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Ensuring the Middle and Back Offices Meet Regulatory Standards

By Tim Keady, DTCC Managing Director and Head of DTCC Solutions | June 9, 2021

New regulatory mandates, both current and pending, place additional demands on firms' middle and back offices. What is the best way forward? A holistic approach, writes Timothy Keady, Chief Client Officer and Head of DTCC Solutions. Advice from experienced third parties, whether vendors or consultants, will allow firms to identify the optimal approach to increasing their middle- and back-office efficiencies, Keady explains, and also ensure their post-trade processes are robust and ready for the next wave of regulation.

Since 2008 financial crisis and the ensuing 2009 G20 Summit in Pittsburgh, when the decision was made by policymakers to mitigate systemic risk by strengthening market infrastructure and post-trade processes, the industry has faced waves of new and revised regulations and has adapted to meet evolving compliance requirements. And their efforts continue as forthcoming regulatory changes over the next two years include the push toward harmonizing derivatives trade reporting standards across jurisdictions, the implementation of the final phases of uncleared margin rules (UMR) and the start of CSDR’s Settlement Discipline Regime (SDR).

Combined with existing regulations, these and other emerging mandates are significantly straining firms’ operations. Given most infrastructure and control frameworks at individual companies are already a patchwork of functionalities assembled over a decade of adapting to regulatory change, they now face a number of challenges including when to upgrade infrastructure to comply with forthcoming regulations, how regulatory obligations can be fulfilled in a manageable and cost efficient way and how to ensure these upgrades can future-proof a firm for ongoing regulatory change in an environment that may include more rigorous enforcement.

When considering how to approach these important decisions, one can look at the example of a homeowner, who, 20 years after having moved in, is faced with an outdated kitchen and old appliances. Incremental or do-it-yourself (DIY) repairs may appear easy and cheap at first glance, but they could fail to pass inspection and may delay the inevitable full renovation that’s required.

When you combine this regulatory landscape with decades old processes, controls, governance and systems, solving for these compliance challenges may seem overwhelming.

Similarly, while a piecemeal or DIY approach to adapting to regulatory change may be less daunting in the short-term, it will likely be more costly and onerous in the mid to long term. Ideally, when it comes to operational infrastructure, controls and processes, firms should address upgrades in a holistic way that delivers the greatest value and readies them for regulatory changes in the short-term and beyond.

A Long To-Do List

The current and forthcoming regulations around transaction reporting, UMR and settlement discipline across multiple jurisdictions are significant. Regulatory moves, like the CFTC and SEC’s planned expansion and potential reengineering of the trade reporting construct laid out in 2013, along with more rigorous requirements around liquidity management and settlement for UMR and CSDR, respectively, will require continued changes to firms’ compliance strategies and processes

When you combine this regulatory landscape with decades old processes, controls, governance and systems, solving for these compliance challenges may seem overwhelming. To keep pace, firms must simplify their trade reporting data sets, become more sophisticated in sourcing key data elements related to collateral and unique identifiers, ensure a robust and automated collateral management workflow and implement measures to further mitigate settlement fails.

The Optimal Approach

By focusing on key areas of the post-trade process and taking advice and considering proven offerings from third parties with experience in these areas, such as consultants, vendors or market infrastructures, market participants can identify the optimal approach to reconfiguring middle and back office operations to ensure their post-trade processes are sufficiently robust and future-proofed for evolving regulatory mandates. For derivatives trade reporting, operations teams need to account for new data fields, new products, new processes and controls, and new stakeholders. UMR requires heightened monitoring and control of liquidity and SDR requires more-efficient settlement processes that drive down fails.

The optimal approach for market participants is to view this demanding compliance environment as an opportunity to transform legacy systems and processes for trade reporting, liquidity management and settlement for the long term — simplifying and modernizing them to meet new and evolving global regulations while leveraging best practices. In doing so, firms can achieve a scalable and efficient infrastructure that lowers operating costs and risk, meets evolving mandates and positions them for future operational and business success.

This article first appeared in TABB Forum on June 4, 2021.

Tim Keady, DTCC Managing Director and Head of DTCC Solutions
Tim Keady Managing Director and Head of DTCC Solutions

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