It’s time to start thinking like a regulator

Submitted by Vito on Fri, 03/18/2022 - 10:55

In financial markets, asymmetry of information is commonplace. With banking regulations like Brexit, CSDR, and SFTR all in the rear-view mirror, European National Competent Authorities (NCAs) are turning their attention to increasing regulatory scrutiny over data quality of regulatory reporting. When it comes to evaluating the quality of your reported data, NCAs have a distinct information advantage – they have access to every firm’s reporting data; you only have access to yours. Regulators can benchmark the quality of your reporting against your peers, meaning they can spot potential errors you didn’t know you were making.

Data quality and accuracy have always been a hot topic for regulators since MiFID I in 2008, but recently they have started making more noise about it. In the last few weeks, Luxembourg’s CSSF published their wide-ranging review into Article 26 reporting1 , and in the UK, the Financial Conduct Authority (FCA) recently announced they have allocated £3.5m to find better techniques to evaluate reporting data – not long after they invited Regtech/Suptech firms into their offices for several “showcase days”2.

What does this focus on data quality mean for you? In short, it means regulators will get smarter about analysing reporting data and, with this increased scrutiny, will likely find new errors not discoverable by typical front-to-back controls. Persistent errors risk creating a two-fold impact for firms: first, they are expensive (monetarily and reputationally); and second, with the introduction of the Senior Managers Certification Regime, they can impact you individually. Senior managers now need to have utmost confidence they have adequate controls in place to catch errors.

There is no doubt that regulatory scrutiny is growing, and while this is good collectively for the market, for individual actors it poses a continued challenge. To meet that challenge, firms need to be thinking about data in the same context as the regulators – developing tools and processes for real-time surveillance of the entirety of their reporting output or streams.

However, from our experience working with 100s of firms across Europe, internal controls appear to be reaching the limit of how far they can improve. There is only so much you can do to validate your own data. Without the benefit of seeing how others are reporting it, it is tough to keep iterating. To compound the issue further, ever tightening budgets across the industry make it even harder to innovate in-house.

With these two constraints in mind, partnering with an innovator who offers new techniques to common challenges across multiple regulatory regimes is fast becoming the only viable approach versus traditional in-house solutions.

Stay tuned for our next blog to see how MarketAxess Post-Trade is building a solution to tackle this challenge.



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