ADJUSTING TO THE REGULATORY ENVIRONMENT

Interview with Silvano Stagni, Global Head of Research at Hatstand, a Synechron company

1. The data demands for financial services companies are increasing with the advent of more electronic trading, processing and reporting – and could change even more – with ongoing regulatory reform in both the U.S. and Europe. What are the biggest concerns Synechron is hearing from companies as they adjust to this new regulatory environment?
   As trading becomes increasingly electronic across all asset classes and regulators demand further regulatory reporting to increase transparency into business operations, financial institutions need to enhance their data management. Industry bodies like the EDM Council have launched their Data Capabilities Assessment Model (DCAM), allowing financial institutions to assess their data capabilities across business areas and then prioritize where they may need to enhance their capabilities to adjust to the new regulatory environment.
   

   Silvano Stagni

   Additionally, while many of the large banks have started data and reporting frameworks for regulations like MiFID II, many of the smaller firms have not yet started and the larger firms face data redundancy challenges as the onslaught of regulatory reporting requirements call for many of the same data points, for example Legal Entity Identifiers (LEIs), to be collected across multiple regulatory reports. What many of our clients have been asking for is a consolidated approach to dealing with multiple regulatory reporting regulations that impact their businesses.
   Moreover, there is the constant risk of poorly documented legacy. The considerable amount of changes to a financial firm data landscape that is a consequence of implementing the current and forthcoming regulatory change. This should prompt a review of old legacy systems and their data base with a view to lower technology risk and resolve redundancies and streamline processes.

2. Let’s talk about data standardization and efficiency within data. How are firms dealing with the different definitions and standards across regions and as they connect to different systems and vendors?
   Global data definitions and standards may vary by region; however, the DCAM model allows financial institutions to rank their data capability for data standardization and efficiency, allowing them to create an internal benchmark from which to measure their progress.
   Additionally, within the business, we’ve seen some of our clients using a federated data approach that assigns data channel managers to help define and standardize data based on how it is applied to that area of the business. This approach allows the channel manager to customize the approach to regional regulations and business needs.

3. How are market participants addressing these data and compliance needs? Are firms shifting from a more reactive/firefighting position to a more proactive/strategic as they try to refine their data handling? What is Synechron hearing from firms, and how might they best prepare as they make the transition?
   Synechron is a DCAM Authorized Partner (DAP) firm, meaning we are certified to work with financial institutions to assess their capabilities against the EDM Councils’ industry standard data capabilities model. We are finding that this is a highly practical way for our clients to understand their data capabilities across their businesses and as compared with their peers.

4. Now on to managing intraday liquidity, specifically with regard to international compliance and collateral management. Synechron has said banks need to consider governance and operating models in addition to paying attention to technology – can you describe why it feels this way, and how a firm might go about doing this?
   In order to manage intraday liquidity better and enhance collateral management operations, firms need to take a comprehensive approach that brings together high-quality, digital data; strong governance; new operating models and technology. Regulations such as EMIR in Europe, Dodd-Frank in the US and others have increased required margin exchanges to ensure that there is sufficient collateral, if needed. But high-quality collateral demands are difficult to meet with the current technology and operations available for collateral management. In fact, 15% of collateral is currently left idle, costing ~$4.5Bn/year. This is an area where new technologies like Blockchain can be used, if applied with an understanding of the regulatory landscape and financial services business model to enhance operations and governance.

5. Finally, how is the environment for market makers changing for the coming years? Will regulation become increasingly challenging?
   As with any market participant, market makers can expect that new regulations will hold them to a higher standard of transparency than before. MiFID II considers them execution venue and this entails more reporting requirements. There are also specific rules for market maker that operate High Frequency Systems.  In Europe, the definition of Market Makers in MiFID II and in the Short Selling Regulation slightly differ but they will co-exist. This does not have to make their lives more challenging. If these businesses take the time to understand what these regulations are proscribing, they can add the requisite reporting capabilities to continue their business operations as always. The savvy ones, will find a way to take that added insight gained from regulatory technology solutions to create additional business advantage.

Interview with Silvano Stagni, Global Head of Research at Hatstand, a Synechron company

1. The data demands for financial services companies are increasing with the advent of more electronic trading, processing and reporting – and could change even more – with ongoing regulatory reform in both the U.S. and Europe. What are the biggest concerns Synechron is hearing from companies as they adjust to this new regulatory environment?
   As trading becomes increasingly electronic across all asset classes and regulators demand further regulatory reporting to increase transparency into business operations, financial institutions need to enhance their data management. Industry bodies like the EDM Council have launched their Data Capabilities Assessment Model (DCAM), allowing financial institutions to assess their data capabilities across business areas and then prioritize where they may need to enhance their capabilities to adjust to the new regulatory environment.
   

   Silvano Stagni

   Additionally, while many of the large banks have started data and reporting frameworks for regulations like MiFID II, many of the smaller firms have not yet started and the larger firms face data redundancy challenges as the onslaught of regulatory reporting requirements call for many of the same data points, for example Legal Entity Identifiers (LEIs), to be collected across multiple regulatory reports. What many of our clients have been asking for is a consolidated approach to dealing with multiple regulatory reporting regulations that impact their businesses.
   Moreover, there is the constant risk of poorly documented legacy. The considerable amount of changes to a financial firm data landscape that is a consequence of implementing the current and forthcoming regulatory change. This should prompt a review of old legacy systems and their data base with a view to lower technology risk and resolve redundancies and streamline processes.

2. Let’s talk about data standardization and efficiency within data. How are firms dealing with the different definitions and standards across regions and as they connect to different systems and vendors?
   Global data definitions and standards may vary by region; however, the DCAM model allows financial institutions to rank their data capability for data standardization and efficiency, allowing them to create an internal benchmark from which to measure their progress.
   Additionally, within the business, we’ve seen some of our clients using a federated data approach that assigns data channel managers to help define and standardize data based on how it is applied to that area of the business. This approach allows the channel manager to customize the approach to regional regulations and business needs.

3. How are market participants addressing these data and compliance needs? Are firms shifting from a more reactive/firefighting position to a more proactive/strategic as they try to refine their data handling? What is Synechron hearing from firms, and how might they best prepare as they make the transition?
   Synechron is a DCAM Authorized Partner (DAP) firm, meaning we are certified to work with financial institutions to assess their capabilities against the EDM Councils’ industry standard data capabilities model. We are finding that this is a highly practical way for our clients to understand their data capabilities across their businesses and as compared with their peers.

4. Now on to managing intraday liquidity, specifically with regard to international compliance and collateral management. Synechron has said banks need to consider governance and operating models in addition to paying attention to technology – can you describe why it feels this way, and how a firm might go about doing this?
   In order to manage intraday liquidity better and enhance collateral management operations, firms need to take a comprehensive approach that brings together high-quality, digital data; strong governance; new operating models and technology. Regulations such as EMIR in Europe, Dodd-Frank in the US and others have increased required margin exchanges to ensure that there is sufficient collateral, if needed. But high-quality collateral demands are difficult to meet with the current technology and operations available for collateral management. In fact, 15% of collateral is currently left idle, costing ~$4.5Bn/year. This is an area where new technologies like Blockchain can be used, if applied with an understanding of the regulatory landscape and financial services business model to enhance operations and governance.

5. Finally, how is the environment for market makers changing for the coming years? Will regulation become increasingly challenging?
   As with any market participant, market makers can expect that new regulations will hold them to a higher standard of transparency than before. MiFID II considers them execution venue and this entails more reporting requirements. There are also specific rules for market maker that operate High Frequency Systems.  In Europe, the definition of Market Makers in MiFID II and in the Short Selling Regulation slightly differ but they will co-exist. This does not have to make their lives more challenging. If these businesses take the time to understand what these regulations are proscribing, they can add the requisite reporting capabilities to continue their business operations as always. The savvy ones, will find a way to take that added insight gained from regulatory technology solutions to create additional business advantage.