REGULATORY REPORTING: how do capital market participants assure ongoing compliance within an ever-changing regulatory landscape?

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    REGULATORY REPORTING: how do capital market participants assure ongoing compliance within an ever-changing regulatory landscape?

    The investment banking industry is undergoing a monumental transformation as the world’s regulators shift their focus away from exchange-traded instruments to the strict enforcement of a new regulatory regime in the historically unregulated and opaque OTC derivative market. Nowhere is this shift more apparent than in the US where the Commodities Futures Trading Commission (CFTC) is pushing ahead of the other global regulators with all four of the G20 commitments: mandated execution (trading), clearing, capital and reporting obligations. These requirements are certain to transform the investment banking industry altogether. As the industry is currently implementing a number of tactical fixes and interim technological solutions, Cian Ó Braonáin, Paul Gibson and Jon Szehofner look at the strategic steps participants can take to ensure they stay competitive in an ever-changing industry.

    Many industry participants disagree with elements of the new regulations that are impacting OTC derivatives in both strategy and implementation. However, Gary Gensler, chairman of the CFTC, recently made it clear that enforced transparency and holding more capital to reduce risk works toward the legitimate goal of improving access to the markets and reducing systemic risk. In short, this new framework is here to stay whether market participants like it or not.

    The $648 trillion OTC derivative market (based on notional value) is characterized by opacity, both in trading and reporting, along with varying levels of standardization. At one end of the spectrum, there are non-complex, highly liquid transactions such as FX forwards, while on the other end are the complex, bespoke equities products which take weeks for large investment banks to structure. The G20 commitments and resulting regulations are forcing all of these OTC derivative instruments to become standardized and have transparent reporting and execution mechanisms that almost mirror the exchange-traded world.

    Gensler also contrasted the damage done to the swaps market by the most recent financial crisis with the futures market, which, he argued, was able to weather the downturn due to previous reforms. The movement to instill similar reforms in the swaps market has actually led to a shift towards futures, in a phenomenon known as the “futurization of swaps,” as described by economist Robert Litan. The futurization of swaps refers to large financial and non-financial institutions moving their transactions out of the OTC derivative market altogether to take advantage of the lower collateral requirements on exchanges. Regardless of whether or not participants choose to move some of their products out of the OTC derivative market, capital market participants will have to completely review the way in which they execute and book their products.

    To address the challenges and requirements of complying with the G20-mandated global regulatory regime and avoid regulatory and operational risk, capital market participants should employ a more strategic approach to adhering to the mandatory change. Firms should begin conducting cross-asset, industry technology and business reviews that look beyond today’s needs to ensure that the market infrastructure and operating models are flexible and robust enough to accommodate future change.


    Based on the current regulatory landscape, it is clear that transaction reporting will remain a permanent fixture in the investment banking industry for the foreseeable future. The G20 declaration has dictated that all major trading jurisdictions carry the burden of reporting financial transactions. For the majority of investment banks, this requirement has raised a sizeable technical challenge, and one that will continue for the coming years. Many banks that rushed to achieve Dodd-Frank day-1 compliance now have a legacy of tactical solutions and technology shortcuts. These tactical solutions usually carry high operational risk and contain a degree of manual intervention. They are further impacted by a poor understanding of the increased cost per transaction to the bank and an unqualified level of operational and reputational risk.

    Unfortunately, complying with Dodd-Frank does not mean that it will be easy to comply with EMIR and other rules. The stricter upcoming European requirements will put an even greater strain on business models, especially in technology infrastructure and operations.

    Dealing with the changes in internal operational and technological infrastructure for Dodd-Frank has been an ongoing struggle for even the largest banks. Many firms in the industry have been solely concentrating on efforts to comply with the deadlines enforced by the CFTC (end of December for Rates and Credit and February 28 for FX, Commodities and Equities). It is clear that if capital market participants want to take part in financial markets going forward, there are a number of operational enhancements they will have to undertake. The CFTC requirement for real-time messaging, combined with additional confirmation, valuation and collateral information required by end of day (4am Eastern Time), is severely testing market participants’ operational efficiencies.

    For these firms, inaccurate data is going to be a real problem. One easy step is to ensure that any large trader reporting (under party 20) reconciles with the position roll-ups the trade repository will make for Dodd-Frank Reporting Rules part 43 and 45, as this is an obvious place for the CFTC to identify inaccuracies. Looking at an efficient system of matching positive and negative acknowledgements will significantly increase the possibility of getting the report right and help to avoid instances of prolonged misreporting.

    Many market participants are fighting against the clock with basic compliance and are adopting an approach to ensure all data that the CFTC could possibly require will be sent. This may result in over-reporting, which is a reporting failure in itself; although, it is less severe than a failure to report required transaction data. Focused on efficiency, the CFTC has been clear that timeliness is more important than accuracy. Rather than risk the substantial fines banks would face for withholding transaction information, the industry looks set to subscribe to the CFTC’s philosophy—at least for now. This view is likely to change quickly as reporting processes mature.

    Estimating the Total Cost for Compliance
    While much has been made of the implementation costs of Dodd-Frank reporting solutions (an estimated industry average of $10m for each reporting solution), little analysis has been conducted to truly understand the new cost per transaction to the bank for being Dodd-Frank compliant. A tactical solution that involves reporting functionality and logic distributed and duplicated across many trade booking systems will mean an increased cost of maintenance and support. Adding this regulatory responsibility to a system primarily responsible for trading diminishes the flexibility for agile change and increases the regression testing effort required with each system release. As a result, the cost per transaction rises dramatically—and that is without taking into account any manual intervention in the reporting process for complex exotic transactions or workarounds.  Banks should investigate the duplication of reporting logic in multiple systems, because when independent, asset class-specific teams manage the same process and conduct manual interventions for quick fixes, there are likely other teams across the bank conducting the same activities. The additional costs from this duplication of effort must be factored into the revised cost per transaction and will heavily impact the trading landscape over the coming years. To ensure profitably, all regulatory costs must be kept under control and be tightly monitored.

    Meeting Reporting Obligations
    Many market participants are still coming to terms with the volume of information required for Dodd-Frank reporting and the timelines by which they must deliver. Meeting the deadlines is an enormous task that will involve developing training desk handbooks, implementing strategic solutions to accommodate all new regulators and ensuring confidence in the reporting accuracy. There will likely be future changes to Dodd-Frank definitions regarding subsidiaries of financial institutions and foreign branches. With these changes, firms will need to trust the reliability of the counterparty data and the systems and control framework in place for monitoring potential changes. With more stringent requirements coming from Europe and Asia, firms must begin planning a strategic solution capable of delivering robust reporting and high levels of confidence.

    Mitigating the Risk of Non-Compliance
    With these new mandates, regulators are trying to encourage better and safer trading practices. The data submitted will show the regulator if there are weaknesses in a firm’s processes—whether it is through the exposure of the trade life cycle process or inconsistencies in the trade booking and confirmation process. Having the correct control framework and governance in place for transaction reporting activities will help to ensure that industry participants have the infrastructure needed to monitor risk.

    Today, proof of that infrastructure is at varying levels of sophistication across the industry. Key artifacts being created include official computer-based training (CBT) results of all staff impacted by regulations, from Trading and Sales to Operations and IT. In addition, firms are putting together documentation describing the process, a clear governance framework and policy. Finally, proof of testing results and justification for contentious compliance decisions will be needed. With news of the first fines from the CFTC coming to light, censure is no longer a theoretical possibility. In fact, one firm already has been fined $700k for over and understating open interest and failing to report positions. As the ramifications for non-compliance to Dodd-Frank sink in, firms will be motivated to establish a strong control framework that provides detailed assurance.


    To help mitigate the risk of non-compliance, reporting entities must review and deepen their understanding of the environment they control—their own operating models. Ultimately, the responsibility to report accurate and timely information to the CFTC and ESMA will always rest with the reporting party. The reporting obligations under both Dodd-Frank and EMIR will help firms demonstrate a solid operating model and ensure that internal risk is well managed. A model that holistically addresses governance, people, process, systems and data will enable a firm to successfully and swiftly navigate and comply with reporting obligations. The starting point for every financial institution should be to understand and map their operating model to what their pain points will be once the reporting obligations come fully into force. Furthermore, the global operating model will need to adapt in order to cater to regional anomalies because cross-regional regulations are moving at different paces.

    To help ensure ongoing compliance, operating models must be both scalable and future-proof. Market participants that have effectively reviewed their operating processes could potentially have a competitive advantage when all of the new reporting obligations come into force. Figure 1 offers a high-level view of an operating model and assurance framework. It enables participants to test their current operating models against market best practices and stay ahead of the curve—even in a changing regulatory environment. Market participants should consider each constituent part of the operating model assessment and how it can be best assured and monitored. And, they should conduct this review regularly to ensure that no failures have been introduced through technology or organizational changes.

    Figure 1: An Example of an Operating Model and Assurance Framework.

    A Flexible Operating Model is Critical
    The key challenge market participants are facing with respect to their reporting requirements is to have an operating framework that is both scalable and future-proof. As global regulations continue to be implemented, uncertainty may cause many market participants to delay strategic decision making. Assuming that technology solutions alone are the answer to addressing today’s and tomorrow’s challenges could leave market participants exposed to both regulatory and operational risk. In the end, technology is an enabler. To address future requirements, firms must conduct a thorough technology and business review that looks beyond today’s needs and ensures the infrastructure and operating model are flexible enough to address tomorrow’s requirements.


    The tactical fixes and interim technological solutions that many firms are rushing to implement in response to the Dodd-Frank Act are not the answer for addressing the challenges and requirements associated with complying with the global G20 mandates. Those capital market participants that fail to acknowledge this fact soon will leave themselves exposed to both serious regulatory and operational risk. And, they will miss out on the competitive advantages that investment in market infrastructure and operating model reviews can offer. To address these, and any future requirements, firms must conduct enterprise-wide technology and business reviews that ensure their market infrastructure and operating models are flexible and robust enough to address additional requirements and provide ongoing assurance to regulators for years to come.

    The Authors
    Cian Ó Braonáin

    Cian Ó Braonáin
    co-leads Sapient Global Markets’ Regulatory Reporting practice, drawing on deep experience in all disciplines of risk management including defining, scoping and delivering complex change and assurance programs for major Tier 1 and 2 Investment Banks. From executing operational risk programs for MiFID FSA reporting through to the latest Dodd-Frank and EMIR regulatory reporting commitments, Cian has built a strong portfolio of experience with a refined approach and toolset to deliver complex advisory regulatory reporting programs.

    Paul Gibson

    Paul Gibson
    is a Senior Associate based in London specializing in Capital Market initiatives. Paul has worked as a Business Analyst for a Financial Market Infrastructure provider in a Global Regulatory reform initiative across Investment Banking. He is currently working as a Senior Business Analyst at a top investment bank focusing on the reporting of all OTC derivatives into a Global Trade Repository, from initiation through to planning, requirements gathering and tracking to completion.

    Jon Szehofner

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