The 2008 Global Financial Crisis brought about massive regulatory initiatives across financial services aimed at bringing increased transparency and security to global markets. Significant new and revised mandates have come into effect over the last decade, with no signs of slowing down. As a result, in-scope firms have had to continually adapt their processes, systems, and infrastructure to maintain compliance.
As we move further from the catalytic events behind these reforms, the obligations become more and more institutionalised, and in turn, the impact of failure is becoming more tangible – whether it be reputational and financial loss through enforcement, or secondary breaches in areas such as privacy, data management and operational resiliency.
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Navigating the regulatory roadmap
With the industry operating under existing regulatory obligations, incoming regulatory change across various pre- and post-trade processes will further stress legacy operational systems and infrastructures, not to mention budgets and resources.
Firms are asking themselves:
- Is now the time to embark on an in-depth review of existing operational infrastructure to better manage forthcoming regulatory mandates?
- What is the most cost-effective and scalable approach that will address specific business, operational and compliance needs while introducing best practice?
- How can we ensure the chosen solution or approach is future-proofed for future regulatory demands and market developments?
- How can we access the right level of expertise and capability needed to deliver the required change?
It is clear firms need an option that not only responds to immediate compliance needs following best practices, but also brings the greatest value to the organisation in the long term.
Ensuring T+1 readiness
Topping the list of incoming changes driving the industry to question their readiness, is the requirement for US cash equities, corporate debt, and unit investment trusts to be settled on a T+1 settlement cycle, effective 28 May 2024 – a requirement that is being, or is expected to be, replicated across the globe.
What does a move to T+1 mean for firms in Asia? Depending on time zones, Asia-based firms with trading interests in the US will likely have less than one business day to process, allocate, confirm, and affirm their transactions if they are to meet the 9:00 pm Eastern Standard time on trade date, a best practice recommended by the industry.
Unlike previous moves to shorter settlement timelines, moving to a T+1 settlement cycle will require significant structural changes including the remodeling of processes, systems, and current operating models. Given the tight timeline before the May 2024 implementation date, as well as the relative scarcity of true subject matter experts in the region, APAC firms are increasingly looking to source expertise to jumpstart their front-to-back trade lifecycle review process.
Considerations include an understanding of the requirements to address inefficient processes, key organisational risks, and pain points. Specifically, firms will have to look into managing time zone differences, processing foreign exchange and multi-currency conversion, handling trade exceptions, and more. Firms will have to ensure that existing systems are enhanced and optimised to seamlessly function in an accelerated T+1 environment, and most of all, in a way that adheres to global best practice.
Derivatives trade reporting rules rewrites
In addition to the move to T+1, firms are also focused on evolving derivatives trade reporting requirements, as local regulatory regimes look to harmonise reporting rules to enable even greater levels of transparency into derivatives markets.
Related Video: APAC considerations for OTC derivatives reporting rule rewrites
Over the next few years, regulators across multiple jurisdictions including Australia, Japan, and Singapore will progressively roll out a spate of revised derivatives trade reporting rules to bring greater alignment to the quality and accuracy of reported data. We have already seen this occur in North America, and Europe is moving in the same direction ahead of APAC.
Central to these rewrites is the adoption of harmonised data standards and definitions that will necessitate not just changes to system flows and technology, but also to operating models, reconciliation logics and control frameworks. Modifications could be required from onboarding to trade booking and trade confirmation, to margining down to data reconciliation. Attaining the expertise needed is a significant challenge.
Charting the path forward
As firms consider the way forward, they are left with an important business decision: implement quick-fix solutions and patches to achieve compliance, or consider a more holistic, ground-up approach that enables success today and for the future.
Given the IT talent deficit reported by International Data Corporation (IDC) in March 2023, and increasing evidence of a shortage of regulatory change expertise across the industry, firms may consider engaging external experts to help them develop a holistic and integrated approach to diagnosis, design, and implementation of the business, operational and compliance requirements, and a scalable compliance-IT-operational construct for successfully managing through change.
As we look forward and consider the vast regulatory demands facing each firm around the globe, the post-trade regulatory space is about much more than just addressing today’s problems. Firms must also position themselves for future success, by driving best practice, enabling scalability and effective risk management, future-proofing implementations, and achieving a lower cost base – with guidance from external experts where applicable.
This article was originally published to Regulation Asia on October 27, 2023.