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28th June 2022 | Insights

Regulatory reporting regimes’ differing stances create headaches for the sell-side and investment firms

From later this year and running into the next, multiple jurisdictions will bulk up their regulatory reporting frameworks to better align with global standards. They hope this will improve the quality of data that regulators use to supervise derivatives markets and create a more harmonised view of derivatives transactions and the market as a whole.

The EU, UK, Australia, Japan, Singapore and US (more than once) are all updating their derivatives reporting regimes. Firms in scope for the new rules are already deep into a long and hard implementation period that will run into 2024 .

Regulators are demanding greater standardisation and improved data quality – a point that ESMA has criticised the market on in the past. The more globally harmonised these aims can be achieved, the better.

In practice, this will include initiatives like the Global Unique Transaction Identifier (UTI). In 2014, the Financial Stability Board identified this as one tool to improve the standardisation and harmonisation of data reported to trade repositories and authorities. If implemented successfully, it should ease regulators’ roles in monitoring and understanding the markets that they have oversight of.

As international guidelines filter through jurisdictions’ frameworks, variation starts to emerge though. This is already happening with the onboarding of CPMI-IOSCO guidance for harmonisation. Regulators like ESMA and MAS are aiming to fully onboard the guidelines into reporting regimes. Others are seeking a more modified model. As implementation progresses, so do the chances of guidance being adapted.

As such, initiatives like Global UTI harmonisation can still lead to a variety of different jurisdictional rules.

The end result for firms with reporting obligations is often an increased compliance lift. Increasing complexity in reporting requirements also raises the risk of errors, trade breaks and worst of all, fines.

These concerns came through in a recent Acuiti report, conducted in partnership with Broadridge Financial Solutions. Acuiti surveyed and interviewed regulatory reporting experts from 40 sell-side and investment firms on the challenges their teams face in implementing new rules.

The findings showed that firms have found data quality to be a major challenge in meeting reporting obligations. Senior executives say that errors are an inevitable part of the process, a problem augmented by the sheer volume of transactions covered by the rules.

It is therefore essential that firms can ‘show their working’ – providing regulators with reports that show any mistakes were made in good faith.

One of the stresses of regulatory reporting is the different approaches of regulators. Some take a more aggressive stance to mistakes, such as pursuing formal investigations instead of a dialogue first approach. This means firms must be on top of their reporting processes and able to explain errors in their submissions to the authorities and remediate them expeditiously.

Technology is essential to solving these problems – such as exception management tools that identify errors and the processes that led to them. These can also flag the reporting regime under which logic errors occurred, and help improve internal processes if the route of errors can be identified correctly.

This may be one way to ease the compliance burden, and maybe, work towards harmonisation.