As pressures for timely reporting of OTC transactions mount on both sides of the pond, Ian Salmon of ITRS Group explores the challenges that this presents, while explaining why the sell-side requires a fresh approach to avoid heavy fines and reputational damage….
Hindsight is a wonderful thing. Having met the Dodd-Frank deadline for reporting trades to a data repository, most banks in Europe initially felt that the 12th February deadline for Emir compliance presented little problem. Fast forward a few months and that first flush of optimism feels wildly misplaced. Mention Emir to a compliance officer now and you are likely to be met with black scowls and a rapid change of subject. Somewhere along the line, Emir turned out to be a lot more challenging than was first anticipated.
What hindsight tells us with astonishing clarity is that the differences between Emir and Dodd-Frank were always going to create difficulties. The two regulations have different specifications for timing of reporting and the inclusion of collateral reporting. More significantly, where Dodd-Frank Title VII looks at mandating transaction reporting solely for OTC instruments, Emir includes both OTC and exchange-traded derivative products.
Most importantly of all, the two regulations differ when it comes to which entity reports a trade. Under Dodd-Frank, the dealer takes responsibility for reporting a transaction. Under Emir, both parties to the trade are accountable. Emir also specifies several additional data fields to Dodd-Frank, including information that is specific to each counterparty.
To achieve compliance with Emir, each counterparty needs to apply a unique trader reference identifier to each trade at the same stage of the workflow. How to ensure all identifiers match so that both counterparties have the same reference at a point at the same time is – often quite literally – the six million dollar question.
To make things even more interesting, Emir allows one counterparty to delegate transaction reporting to the other. They can even arrange for a third party to do the necessary reporting. Given that workflow surrounding derivatives trading can often resemble a game of pass the parcel, this only adds new layers of complexity both when trying to ascribe a unique identifier to the trade and when trying to assign responsibility for its reporting.
With brokers giving up electronic flow to fellow brokers to execute on their behalf, the relationship between the reporting entity and clearer is much more convoluted. Each of the intermediaries in the way represents a break point in the workflow, and the potential for reporting responsibility to fall between a gap. Banks that undertake reporting on their clients’ behalf need to ensure they have the means to source customer-related data in order to report it. No wonder that Emir is discussed only through much gritted teeth.
Principles and prescriptions
The specifics of transaction reporting aside, what this highlights once again is the difficulties associated with trying to create a model for OTC and derivatives trading that is based on equities workflow. In effect, the regulators are trying to deliver an identical end result from very different materials.
By very definition, OTC transactions are not standardised. Futures and options have less centralised markets, different platforms and different flow for different instruments. There’s no consistent and verifiable data streams. Even within a single institution there is unlikely to be a single infrastructure to handle every OTC transaction. The likelihood of two separate counterparties having identical infrastructure and workflow is even less likely.
That’s a very different proposition to the equities world, which although fragmented and complex, still retains a more straightforward and linear workflow. A standardised infrastructure is in place, which makes it much easier to deliver consistent results.
For many, the situation brings back painful memories of the early days of MiFID, with its lengthy consultative and often quite disorientating process. This is perhaps the biggest difference between Dodd-Frank and Emir, and is symptomatic of the broader difference between prescriptive and principles-based regulation. It also has the most implications for Asian markets as the regulatory trend moves inevitably eastward.
So where Emir is the liberal parent asking a teenager to decide whether they should stay out late or come home early, Dodd-Frank is the parent that demands they be home by ten. Interestingly, when ESMA was introduced in Europe it implemented a bunch of quite short, sharp regulations and applied them quickly to market participants. The approach was close to that taken in the US: this is what you have to do, this is when you have to do it, and this is what happens when you fail to comply.
The problem with Emir is that the market infrastructure is not in place for them to do that. They have effectively asked brokers to be home by ten, but can’t enforce it because there is no train service until half-past. Both regulator and regulated are caught in a stand-off, trying to work out how to progress without the necessary infrastructure in place.
Facing the future
Nonetheless, there will be a point where the regulator will enforce the transaction reporting requirements, and there are ways in which brokers can prepare now to avoid fines and reputational damage later. The principles-based approach gives brokers plenty of opportunity to develop their own proposals and plans for dealing with the problem. Mapping their own workflows across their disparate systems the in front-, middle- and back-office and then creating a landscape of transactions enables them to identify potential break points or gaps where data can slip.
This is the kind of information that can be used to engage with the regulators. It is far more about using specialist reconciliation tools to monitor infrastructure and applications, and using business intelligence to analyse potential improvements, rather than re-building platforms for interest rate swaps or installing monolithic derivatives platforms.
Increasingly, the solution is a light-touch layer of software that sits above and across all existing infrastructure and looks at the completeness of these flows – what gets traded and what gets reported, and flags up any discrepancies. It is far easier for intelligent software to spot that thirty incoming trades have only produced twenty reports than it is for a compliance officer to do the same – and it is the only way to ensure that thirty thousand trades produce thirty thousand reports.
The added advantage of course is that it protects brokers from whatever final demands the regulator makes. But there is more to it than that. To date, buy-sides have outsourced their reporting process to their brokers, and if banks didn’t report on behalf of their counterparties, buy-sides may have chosen to take their business elsewhere. That has always required a level of trust. But now the regulators are demanding a standard of proof that the buy-side – as well as the sell-side – has acted responsibility. This subtle, but important shift, places buy-sides under greater scrutiny: we are certain to see regulators asking some very probing questions in the future.
For smart brokers, it’s yet another tool to be used to demonstrate absolute compliance with the complex network of regulations that now encircle the world’s capital markets. It is another way of demonstrating value. Interestingly, after the transformative effect of the technology arms race, it is compliance standards (as well as the speed of the algo or quality of the DMA) that is now attracting clients.
Who Needs an Offshore Bank Account?
By Luigi Wewege is the Senior Vice President, and Head of Private Banking of Belize based Caye International Bank
Even today, many people believe that offshore bank accounts are only for the rich. Those in the upper-class ranks can indeed benefit from establishing international accounts and depositing into them regularly.
You should also know that people with more modest incomes can also benefit from choosing to open one or more offshore bank accounts. If any of the following applies to you, then looking into accounts with the right offshore bank is something you should seriously consider.
People Who Want Resources for a Rainy Day
It’s always nice to have some money set aside for a rainy day. One way to do that is to set up an account for use in emergencies. While you want to access that account at will, you don’t want it to be one of the bank accounts you use for typical purposes.
This is where an international bank account can be helpful. Many of these accounts require a minimum deposit to become established. If you put in enough, the balance will generate some interest. In the best-case scenario, that interest would be enough to handle whatever emergency has arisen without depleting the remaining balance.
Anyone Who Likes the Idea of Competitive Interest Rates
Speaking of interest rates, did you know that some offshore locations offer better rates than what you can get from a domestic bank? For example, there are time deposit accounts that allow you to earn an impressive amount of interest if the balance is kept over a certain amount. Some offshore accounts like this one have a tier system for interest; as the balance reaches different levels, you qualify for higher interest rates. That’s a great way to make money and save, letting your money work for you.
Remember that you don’t have to start the account with more than the minimum deposit required. It’s always possible to start with a smaller balance and then gradually add to it until you reach a level that generates interest. For people of more modest means, this is often a great way to get started with offshore banking.
Those Who Plan on Living Abroad
You may have a dream of retiring to another country someday. Now is a great time to begin preparing for making that transition. If you establish accounts with an offshore bank now, it will be easier to ensure the process of transferring assets from your domestic accounts will be more straightforward.
Since you plan to visit that intended retirement location between now and when you make it your permanent home, it’s nice to know there are funds on hand if you need them.
Don’t forget that those who are preparing to be expats may receive certain tax benefits. Depending on your country of origin, those benefits may be based on confirming that you are an expat. Bank accounts that are located offshore and have local addresses attached to them can satisfy that requirement.
People Who Travel Internationally
Right now, the primary focus is on making sure you have an account complete with a debit card for use while traveling abroad. Depending on where you’re going, a card associated with an offshore account may work better than using the one related to a domestic bank account.
Why could this be the case? The exchange rate between the country you’re visiting and where the account is based may be more favorable. Perhaps the banking laws that apply to the country where your account resides is more favorable for some other reason. Whatever the combination of circumstances, you end up finding it advantageous to use your offshore debit card rather than withdraw from your domestic funds.
Anyone Who Wants to Build Nest Eggs for Retirement
In an uncertain world, setting aside money for the retirement years is a must. You’ll find that establishing an offshore savings account can help you with this goal. Depending on the terms that come with the account, it’s likely to be a better choice than depositing funds into a domestic savings account.
It’s not just the interest rate that may be more attractive. The fact that the account is based in another country may make you less tempted to withdraw the funds unless they are seriously needed. In this way, you protect yourself from falling into a pattern of making deposits and then withdrawing funds to pay for things that you don’t need. The result is that the money remains in the account, earns interest, and leaves you more financially comfortable when you retire.
Those Who Value Their Privacy
Privacy is another reason to consider opening an offshore account. The fact is that you don’t want everyone to know where you have your funds deposited. While the information will come to light should you die, there’s no reason why you have to share it now. You’ll find that an international bank is a great way to protect your privacy as well as your money.
International banks are known to be careful with information about depositors. You are free to designate authorized people to access your account. However, without your permission, there is little than can be done by others to gain information regarding your account other than through specific courts.
People Who Want to Reduce Their Tax Obligations Legally
Depending on domestic tax laws, the funds you place in offshore accounts may be subject to less taxation. In some cases, the money may not be taxed unless you choose to transfer it to a domestic bank account. Thanks to this measure, it may be possible to deposit up to a certain amount in your offshore account annually and reduce your tax burden.
Keep in mind that the offshore banks in many countries do provide limited information to domestic tax agencies. Do keep accurate records and report offshore funds by following the requirements of your country’s revenue agencies. Doing so ensures that you get to enjoy the benefits but do not create any issues that could make things difficult at home.
Anyone Who Wants to Protect Their Wealth from Political Risk
If the political climate at home is somewhat unstable, you may be wondering what would happen if things got worse. How would it affect your holdings or possibly the ability to make use of them? The money in your domestic accounts could indeed become difficult to utilize if things get worse. That won’t happen with your offshore accounts.
Even if there are problems with domestic banks, they won’t affect the funds found in your offshore bank accounts. They could end up being the means of keeping your head above water until things are more stable at home politically.
Those Who Want to Protect Assets in the Event of Domestic Legal Actions
While the political situation may not be a pressing concern, there’s another issue that you may want to consider. What would happen if someone sued you, and the judgment was not in your favor? What would happen to the financial assets held in domestic accounts? The most likely outcome is that the court would authorize the seizure of those balances to satisfy the judgment.
If that happens, the funds kept in your offshore savings, term deposit, or checking account cannot be automatically seized. You can use the balances in any way you see fit. That includes being able to support yourself while you re-establish your domestic accounts after the judgment is satisfied.
How to Open Your Offshore Bank AccountHow HHsdalfasd
Have you been thinking about establishing one or more offshore bank accounts? There is no better time than now to open an account.
Caye International Bank, located on Ambergris Caye island in Belize, offers a full range of banking services. We’ve been helping individuals and corporations with their financial needs for almost two decades.
Contact one of our financial service professionals today to discuss your many offshore banking options.
This is a Sponsored Feature.
Luigi Wewege is the Senior Vice President, and Head of Private Banking of Belize based Caye International Bank, a FinTech School Instructor and the published author of The Digital Banking Revolution – now in its third edition.
You can follow his posts on trends shaping the banking and financial services industry on Twitter: @luigiwewege
More Regulations on the Horizon for Banks as Pandemic Exposes Security and Identity Deficiencies
OneSpan Global Financial Regulations Report reveals coming regulations on identity verification, Open Banking, AI, cryptocurrencies and biometric authentication aimed at enabling secure, digital economies
OneSpan™ (NASDAQ: OSPN), the global leader in securing remote banking transactions, today released the inaugural OneSpan Global Financial Regulations Report. The report examines regulatory and legislative initiatives impacting financial services globally in fraud prevention, digital identity, data protection, payments, Open Banking, e-signatures and more.
Governments around the world are considering and enacting laws, policies and regulations to enable and protect digital transactions and commerce, with the global COVID-19 pandemic further increasing the focus on remote banking, telehealth and other remote alternatives for essential activities. This is in large part due to the pandemic having exposed shortcomings in the current security, data management and privacy policies of financial institutions and others. At the same time, the race to digitize the industry to keep pace with evolving customer expectations and competition is also driving rapid regulatory change.
As a result, there will likely be more data privacy and data protection laws enacted throughout the world, each bringing unique regulatory requirements for financial institutions. To help financial services leaders navigate the uncertainty, the OneSpan Global Financial Regulations Report includes guidance on the following trends:
- Artificial Intelligence is under increasing scrutiny as adoption grows: Regulators and governments worldwide are grappling with the creation of frameworks for the development and application of AI that focus on data protection and privacy, as well as the ethical and transparent use of the data.
- Digital identities and remote account openings are gaining traction worldwide: Regulators in Hong Kong, Pakistan, Greece, Macedonia, Mexico and Turkey approved remote bank account openings in 2020 – a clear indicator that even processes rooted in traditional face-to-face meetings in the branch are now going digital and touchless around the globe.
- Open Banking is growing rapidly throughout the world: As third-party providers (TPPs) are allowed to use banking information to help consumers save money, borrow more easily and pay efficiently, banks will increasingly work with TPPs. In the U.S., the Consumer Financial Protection Board (CFPB) issued an Advanced Notice of Proposed Rulemaking on consumer authorized access to financial data, which could be the catalyst for Open Banking in America.
- Facial recognition is driving the greatest changes to banking regulations: As banks increasingly use facial recognition technology for Identity Verification requirements, they are housing large amounts of consumer biometric data. Standards organizations such as the National Institute of Standards and Technology (NIST) and Fast IDentity Online (FIDO) Alliance and are developing frameworks that could be adopted at the national level and would stipulate how banks protect and store their customers’ biometric data.
- Regulation is on the way for cryptocurrencies: As digital banking platforms have experienced massive growth, many governments and industry bodies worldwide have begun to look to Central Bank Digital Currencies (CBDCs) and cryptocurrencies in terms of what they might add to the financial sector. This has resulted in new and refreshed conversations around the possible uses of CBDCs and cryptocurrencies.
“The COVID-19 pandemic could become the most serious challenge to financial institutions in nearly a century, while at the same time the industry grapples with massive changes driven by regulatory developments,” said OneSpan CEO, Scott Clements. “Banks must act now to prepare for the significant changes coming their way in 2021. OneSpan’s inaugural regulations report will arm banks and financial institutions with the information they need to plan accordingly and be well-positioned for the industry transformation that has already started.”
Bank be nimble, bank be quick: how financial institutions can become more agile in times of pandemic
By Peter Simon, Financial Institutions Data Science Practice Lead, DataRobot
If banks want to survive and thrive in and after COVID-19, AI and machine learning are very important, but the current approach to making these technologies happen simply isn’t fit for purpose. Automating development, deployment and monitoring processes unblocks the bottleneck.
You’ve probably heard the one about COVID-19 doing more to change the way we work and to make global business digital in one year than the last thirty years of the “paperless office”. Something similar seems to be going on in financial institutions: the rapidly-shifting environment in the pandemic is driving changes to how banks work more urgently than a decade of competitive threats from fintechs and challenger banks ever did. At the same time, it’s unleashing a gale of creative destruction that could threaten the very fabric and existence of venerable financial institutions if not addressed.
Let’s cut through the hype and take the following premises as read:
- The COVID-19 pandemic is awful in many ways and devastating human lives and livelihoods.
- There are unprecedented (yeah, sorry, that word) downside risks to the global economy as a consequence of both the pandemic and policy reactions to it. These are affecting businesses across all industries and countries; the business of money is no exception.
- COVID-19’s effects are different from a typical recessionary downturn in a number of ways, and unpredictable. Yes, the pandemic has felt like a slow-moving train wreck this year, but business conditions have been moving fast, and one month’s certainties quickly become the next month’s history.
So what’s a bank to do? There are three challenges to address; let’s call them the three stages of ‘Rona Response.
First, survival. Banks’ short and medium-term survival will depend on their ability to identify and mitigate risks as the economy changes during and after the crisis. One would think that, almost a year into the pandemic, this stage would be complete, but arguably the worst of it will only arrive once fiscal policy ‘life support’ measures finally expire. As it is, the number of large corporate bankruptcies in the US this year already looks to be on track for an all-time high, with correspondingly high risks of collateral damage—and correspondingly difficult decisions to be made.
Next, resilience. Survivors will need to be proactive with identifying at-risk clients and help them before it’s too late. This will earn customer loyalty, better protect shareholders by reducing loan losses, and help banks and their communities to recover more quickly (thus being an investment in the institutions’ long-term viability as businesses). It will also shore up the odds of survival should the economy and/or the pandemic take another turn for the worse.
Finally, long-term adaptation and growth. The focus here is on preparing the post-COVID world, whatever shape it may take. It looks like we won’t see a return to “business as usual” anytime soon, but the ability to adapt quickly to whatever shape the “new normal” takes will ensure long-term profitability. There’s no time to wait and see how this new shape will pan out, as by then the most responsive institutions and fintechs will have stolen a march.
The common thread in addressing these challenges successfully is the ability to be nimble in the face of rapidly evolving conditions—effectively becoming an “agile bank”. It’s not going to help anyone if ensuring survival, by changing the way your institution does business, takes a 2-year big-bang transformation programme involving comprehensive re-engineering of all the business processes, hundreds of PowerPoint slides and thousands of consultancy hours; at the end of all of that, it could well be too late. Far better to address these challenges by a series of small, incremental, but immediately impactful adjustments which are fast to deliver. A good place to start is the way in which financial institutions make decisions; not the big, strategic decisions, but rather the hundreds of thousands of everyday operational decisions a typical bank makes, such as which customers to approve, how to target the marketing, what pricing to offer to new and existing customers, which transactions require supervision or investigation, and so on.
Example AI applications in financial institutions, by stage of ‘Rona Response
|● Rapid-response models (address specific short-notice needs and gauge speed and extent at which drivers are evolving)
● Anomalous activity detection for risk flagging (compare to pre-crisis activity patterns)
● Explanatory models of previous crises (what drove KPIs? what is different this time?)
|Survival use cases, plus:
● Customer forbearance models: where to extend maturities, reschedule payments, grant temporary limit increases, reduce rates, and/or waive late fees
● Regulatory capital and liquidity needs scenario modelling
● Sensitivity analysis5
|Resilience use cases, plus:
● Determining new channel usage patterns and preferences
● More efficient client outreach, to increase value, positive brand awareness, and loyalty
● Automated pricing and targeted marketing of new products
AI and machine learning have made inroads in this space, but banks have often struggled to realise these technologies’ promise. A recent McKinsey study found that reasons for this include, inter alia, a lack of clear strategy, inflexible infrastructure and outmoded working models that make it difficult for business and technology teams to collaborate. Let’s add slow and largely manual development processes, poor communication between technology and business silos, and the glacial pace of governance and implementation to the case for the prosecution. If banks want to become more responsive and agile, the current approach to making AI happen quite simply isn’t fit for purpose.
Modern automated approaches to machine learning and AI (“autoML”) help financial institutions achieve this, unblocking the bottleneck and sweeping away some of the problems described earlier, by:
- making the people who build the models to automate the decisions much more efficient and productive, automating their repetitive tasks and massively shortening the development cycle;
- exposing the ability to build powerful predictive models to a wider audience, such as business intelligence (BI) specialists who currently focus on building current-state or historical information—this allows the business to get much closer to the models than was previously the case; and
- making governance, deployment, ongoing monitoring and model refresh a much faster process, by enforcing a structured, repeatable approach to addressing the business problems at hand—even automating much of the documentation needed for model validation.
What can be automated?
Embracing these technologies can lead to some quite astounding results. One of DataRobot’s fintech customers has accelerated their credit model governance process to the point where credit scoring models can be built and deployed in a matter of hours. This allows the business—which approves over three thousand loans each day—to react quickly to the changing realities of their marketplace by ensuring that their decisions are based on the very latest data. Of course, not all banks will be able to achieve quite as drastic an improvement in process speed, but it’s realistic to expect substantial benefits; typically, we see the model development cycle shorten from three months to less than three weeks, with model validation, governance and implementation times also substantially reduced.
Around the world, we’re seeing increasing numbers of financial institutions of all shapes and sizes adopting these technologies. This newfound ability to finally “do AI right” is therefore becoming an increasingly important ingredient in the recipe for financial institutions’ long-term endurance, resilience and adaptability.
 Bank jumping over the candlestick is optional.
 The fully paperless office apparently being on track to arrive at around the same time as the fully paperless toilet.
 Perhaps even in the original, Schumpeterian sense, but that debate is well beyond the scope of this article.
 Special care is needed with this use case, as the unprecedented nature of current events results in an absence of historical data on which to train the machine learning models, and models trained on what is available may not extrapolate well, or at all. We list it nevertheless, as it can be very powerful when used wisely.
 Available at https://www.mckinsey.com/industries/financial-services/our-insights/ai-bank-of-the-future-can-banks-meet-the-ai-challenge
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