax or mail. Senior executives in securities services are being forward thinking. Cian Burke, global head of securities services at HSBC said Blockchain or DLT would not be an existential threat to banking, but will rather complement and constructively change the way in which banking is done.
In other words, securities services is not going to be swept away by Blockchain, but rather the latter will be integrated into it. An apt comparison would be television viewing patterns. The emergence of Netflix, Amazon Prime, Apple TV, Now TV and BBC Iplayer have all changed viewers’ television habits. Those TV sets which build in and accommodate for these new functionalities and changed viewing habits will still have a market. Those that do not will obviously struggle. Banking and Blockchain is no different. Those banks which allow for flexibility and integration of new technologies come what may will have a strong hand. But it is important not to get ahead of oneself with Blockchain and the impact it could have on regulatory reporting.
Fundamental questions still need to be answered before the technology is infused into the securities services world. As and when standards should be introduced for Blockchain is generating much debate. If regulatory data is held on a Blockchain, its security must be completely guaranteed. Cyber-security is a top priority for all stakeholders as threats become more pronounced. Collaborating and communicating with peers on cyber-best practices not just on Blockchain but across the whole industry is a priority, and can help mitigate risks, a point made by Rob Wainwright, director at Europol.
But how else can regulatory reporting be simplified? Robotics, artificial intelligence (AI) or machine-learning are flavours of the month in some quarters, with a number of panels devoted to the issue at Sibos. But how could such technologies be applied practically?
The European Securities and Markets Authority (ESMA) has found itself in a bind in terms of its oversight role of the derivatives market under the European Market Infrastructure Regulation (EMIR). EMIR has solid intentions. Firms must report all of their listed and OTC derivative transactions to trade repositories, who in turn provide the reported data to ESMA. This sounds straightforward except ESMA demands two-sided reporting from both trading counterparties. Predictably, those trading counterparties may not always supply identical data sets on their trades making it difficult/impossible for repositories to reconcile the information. In other words, regulators are frequently looking into a black box of unreconstructed data littered with errors.
AI or robotics could help organisations report uniform data, and allow regulators to identify gaps, mistakes, inconsistencies or systemic risks in the information they have at repositories. The same could be applied to any regulatory report. In other words, regulatory resources would be devoted to financial institutions which have mis-reported as opposed to those that have consistently supplied honest and accurate data.
As with Blockchain, AI is not going to invalidate the industry’s usefulness, but rather complement financial services. If technology platforms, rather than the underlying business operations, ever became the key systemic risk in the securities life cycle, it could impose impossible costs and obligations on these disruptors – balance sheet capital requirements, stress testing, significant reporting, for example. The likely outcome of this would be that AI becomes part of the furniture at banks and financial market utilities, particularly around regulatory reporting. However, if these disruptors provide shared technology, then they will of course have to demonstrate the resilience of their platforms to regulators. Those banks and utilities which recognise the importance of technology and disruptors will still be part of the Sibos family come 2017 in Toronto and beyond.