Like their global counterparts, market participants in the Asia-Pacific region (APAC) are preparing to comply with the biggest round of OTC derivatives trade reporting changes since the original reporting mandates came into effect over a decade ago. However, APAC is not a homogenous region with markets progressing at different levels of maturity and changes to existing requirements remaining unclear in some parts of the region. In a DerivSource Q&A with Oliver Williams, DTCC General Manager, Business Management – Asia, Repository and Derivatives Services, we explore how nuances in the APAC region and related challenges are driving some firms to consider industry partner and vendor-driven trade reporting solutions.
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Q. How is the APAC approach to OTC derivatives trade reporting different to other regions?
A. The APAC region has a wide variety of political, social, legal, and regulatory environments. There is not the kind of cross-regional consistency you would see in Europe, for example. Europe, despite its complexity, and despite Brexit, has much more harmonisation across different regimes, thanks to the European Council (EC). There is a gradual shift towards greater harmonisation in APAC, but this disparity is still very prevalent.
In addition, while Japan and Hong Kong quickly went live with trade reporting rules about ten years ago, they and most jurisdictions in the APAC region generally prefer a “fast follower” approach, where they wait and see how reporting requirements work in the Northern Hemisphere first. This is especially true now with trade reporting rewrites.
Within APAC, there is a marked difference between how global financial institutions are approaching upcoming regulatory rewrites compared with their regionally headquartered counterparts. Global firms operating in APAC are typically driven by how their colleagues in the Northern Hemisphere are approaching the same challenges. They adopt the same interpretations, technology, and data analysis and test cases used in earlier releases. In contrast, firms that are headquartered in the APAC region are often not as globally active and may have fewer reporting obligations. They adopt new regulations and rewrites on a more ad hoc basis, with less re-use and the efficiency that brings. This means there is some inconsistency across the global derivatives industry in how firms manage their regulatory change programs.
While there are market differences between APAC regimes, all the requirements are “dual-sided”, meaning derivatives contracts must be reported on both sides of the contract. The Australian market sees a lot of delegated reporting, where buy-side firms outsource reporting to their sell-side counterparts, but outside of Australia, this is less common. There is a lack of consistency around the use of delegated reporting models in APAC, which contrasts with the European markets.
Lastly, there are slightly higher rates of outsourcing of some trade reporting functions in the APAC region, driven by regulatory complexities in the region and a relative lack of local subject matter expertise.
Q. What are the main challenges APAC firms face as they prepare to meet the trade reporting requirements?
A. The APAC markets are smaller and less mature than those in the Northern Hemisphere and access to trade reporting expertise can be more difficult to source in Asia than in other regions. While there are large knowledge hubs in Hong Kong, Singapore, Australia, and Tokyo, there are not large talent pools or resources, and those that can be found are in high demand.
This presents a significant challenge for firms because the rewrites are very technical and specialised, and firms need to find people who can support implementation. Some firms struggle to find the right resources and are consistently seeking additional experts to complete the required work. High demand means resources are relatively costly compared with other capabilities within the banks. Legacy teams are often stretched too thin, and it can be hard to retain top talent. At any given time, most firms are operating under resource constraints. The latest rewrites are very technical and the pressure on firms to find the right people will only increase.
Global firms can leverage technology and resources across regimes, but APAC-centric businesses have a smaller global reach. The bulk of their obligations and resourcing is in Asia and the challenge of meeting a global remit and agenda for these rewrites is quite onerous. For example, some large Australian and Singaporean banks have significant mortgage and retail businesses. These firms’ global markets businesses are relatively small compared with those of US-based banks, yet they face the same trade reporting requirements as global trading houses. Their access to resources is very different and that is an increasingly difficult challenge.
This confluence of challenges—lack of access to expertise, high costs and the scale of technological change required—is driving some firms to consider both industry trade reporting solutions and complementary consulting services.
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Q. Why might a firm look to a third-party solution rather than build in-house?
A. Regulatory rewrites are forcing firms to reassess the viability of their systems in meeting new reporting requirements. Some firms are either on, or moving on to strategic platforms, while others are dealing with legacy architecture that is not suitable for the new requirements. In the case of older systems that have been patched and added too many times over their life span, it can be challenging to understand the current technological capabilities and whether the technology can meet best practice for the rewrites. The gaps in existing technology stacks are driving some firms to explore industry solutions for some of their trade reporting tasks. For example, firms can leverage DTCC’s Report Hub® service to simplify their pre and post trade processes and hence manage the complexities of reporting across multiple jurisdictions. Given the shortage of expertise in the region, vendors may be able to provide scale that an in-house strategy cannot. For instance, a vendor operating in Australia with multiple clients will have economies of scale which not only drives efficiency, but also gives access to a community of experts offering a consensus-driven interpretation of requirements alongside solutions to common problems. When a vendor is able to leverage a community of capabilities, expertise, and ideas, that helps drive compliance certainty, which is especially important for firms as regulations continue to change.
Consulting services offer another option for APAC firms given the tight market for local expertise. For example, DTCC consultants are currently supporting firms at all levels of rewrite preparations across the globe. Engaging with our team of experts can be useful to firms whether they are moving to an industry solution or staying with in-house capabilities. DTCC’s consultants can also help firms understand and review their internal reporting control mechanisms to mitigate compliance issues and manage operational risk.
Q. What should firms consider before they move ahead with a third-party solution?
A. Firms should think about whether the provider has the right tools, subject matter expertise and teams in place to take ownership of key trade reporting tasks in the long term. It is important to clarify here that while a firm can outsource the technology or the capability to deliver the reporting, it cannot outsource the ultimate regulatory obligation, but choosing the right partner can significantly reduce the overall burden on internal resources.
Another key consideration is data transparency, which is becoming increasingly relevant for firms and derivatives trade reporting operations. The solutions provider must deliver complete transparency around data migration treatment so that at any point in time, a firm can easily trace all the way back to source and understand exactly what has been done to their data.
When thinking about integrating a third-party platform, firms need to be strategic and look at what they want to achieve and whether the solution provider will help them realise that goal now and in the future.
Q: What are some of the perceived disadvantages around using third-party solutions?
A: Some firms may think their business is too complex for a third-party to understand. Sometimes that is down to a lack of transparency of processes caused by unwieldy legacy systems, but it is usually not insurmountable. It is important to plan the implementation well and think strategically about how they want to handle data integration.
There can also be objections around the upfront costs, but a third-party solution may deliver cost savings over the long term. There is an opportunity cost in running an inefficient platform. Choosing to partner with third-party can also free up high skilled and limited resources for other work.
Q: What are the long-term strategic benefits of using a third-party solution here?
A: Using a third-party solution means that regulatory reporting is no longer project driven but becomes mutualised across the providers’ users. This reduces the burden of change on individual clients, saving time and effort, and enables firms to focus on their core business. Using a third-party solution also reduces compliance uncertainty. The cost of failure is not just a fine, but remediation and all the efforts around damage limitation.
This article was originally published to DerivSource on January 10, 2024.