Mandates and machines: The power of technology to bridge regulatory gaps

As Securities Financing Transactions Regulation (SFTR) brings reporting requirements to a segment of the industry unfamiliar with trade reporting, securities markets participants are finding that navigating conflicting regulatory priorities is increasingly a part of doing business.

An automated service can also transform user firms’ data into an SFTR-compliant format.

Many firms are beholden to several regulatory bodies mandating different requirements for trade reporting, obligating them to navigate internal implementation decisions centred around how to adhere to multiple regulatory requirements across jurisdictions while simultaneously ensuring business processes continue.

The challenge is complex, but there is good news: existing technology can bridge these gaps, help alleviate current regulatory burdens and add value while newer technology is being developed. Date format is a solid example of how two regulatory bodies – European and American – can differ greatly on data requirements for trade reporting, as the two regions do not format dates the same.

Some tech firms are forming partnerships with data automation specialists on pre-reporting transformation services to help address this issue, ensuring that regardless of what format data is initially sent, it is translated into the format required within the jurisdiction that governs the trade – streamlining compliance with SFTR reporting requirements.

An automated service can also transform user firms’ data into an SFTR-compliant format before it’s submitted to the trade repository and is a powerful driver of efficiency and cost reduction. Ultimately, technology can empower firms to alleviate burdens in the absence of the harmonisation of requirements between jurisdictions.

But leveraging technology to close regulatory gaps is not just about replacing regulatory alignment. Robust standards at the start of a process are ideal because standards empower technology to be more effective. But in cases where upfront standardisation does not exist, there are technological options to help firms bridge those gaps and bolster the trade reporting process.

At the same time, many firms are weighing regulatory priorities internally, with compliance departments busy scanning regulatory notices and changes to determine the optimal strategy for implementation in balance with business priorities. Technology can help there, too, by codifying regulatory rulebooks, comparing them with internal rulebooks, and then aligning the two, while scanning for upcoming changes to rules and regulations, and relieving the burden of what has become an operationally and manually intensive task.

Regulators are also becoming increasingly receptive to fintech and regtech, and are responding by creating fintech committees, working groups and sandboxes with the goal of learning from fintech providers and the industry.

While transformative technology is exciting and creates a natural tendency for it to be surrounded by hype, the reality is that the industry is burdened by regulatory requirements and other issues that need to be – and can be – solved now. Take blockchain as an example. Blockchain technology has a lot of promise. However, it is still in the infancy stage. Significant investments of time and effort are necessary to build confidence in and experience with the technology to the level that it could transform reporting practices.

Can blockchain perform business logic?

Can blockchain perform business logic? Yes. Is blockchain capable of smart contracts aimed at regulatory compliance? Yes. But is the technology robust enough and proven to the level that firms can confidently build their regulatory requirements into smart contracts and implement it right away? No. We are some years away from that point and perhaps may never get there.

In March, the European Union published SFTR’s delegating acts and implementation rules, setting the timeline leading up to the regulation’s go-live date. The reporting obligation

deadline for banks and investment firms is 13 April 2020; followed by central counterparty clearing (CCPs) and central securities depository (CSDs) 13 July 2020; then pension funds, insurance companies, Alternative Investment Funds and Undertakings for Collective Investments in Transferable Securities (buy-side) obligated to report 12 October 2020; and finally, non-financial institutions go live 11 January 2021.

With less than a year until the first deadline, firms can draw on existing technologies for their SFTR compliance. New and proven technologies – such as the cloud – are bringing greater efficiency and risk mitigation to the financial markets while helping market participants to address regulatory requirements and assist in its compliance.

This is not to say that newer technologies such as distributed ledger technology are unable to deliver benefits in the short to mid-term. Rather, their adoption in financial markets – particularly in market infrastructure – should follow a meticulous assessment and in-depth testing to ensure the tools meet the required industry standards around risk mitigation and scalability. For compliance with existing regulation, market participants should look towards proven and currently available technology with an eye on newer technology in the future.

By Jennifer Peve, managing director, fintech strategy, DTCC