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The Benefits of Compliance

By Val Wotton, DTCC Managing Director, Product Development & Strategy, Derivatives and Collateral Management | April 22, 2019

The Benefits of Compliance
Val Wotton, DTCC Managing Director

As we enter a new phase of regulatory reporting implementation, in the form of the Securities Financing Transactions Regulation (SFTR), it is important to assess the wider benefits that post-crisis regulatory mandates have delivered to the industry and to consider what the future state of reporting could look like as firms continue to need to reduce costs, improve operational efficiencies and ensure compliance.

The cost of compliance has driven the need for market participants to do more with less in all areas of post-trade. As such, the 'build it yourself’ logic has begun to decline in popularity and in its place has risen fruitful collaboration between market infrastructures, as well as  partnerships between market infrastructures and regtech/fintech companies. These collaborations have been driven in most part  by the need for market infrastructures to provide greater value to their clients, in order to assist them with regulatory compliance, reduce their costs and enhance operational efficiencies.

An example of this can be found in helping market participants to prepare for the upcoming SFTR, due to enter into force in the second quarter of 2020. Currently firms are exploring ways to access, validate and obtain the data required to meet SFTR  reporting obligations. As well as addressing the data requirements of SFTR, firms are also beginning to recognise how important the pre-matching process will be to the successful implementation of the reporting mandate. Although SFTR does not require the pre-matching of trades before reporting to a trade repository, the scale of the regulation's requirements means that firms are incentivised to minimise the number of breaks by pre-matching data where possible to enable the generation and sharing of Unique Trade Identifiers (UTIs). 

In response to these types of needs, DTCC has formed partnerships with 10 established providers offering solutions in support of SFTR, to enable mutual clients to prepare for the upcoming regulation. For example, our latest partnerships with Xceptor and Droit will enable firms to enrich, normalise and validate data before submitting it to a trade repository, and apply reporting eligibility logic respectively, before submitting transactions to a trade repository. These types of partnerships are enabling the development of 'platforms' or end to end  solutions which can automate processing earlier in the trade lifecycle and improve the quality of data and are therefore helping clients to make further efficiency gains and achieve greater operational risk reduction. Without the regulatory mandates of the European Markets Infrastructure Regulation (EMIR), Dodd Frank and latterly, SFTR, these types of collaborative initiatives may not have existed.

Many firms have taken the opportunity to go far beyond approaching regulatory reporting compliance as simply a box ticking exercise. The forthcoming SFTR is a good example of this. If firms take a more strategic approach to addressing the requirements of the regulation they can ensure increased levels of pre-trade matching, less trade fails and more collateral efficiencies, which will result in significant benefits such as balance sheet optimisation. Furthermore, by adopting a strategic approach and working with independent, collaborative providers, firms can respond to any further regulatory change at less cost. The EMIR REFIT and the CFTC’s re-write of current derivatives regulations under Dodd Frank -- both of which are being undertaken to simplify some of the existing requirements -- are good examples of where market participants can rely on the tools and services from solutions providers instead of having to amend their own systems to respond to these individual changes, which can often lead to increased costs and compliance risk.

Additionally, by working together, not only to offer enhanced reporting services but also across jurisdictions, a community of users begins to form which can help to drive data standardisation and harmonisation on a global scale. As a result, this will help regulators to more effectively analyse the data that is reported according to various regulatory mandates and in turn identify the build-up of risk in the financial system. 

Post crisis regulation has required enormous efforts on behalf of the industry and much progress has been made in terms of market participants’ ability to comply with the new rules. While this should be applauded, it is also useful to recognise the positive ripple effects of regulation such as cost reduction, collaboration and a best practice approach in order that these positive trends continue to dominate the market infrastructure space long after post crisis reforms have been implemented.

The article was originally published in Global Investor/FOW