DYNAMICS OF DISRUPTION: an ‘Uber’ approach to compliance reporting
With MiFID II requirements looming, firms face the need to build the new capabilities necessary to meet complex mandates for trade and transaction reporting. Or do they? As Uber and Airbnb continue reshaping the transportation and hospitality industries, a growing number of firms are adopting a similarly disruptive approach to trade and transaction reporting— positioning themselves for greater cost efficiency, reduced risk and more time to invest in meeting customers’ expectations. In this article, Cian Ó Braonáin and Randall Orbon explore why it is no longer a matter of if—but rather when and how—firms will exit the “business” of trade and transaction reporting.
A wave of regulations has hit financial institutions, and one of the most recent—the Markets in Financial Instruments Regulation (MiFIR) and Directive (MiFID II)—is driving a fundamental “rethink” of how firms respond to changing regulations. What started as a whisper is now reaching a roar in the industry, as a growing number of participants shift to a different way of thinking. In short, participants are recognizing that they no longer can—or should—own and operate the systems that support trade and transaction reporting. Instead, they are choosing to access shared systems that address requirements without draining budgets, straining resources and distracting from their core revenue-generating businesses.
DRIVERS OF DISRUPTION
Driving this strategic rethink are new requirements that significantly increase the scope of reportable instruments and reflect the provisions in the market abuse legislative proposals. Meanwhile, firms face specific additions to the content of transaction reporting—including information related to clients, algorithms, trader IDs and short sales, as well as the price and negotiated waiver under which the trade took place. Together, these changes pose significant organizational, systems and technological challenges—which are merely the latest in a long and ongoing drumbeat of changing regulations.
Industry thought leaders are abandoning the chore of building and maintaining dedicated systems and moving toward a common platform. Such an approach enables faster, more cost-efficient access to needed reporting services, shared risk across industry participants, and the ability to focus monetary and human resources on more strategic initiatives that will strengthen the customer experience and drive top- and bottom-line growth.
THE RISING PRICE OF COMPLIANCE REPORTING
Should we exit the “business” of regulatory reporting? When faced with this strategic question, more and more firms are answering with a resounding “yes.” Cost is a major reason why. Consider, for example, that investment banks alone have spent nearly $25 million on average to achieve compliance for both Dodd-Frank and EMIR.1 Yet few participants believe these systems will deliver the adaptability, scalability and flexibility needed to meet new requirements. A recent survey by Sapient Global Markets found that 72 percent of firms are using in-house systems, 16 percent are using a third-party vendor solution and 6 percent are using a managed service solution to manage trade reporting. Among those using an in-house system, more than a quarter (26 percent) expect their trade reporting costs to increase by 50 percent or more over the next two years.
THE ‘UBER’ APPROACH TO REPORTING
So what, exactly, do Airbnb, Uber and other industry disruptors have to do with the latest regulations and those affected by them? There are two
angles to consider:
- First, these innovative companies have demonstrated real success by focusing on their core services rather than the assets that support delivery of those services. Uber provides transportation yet does not own and
maintain a fleet of vehicles. Airbnb is revolutionizing hospitality but does not own or manage a single hotel property. Their strength lies in the ability to provide an outstanding customer experience—a priority shared by banks in this “Year of the Customer.”
- Second, market participants intuitively grasp the potential benefits of regulatory reporting services delivered via a “virtualized” model. Why incur the massive time and expense of building trade and transaction reporting systems? Why commit to ongoing maintenance and updates of the system? Why not find a means of tapping into the benefits of such a system without the burden of owning it?
Many firms are increasingly recognizing that they no longer need full ownership over the reporting systems that support compliance—and many are questioning whether or not they can actually afford to build and maintain such systems (see sidebar: The rising price of compliance reporting). As they investigate different approaches, they are also realizing a number of other advantages.
As with other outsourced or virtualized solutions, an “Uber” solution for trade reporting positions a market participant for the following:
- Lower cost of ownership. Just as Uber provides its users with reliable transportation—without having to buy and maintain an automobile—a managed trade reporting solution helps a firm address reporting requirements with minimal capital outlay and staffing requirements. And, because operating costs are spread among multiple subscribers, a managed solution also keeps ongoing cost of ownership in check.
- Improved reconciliation. Most firms lack a reconciliation engine that pulls reports from trade repositories, TriOptima and other sources. Typically, a managed solution will offer this capability, reconciling those reports to each client’s internal database—addressing regulatory rules not only for reporting but also for reconciling portfolios, identifying discrepancies and resolving disputes.
- Reduced compliance risk. Best-in-class trade reporting solutions offer support for reporting to all global trade repositories for all asset classes and message types. In addition, they deliver regular, timely updates that reflect rule changes and are backed by the provider’s close relationships with regulators for staying abreast of new requirements.
- Improved data usability. When a solution aggregates data from multiple sources, its subscribers have new opportunities to deploy data analytics. Beyond addressing reporting requirements, a managed solution can provide a new vehicle for decision support.
- Rapid deployment. A managed solution offers an existing infrastructure that a market participant can simply plug into. Pre-configured reporting rules and message types enable integration with any source system—whether from subscribers, trade repositories, counterparties or vendors.
- Better reliability and security. Compared to onsite solutions, remotely hosted solutions offer a higher, more reliable standard for data protection.
DO MORE—OR DO IT DIFFERENTLY?
The MiFID II requirements demand greater breadth and depth and more investment in order to be able to respond. For those affected, one option is doing more of what has always been done: another massive initiative, another major investment and the continued possibility of new or modified regulations.
But with the latest round of deadlines approaching, the other option—a revolutionary approach to reporting—is becoming increasingly obvious and attractive. Such an approach will not only meet the most recent regulatory mandates but will also pave the way for smoother compliance with future reporting requirements.
With nearly every firm either considering or actively adopting outsourced reporting, it is time for all participants to start asking how and when they will deploy this new model.
1. Bob’s Guide, “Banks Must Streamline Trade Reporting to Cope With Expanding Regulations,” June 29, 2015.
As part of the Sapient Global Markets leadership team, Randall Orbon defines strategy, drives business development and executes key components of the strategy. Randall joined the company in 1996 and has built a breadth and depth of experience that spans Sapient’s capabilities. He has worked with numerous capital and commodity market participants to develop and execute transformative strategies. Randall holds a BSE in Computer Science from the University of Pennsylvania and an MBA from Columbia and London Business Schools.
Cian Ó Braonáin
is the global lead of Sapient Global Markets’ Regulatory Reporting practice, providing guidance, insight, leadership and innovative solutions to the company’s regulatory reporting and response project portfolio. Cian has over 15 years of experience as a lead business analyst, project manager and business strategist, developing methodologies and tools for solving the risks of regulatory impact and change. He has been involved in numerous regulatory reporting projects, many of which focus on pre-compliance date readiness activities, such as analysis, implementation and post-compliance assurance activities.