Global Cosultig Practice White Paper Global Regulatory Reportig: A Strategic Approach
About the Author Gajedra Shirsat Gajedra Shirsat is a busiess cosultat with TCS Capital Markets Cosultig Group. He has more tha 14 years of global experiece ad has led the solutio cosultig ad implemetatio of several strategic projects i the fiacial services sector. As a solutios maager he curretly provides support to cliets o issues related to OTC derivative regulatios (Dodd-Frak Act/EMIR), wealth maagemet ad brokerage.
The global fiacial crisis of 2008 was a turig poit for the capital markets ad allied bakig idustry. It caused the collapse of large fiacial istitutios previously cosidered ivicible; trillio dollar losses for ivestors caught i the market crash; a housig market collapse ad sharp ecoomic dowtur. Govermets ad commetators have posited several explaatios. It is geerally accepted that a key reaso was the iability of regulators to effectively moitor ad mitigate the risks. I the aftermath of the crisis, regulators across the globe proposed stricter reportig. US authorities proposed Dodd-Frak Wall Street Reform ad Cosumer Protectio Act ad the EU iitiated its Europea Market Ifrastructure Regulatio (EMIR). All jurisdictios across the world ow have their ow versios of over the couter (OTC) derivatives reforms. The fiacial services sector is grapplig with the arrival of BASEL III, Capital Requiremet Directive, Market Abuse Directive, MiFID II, REMIT ad a host of other regulatios. These ew regulatios will have far-reachig implicatios for the way the fiacial sector operates. Ivestmet baks will eed to chage to comply with ew madates. Tradig, clearig, risk maagemet ad regulatory reportig fuctios will feel the impact. Compliace requires a holistic approach. Typically orgaizatios lea towards a tactical respose i part because of challegig deadlies ad ambiguities i the requiremets. A fragmeted respose across busiess fuctios, product lies ad geographies leads to process iefficiecies ad therefore icreased costs. To develop truly global, effective ad scalable reportig architecture compaies eed to develop a blueprit of their plaed reportig eeds, techology platform ad data ifrastructure. Their goal should be to optimize the cost of reportig ad reduce regulatory ifractios.
Cotets 1. Navigatig The Regulatory Reforms 6 2. Busiess Drivers: Thikig Beyod the Regulatios 6 3. Leveragig Best Practices for Effective Reportig 7 4. A View of Best of Breed Regulatory Reportig Fuctios 8 5. Techology Cosideratios 11 6. Implemetatio Priority ad Strategy 12 7. Key Success Idicators 13 8. A Opportuity to Trasform 15 9. Refereces 15
List of Abbreviatios LEI USI UPI SDR PET ETL Legal Etity Idetifier Uique Swap Idetifier Uique Product Idetifier Swap Data Repository Primary Ecoomic Terms of a trade Extract, Trasform, Load
Navigatig the Regulatory Reforms Reforms itroduced sice the fiacial crisis i 2008, such as the Dodd Frak Wall Street Reform ad Cosumer Protectio Act (Dodd-Frak), Europea Market Ifrastructure Regulatio (EMIR), Markets i Fiacial Istrumets Directive (MiFID II) ad BASEL III impose rigorous scrutiy o the fiacial services sector. A key requiremet of all of these regulatios is heighteed reportig. This ew focus poses a real challege for ivestmet baks, especially if each regulatio is addressed separately rather tha beig cosidered holistically across jurisdictios. Implemetatio is further complicated by ambiguity i rulemakig ad compliace schedules. The costs associated with this ew regulatory eviromet will be sigificat for ivestmet baks. At preset regulatory reportig exists as a subsidiary fuctio withi operatios departmets icludig frot office, risk ad collateral maagemet ad accoutig withi a particular geography. Key tasks icludig data extractio, erichmet, report creatio, validatios/adjustmets ad subsequet routig are hadled i silos. As a result, there is o eterprise-wide strategy for regulatory reportig, or separate budget for developmet of reportig systems. The focus is o short-term compliace ad the submissio of reports i respose to requests from compliace departmets. This fragmeted reportig approach exists across fuctios, geographies ad asset classes ad leads to: Proliferatio of applicatios icludig duplicates High total cost of owership (TCO) ad maiteace efforts Limited scalability of techology architecture Compromised data itegrity through the use of duplicate, stale or icorrect data Substatial maual effort, work-arouds ad process breakpoits Icreased regulatory icidets Busiess Drivers: Thikig Beyod the Regulatios It is clear that chages i the regulatory eviromet will affect reportig fuctios. Cost cosideratios, data quality cocers ad more importatly, emergig regulatory reforms will mea the fuctio has to look to ew operatig models. Complyig with regulatios While Dodd-Frak ad EMIR are already i place, detailed rule makig ad iterpretatio is a ogoig process. To complicate matters, the rule makig timelies ad implemetatio deadlies for each regulatio are icosistet. The reportig requiremets of some of these regulatios are overwhelmig ad affect global operatios ad trasactios across various asset classes. Global regulatios also uleash ew data idetifiers icludig LEI, USI ad UPI. These eed to be icorporated ito busiess systems ad referece data. The reportig requiremets are sigificat i scope ad they challege baks to idetify commoalities i compliace requiremets. 6
Addressig iteral iefficiecies Curret reportig setups ted to be fragmeted across fuctios, asset classes ad geographies. This results i duplicatio of applicatios, effort ad associated costs. Firms TCO hits the roof due to the umber of applicatios eedig ehacemet ad support. Silos i the orgaizatio impair a baks ability to idetify a strategic respose. Reports ad ad hoc queries are hadled maually. This icreases the cost as well as the risk of errors. Eterprise-wide data quality focus Most regulatory ifractios are caused by uavailability or iaccuracy of data. These problems are caused by depedecy o multiple source systems ad issues of data itegrity across applicatios. Use of legacy spreadsheets ad stale data compoud the problem. Data quality (correctess, completeess, timeliess) across applicatios ad fuctios becomes a critical cocer for the orgaizatio. Ivestmet baks have to improve data quality ad tighte itegratio across busiess lies if they are to meet the challegig compliace timelies of regulatory reportig. Establish cotrols ad goverace If the reportig fuctio is to be efficiet it must operate withi a soud cotrol framework. A structured process must be established to verify that the regulatory reportig data is accurate ad complete. This icludes: iterpretig the regulatios, data sourcig ad delivery, adjustmets, recociliatios, exceptio maagemet ad the workflows associated with all these. There exists a direct relatioship betwee operatioal objectives ad effective cotrols. Itegratig the cotrol framework ad reportig fuctio esures resources are used effectively ad that the right iformatio is shared with regulators. Leveragig Best Practices for Effective Reportig To future proof agaist evolvig regulatios, baks must take a strategic view of regulatios. By formulatig a itegrated reportig strategy they ca achieve both cost optimizatio ad effective compliace. A trasformatio of the reportig fuctio by leveragig the followig best practices provides a rage of beefits: Agile busiess respose By aalyzig regulatios o a holistic basis, baks ca idetify commoalities ad opportuities for icremetal compliace. They ca harmoize the regioal ad global reportig requiremets. Itroducig a imble busiess aalysis framework will improve respose to chages. Smart data maagemet Creatig a sigle view of data retrieved from multiple iteral data sources helps icorporate emergig idetifiers such as LEI. Automatio of recurrig stadard data adjustmets esures that the adjustmets are reflected i source systems alog with a audit trail. Retetio of metadata meas it is available for later review i case of regulatory ifractios. 7
Strategic applicatio portfolio re-egieerig Reports ad stadard equiries that curretly require maual effort ca be automated. Baks eed to reduce reliace o multiple sources durig report creatio. While re-egieerig, baks ca assess what applicatios ca be reused i similar regulatory reportig efforts (e.g. DFA/EMIR). Automated data recociliatios ca be used to iitiate workflows whe issues arise. Robust cotrols ad shared services Baks eed to establish cotrols to address traceability of data ad the ability to roll-out ew regulatory reports for a asset class or a geography. Shared services ca be utilized for fuctios like exceptio maagemet, recociliatio, ad validatio. A View of Best of Breed Regulatory Reportig Fuctios Ivestmet baks are realizig that it is imprudet to access, store ad process data at idividual departmet level. A thoughtful solutio is eeded that respods to challeges at both tactical ad strategic levels. Ad compliace aloe is o loger the ed game. Cost effective compliace combied with competitive advatage i the market is the desired goal. Some cosideratios that ca give mometum to iitiatives aroud these themes iclude: Capability to source data from multiple iteral busiess systems directly from databases, flat files ad messages through a golde data layer cosistig of the most trusted data across the eterprise Supportig ew idetifiers specified by regulators. These iclude: LEI, USI, UPI, Collateral ad Iterim Idetifiers such as CFTC Iterim Compliat Idetifier Rule egie based creatio ad formattig of reports to iclude: Evet drive rules (e.g. trade executio, termiatio), asset class drive rules (specific iformatio as requested uder EMIR, DFA), regime specific rules (detailed collateralizatio data eeded for EMIR) Itelliget routig of reports by jurisdictio (US, EU), regulator type (FED, SDRs), asset class (IRS, FX), trade lifecycle stage (PET, Cotiuatio Data) Goverace ad cotrol framework (prevetive/detective) to moitor reportig status ad metrics, itroductio of ew reports, view audit trails, report metadata, archive reports ad create workflows for validatios, approvals ad escalatios Cetralized fuctio to validate reported data before it is set to regulators Recociliatio of data across sources ad automated data adjustmets to source systems with audit trails Process stadardizatio, automatio, documetatio ad scalability 8
While each regulator has uique reportig requiremets, may reports have commo themes ad require similar calculatios ad processig. By cosolidatig the data sources ad processig applicatios, firms have the opportuity to improve cotrol, efficiecy ad establish cosistecy. For example, if multiple reports are fetchig the same data from two differet sources, it makes sese to idetify this situatio ad choose to extract data from the most trusted source. This esures data itegrity ad cosistecy betwee reports. Where similar calculatio services exist across divisios there is a opportuity to reduce duplicatio ad i doig so save maiteace cost. Busiess Data Trades ad Positios Margis ad Collaterals Risk/ Valuatio Lifecycle Evets Referece Data Legal Idetifiers Couter party Data Asset Class Data Cliet Data Market Data ETL Layer Evet drive Triggerig Rules Evet Data Extractio Data Loadig ad Filterig Data Erichmet ad Validatio Report Costructio Data Mappig/ Report Logic/ Templates Formattig / Laguage Support Report Workflow- Validatio & Sigoff Versio Maagemet Rules Egie Regime Rules Asset Class Specific Rules Evet Based Rules Report Data Maagemet Meta Data Maiteace Recociliatio Report Validatio Recociliatio Validatio Archival & Metrics Adjustmets Sigoff ad Approvals Report Submissio Evet & Time Based Triggerig Report Schedulig ad Status Trackig Submissio to Regulator Ack Receipts Fails Maagemet FpML SWIFT Framework CSV, Excel FTP/SFTP Web Service Others Trade Repositories Regulators Figure 1: Referece Busiess Architecture for Regulatory Reportig The core themes i this architecture are cosolidatio ad scalability. Such architecture provides a automated, structured ad rule-based workflow eviromet to complemet data maagemet ifrastructure. The architecture ca be adapted to chages i a bak s techology eviromet as well as chages i regulatory requiremets. The beefits iclude greater accuracy of reportig to shorter timeliess ad reductio i ru effort ad cost. 9
The key features of this referece architecture iclude: Smart data maagemet Cosistet use of data sources helps establish a sigle versio of truth kow as the golde data layer. Data maagemet should icorporate emergig idetifiers such as LEI, UPI, USI, collateral idetifiers as well as iterim idetifiers. A cetral report data maagemet compoet maitais agreed data models, metadata for each report ad archives based o regulatory eeds. Itegrated ETL layer This fuctioality idetifies reportable evets (e.g. trade, lifecycle), extracts relevat data (e.g. asset class specific data), eriches with referece data (LEI, UPI, USI) ad ca load it ito reports as well as storig. Rule egie based report geerator Rule egie drive report geeratio takes ito accout, regime specific (e.g. Dodd-Frak), asset class specific (e.g. CDS, IRS, FX) or evet specific (e.g. PET, Cotiuatio) rules to geerate reports. A scalable rule egie with multiple cofiguratios reduces the time required to respod to ew regulatory requiremets. Reports should be validated ad siged off through a workflow. Cetralized recociliatios ad adjustmets Recociliatio of recurrig stadard data adjustmets ca be automated ad source systems updates ca be icorporated ito the audit trail. Cetralizatio ad automatio of eterprise-wide workflows for recociliatios, adjustmets, approvals meas data required for ew reports is traceable. Itelliget report routig Itelliget ad flexible routig of automated reports meas they ca be submitted to multiple regulators i appropriate formats. This should iclude ackowledgemet hadlig ad rejectio processig. 10
Techology Cosideratios As ivestmet baks respod to these reforms some clear treds are emergig. These relate to the cosolidatio of reportig ifrastructure ad the scalability of techology systems. Several techology solutios are available. A cost beefit aalysis that cosiders legacy architecture, orgaizatioal strategy ad a techology roadmap will idetify the right solutios. Emergig messagig protocols Fiacial products Markup Laguage (FpML) is a ope source XML stadard for electroic dealig ad processig of OTC derivatives. FpML establishes a protocol for sharig iformatio electroically o, ad dealig i, swaps, derivatives ad structured products. It has bee widely accepted across the OTC sector because it offers a comprehesive way of represetig OTC derivatives cotract terms. By usig FpML to represet complex ad bespoke fiacial products, baks ca provide commo data across all OTC derivatives. The protocol traslates to lower costs ad makes it easier to aggregate data across asset classes. It also provides a flexible framework for reportig. The FIXML protocol, a techical specificatio for electroic commuicatio of trade-related messages, also provides a flexible method of formattig ad describig reportable data. May baks say they will utilize their existig SWIFT ifrastructure to report to multiple trade repositories. Highly cofigurable rule egie Rule egie describes a mechaism for modelig the parameters of regulatory reportig. This modelig should be flexible, extesible ad easy to maitai. If the processig egie is separated from the rules defiitio, ew rules ca be added ad existig rules modified without a ew release of the software. A flexible schema for describig a complete hierarchy of reportig attributes will support the rules egie i the database. Rules are defied by jurisdictio, evets ad by asset class. These cofiguratios are stored i the database ad are read by the rules egie. The rules egie is resposible for evaluatig the rules described i the database. Flexible workflows Large-scale reportig service will require stadardized processes with well-defied workflows if it is to be a success. A workflow maagemet system ca be used to iitiate a actio, track completio, validate, override, approve ad sigoff across a large eterprise. Process dashboards ca give a complete view of activities ad their status. Workflows ca be defied iterally or implemeted through vedor products. Cosolidated data warehouse A flexible data warehouse becomes a ecessity for ivestmet baks grapplig with regulatory reportig o this scale. Warehousig should be see as more tha storage ad itegratio of data. If sources such as databases or cosolidated trasactioal iformatio ad referece market data are seamlessly itegrated baks create a strategic asset. 11
Implemetatio Priority ad Strategy The impact of ew regulatios is clear. A bak s respose ad its prioritizatio of actios should cosider its existig stregths ad perceived challeges. Iteral sposors will require compellig evidece that the trasformatio beefits justify the effort ad cost. If the cost savigs are reivested ito a larger trasformatio exercise the iitiative becomes sustaiable over the log-term. Havig looked at resposes across the idustry our experiece tells us that the priorities are as showcased i Figure 2: Medium Term Log Term Short Term Automatio of maual efforts Retire redudat applicatios Address priority areas like EMIR Establish commo themes across regulatios Istitutioalize holistic compliace Referece data icorporatig emergig idetifiers Golde Data Layer Data Source Ratioalizatio Automatio of stadard data adjustmets Cotrol for traceability ad audit of data Rule egie Flexible routig layer Automated workflows Strog cotrol framework Nimble busiess aalysis framework Figure-2 Implemetatio Priorities Baks have two optios whe it comes to implemetig solutios: They ca build the solutio i-house over a period of time or buy vedor services ad products. Hosted solutios, techology outsourcig ad third party out of the box solutios ca be itroduced quickly but eed to be doe i the cotext of the stregth ad weakesses of the orgaizatio. The cost to buy, customize ad migrate will be prohibitive for some orgaizatios. Efforts that leverage the i-house capabilities icludig applicatio ratioalizatio ad repurposig, buildig a cetralized iformatio ifrastructure, ad automatio of maual processes ca produce medium-term results. Factors such as sustaiability ad scalability must be cosidered. It is likely that the ideal reportig solutio for may firms will combie both approaches. For example, a bak that eeds to cosolidate reportig may fid sourcig compoets like rule egie, workflow systems from qualified vedors while buildig i-house the ETL, core processig ad calculatio services is a viable optio. 12
Key Success Idicators We have see how regulatory chage o such a scale presets baks with profoud strategic ad operatioal challeges. Those that ca deal with the challeges effectively will reap valuable beefits. Eve if time ad resource costraits restrict baks ability to implemet all aspects of the model described they ca adapt best practices to improve efficiecy ad the effectiveess of their reportig. Regulatory risk reductio Accurate data, timely reportig ad suitable cotrols esure that compliace icidets are reduced sigificatly. Cost optimizatio Cosolidatio of the applicatio portfolio ad data framework cetralizatio will reduce the umber of applicatios to be supported. This will brig dow the TCO. Compliace costs ca be reduced substatially if regulatios are aalyzed holistically, ad existig capabilities, processes, data sets ad resources are utilized. Busiess chage adaptability A scalable process ad techology framework meas future requiremets across geographies ca be met swiftly. Flexible busiess ad techology architecture esures compliace with local regulatios. New regulatios should ot be looked at simply as costs. They ca also create ew busiess opportuities. Baks should ivest i ifrastructure that ca support value added cliet services ad ew reveue streams. Robust cotrol framework A robust framework ca support the itroductio of ew reports ad iterpretatio of emergig eeds. Exceptio maagemet ad failure maagemet are critical whe multiple ew reports, accessig data from multiple sources, deliver reports to regulators across geographies. 13
Coclusio: A Opportuity to Trasform Emergig regulatios will fudametally alter the way ivestmet baks view their reportig requiremets. The impact o techology, systems portfolio ad data strategy will be immese. As ew ifrastructure is created, existig systems ad operatig models will eed to be ratioalized or repurposed. The wiers will be baks that look beyod basic compliace. These chages preset a opportuity to trasform the reportig fuctio ad achieve much greater beefits. The real opportuity is to make their reportig fuctios more resposive to regulatory chages, to improve operatioal efficiecies through automatio ad to reduce the TCO. Those ivestmet baks that trasform will retai competitive advatage i the ew busiess eviromet while simultaeously reducig compliace costs ad miimizig icidets of o-compliace. Refereces ESMA, Europea Securities ad Markets Authority (ESMA), 2012, Europea Market Ifrastructure Regulatio (EMIR) Techical Stadards, accessed October 25, 2013, http://www.esma.europa.eu/page/europea-market- Ifrastructure-Regulatio-EMIR TCS, OTC Derivatives Regulatory Reform - Has a ew reality emerged for OTC Derivatives Market?, accessed October, http://www.tcs.com/resources/white_papers/pages/otc-derivatives-regulatory-reform.aspx TCS, Lookig Beyod OTC Derivatives Regulatios - Trasformatioal Opportuities to create Competitive Advatage, accessed October 25, 2013, http://www.tcs.com/resources/white_papers/pages/otc-derivatives- Regulatios-Trasformatioal-Opportuities.aspx 15
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