For the first time in my 25+ year capital markets technology career, a group that traditionally has had the clunkiest systems and the smallest budget is suddenly in the spotlight – post-trade trade reporting. Historically, there was no P&L benefit to speeding up or radically improving post-trade reporting – once trades were processed the pressure was off. This has all changed with the current wave of regulation, which is requiring banks to streamline trade reporting like never before.
In this new regulatory environment, global banks must replace or upgrade legacy systems to improve data quality and reporting timeliness. To be effective, any new tools that augment existing systems must create consistent, high quality data and transparency and address the mounting costs due to errors, duplication of data and inefficient reporting that plague current models.
Banks are spending an average of nearly $25 million to comply with Dodd-Frank and EMIR, often shelling out for multiple trade reporting systems for different business units. Without a flexible, scalable system, trade reporting will hit banks’ bottoms lines even harder. They need new ways to lower total cost of ownership, improve reconciliation and curb compliance risk.
More generally, the industry has been swept into standardisation, encouraging banks to shift away from clunky, costly and outdated in-house systems to more nimble solutions that offer IT savings and long-term prospects for profitability and growth. Product flexibility and scalable IT architecture is especially important for the derivatives industry, which is bearing the brunt of far-reaching global reporting mandates.
Now more than ever, banks are willing to invest in systems that help make trade reporting as painless and predictable as possible. Every new and enhanced regulation places greater pressure on banks to report more data, with increased detail and even greater accuracy.
The challenge is global. Banks are grappling with multiple and often overlapping regulations in the U.S., Europe and beyond which impact trading, trade reporting, and infrastructure across the derivatives markets.
In Europe, REMIT (Regulation on Wholesale Energy Markets Integrity and Transparency) is related to EMIR and MiFID and requires reporting of derivatives trades on physical commodities. T2S (TARGET2 Securities), which also is linked to EMIR and MiFID, aims to harmonise fragmented securities settlement infrastructure in Europe. Basel II, 2.5 and III and BCBS 239 seek more granular and quality data for risk, capital, and trading, reconciliation, and reporting flexibility.
In the U.S., Reg NMS overlaps with Dodd-Frank and SEC derivatives rule by calling for extensive data throughout the post-trade and reconciliation process. Dodd-Frank Act’s Volcker Rule now extends to non-hedged position risk taken by banks’ treasury and/or accumulated across business lines or trading desks.
Evolving regulations demand that banks utilise derivatives predominantly for hedging purposes. Complying with new hedging rules forces banks to integrate their trade and counterparty identifiers for detailed reporting on an intraday basis. For this to be effective, it’s critical to use the same IT and data infrastructure across jurisdictions.
Bloated regulatory costs
The financial industry is expected to spend more than $50 billion on risk and regulatory initiatives globally by 2015, according to a recent Celent report. Swelling regulatory reporting demands are at risk of bloating technology spend.
To address this threat, banks need to adopt tools that can integrate easily into their existing trade reporting infrastructure. Increasing data quality and reliability, from the development lifecycle through to production monitoring, diagnostics, and the audit trail, is the next necessary step toward future-proofing banks.
No industry faces more reporting requirements that banking. Global calls for additional and more granular data have exploded since the financial crisis and will continue to proliferate over the next year.
Banks must act now to find an innovative way to quickly and transparently avoid errors that can cause trades to be inaccurately represented. By making the trade reporting process more accurate and efficient, banks can free up money to reinvest in profitable business lines and boost enterprise-wide profitability. A future-proofed trade reporting process with diagnostic tools to help banks solve a potentially significant problem is essential to survive and thrive amid rapid evolutions in market structure.
By Lloyd Altman, Global Head, Validate.Trade