THERE IS NO SUCH THING AS HARMONIZATION: so let’s get good at translation
With another major regulatory reform bearing down on the financial services industry, organizations are realizing that a one-size-fits-all data reporting solution is out of reach. However, with the right approach, firms have the opportunity to become more nimble around the growing list of regulations and establish a competitive advantage. In this article, Randall Orbon, Brian Lynn and Mahima Gupta explain why firms need to shift their mindset from the idealistic quest for a universal industry standard to one that focuses on enabling message translation in the most efficient way possible to avoid regulatory scrutiny and reduce costs.
Since 2008, various regulatory bodies have unleashed new rules and altered existing regulations to facilitate greater trade and transaction transparency, accountability and risk management. This constant state of flux, coupled with the larger burden placed on trading firms, has created a complex reporting environment lacking any semblance ofstandardization.
Now figuring out how to respond to the Markets in Financial Instruments Directive (MiFID) II by 2018, in addition to keeping up with several other regulations, firms are tasked with meeting the demands of more than 20 different regulators that are asking for data in several distinct formats. For example, the European Securities and Markets Authority (ESMA) is calling for the ISO 20022/XML format to support data exchange, while the Securities and Exchange Commission (SEC) says it wants repositories to communicate using FpML or FIXML. Many other regulators have their own personal preferences as well (see Figure 1).
That’s just the tip of the iceberg.
First, each regulation requires that data is submitted to trade repositories (TRs) and typically anywhere from three to six TRs will be required to meet business constraints. Second, the interpretation of the data fields, which could actually mean the same thing, varies across regulatory bodies, TRs and other delegated reporting entities.
Organizations across the industry are also changing. Many different data sources are emerging as firms expand into different geographies, jurisdictions and asset classes.
The data messaging intricacies are apparent. With unaligned political motivations stymying any chance of harmonization coming from the regulators, there is little reason to believe this will become easier any time soon.
Originally, firms assumed that through the advent of TRs they could isolate themselves from the granular details regulators were requesting to confirm trades. In reality, regulators are pushing their idiosyncratic requirements upstream to data submitters, neutralizing this benefit of TRs. Lacking such a model or any other standardized approach or regulatory synergy, communication between firms and TRs, and TRs and regulatory bodies, has and will remain a headache.
That puts the responsibility on data submitters, custodians, middleware providers, repositories and other participants involved in trade and transaction reporting to improve data governance and become systematic about how data is translated, processed and verified.
Many firms have attempted numerous workarounds, from using bespoke code to buying off-the-shelf extract, transform and load (ETL) tools. However, these processes don’t provide the flexibility necessary to respond quickly to reconciliation requests or seamlessly adapt to amended regulation.
The idiosyncrasies attached to each data requirement necessitate a methodical approach to avoid regulatory scrutiny and minimize compliance costs. Otherwise, organizations are left constantly allocating internal resources toward building hundreds of different connections to fit several varying regulations, only to do it again when a new regulation goes live or a change is made to an existing requirement. What’s more, additional costs and manpower are needed for ongoing maintenance on those systems.
A more systematic approach entails building a core competency around data messaging translation and presentation that is flexible enough to meet any format and pivot as necessary when new regulations or standards emerge.
The strategy must also include a process that’s designed to handle unexpected situations. Inevitably, when data is translated from one format to another, breakdowns will occur. So how is missing data handled? What’s the process for identifying the root cause of the problem? How is the issue corrected and resubmitted? How is it reported so the regulators know that a certain translation doesn’t work?
A root-cause analysis can help limit repetitive reporting inconsistencies and lead to the development of corrective techniques that can save time and money, as well as take a step toward harmonization across the industry. If one data format doesn’t map nicely into another format, that piece of knowledge can be shared with other industry participants. With a systematic process in place, firms can efficiently identify what went wrong or what’s missing and quickly determine how to fill the gaps.
Organizations across the industry can go in a number of directions in an attempt to construct a more consistent and all-encompassing approach to data exchange. That can include building and relying on in-house systems, hiring third-party consultants, outsourcing data exchange to external solution providers or a combination of these options. However, before any of these approaches are adopted, the implications and potential consequences must be weighed in order to develop the most effective strategy.
For the following solutions, assume a data submitter (although these solutions can apply to any participant involved in the data reporting process) is seeking a solution to comply with upcoming regulations. Here are some options to consider:
- Internal teams leverage off-the-shelf tools. Organizations can utilize internal resources and personnel to build proprietary systems or use a combination of internal resources, external consulting and off-the-shelf ETL tools. Pros: This approach allows organizations to have more control, tailor the services/tools to specific needs and become less reliant on outside service providers. Cons: The cost and manpower needed to build and/or maintain these solutions can be quite high depending on the complexity of the firm’s trading platform and the asset classes involved. The quality of the technology is another concern. Since most of the currently available technology was built quickly in isolation, off-the-shelf ETL tools or internal proprietary systems may not be equipped to handle new and evolving trade and transaction data requests. As the regulatory environment continues to develop, ongoing maintenance is required, resulting in higher costs.
- TRs take the lead. Push TRs to develop a formalized translation service. Pros: TRs become the experts at data transformation and develop standardized reporting requirements, taking the majority of the cost and timing burden off of the reporting firms. Cons: Firms have less control over data governance. Because the TRs would oversee how the data is reported in this scenario, firms leave themselves open to regulatory scrutiny if any reconciliation or further validation is needed. Regulators could come back directly to the firms instead of the TRs for such requests, which would require more time and resources to identify and resolve the problem in the appropriate format. Although TRs may play a role in developing reporting standards, it is unlikely they would be able to address the translation/presentation issue alone without harmonization.
- Translation services offerings. Firms can choose a service that takes their data in format X and translates it into format Y. Pros: This approach is the most cost-effective and efficient solution as it requires fewer in-house resources to manage the different formats and data quality requests. External service providers and solutions can also provide insights into forthcoming regulatory changes, thus alleviating the stress, money and manpower involved in constantly keeping an eye out for future regulation and adjusting the reporting tools as necessary. Cons: Firms are now dependent on the service being available and maintained, making the supplier vetting process a critical component. Additionally, submission quirks and legal and contractual processes can be a burden. For instance, some banks may have a difficult time getting approval from their purchasing departments or legal and compliance teams.
MOVING PAST STANDARDIZATION
Data translation is messy. It’s inconsistent. And communication is only getting more complicated with expanded data reporting requirements on the horizon.
Still, if organizations can develop a systematic data translation and exchange solution with the capacity to adapt and evolve in the increasingly challenging regulatory environment, there is an opportunity to become more nimble than the competition and dedicate more time and resources elsewhere—all while avoiding regulatory scrutiny.
With a new wave of regulations already lined up behind current legislation, organizations need to stop waiting on global standardization and get better at data translation.
is part of the Sapient Global Markets leadership team. Randall defines strategy, drives business development and executes key components of the strategy. 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.
is Chief Technology Officer of Global Electronic Markets, Inc (GEM). GEM is a leading advisory service specializing in electronic standards for OTC derivatives. GEM advises many key participants in the industry, including on technology strategy and architecture, consults on standards development, and provides training and mentoring. Brian currently chairs the ISDA FpML working group responsible for addressing global regulatory reporting initiatives such as Dodd-Frank, EMIR, and MIFIR.
is a Senior Manager with the Solutions team at Sapient Global Markets. She is involved in the product management of multiple solutions, including CMRS. She has over 12 years of experience in traded risk management, regulatory reporting and business consulting in the global capital markets. She is currently based out of Gurgaon and is focused on various regulatory change initiatives unraveling in the US, Europe and APAC.