The pace of regulatory change has been so intense that financial institutions have had to get used to running to just keep up. They’ve had little choice but to focus energies on meeting each demand and that has left very little resource available to invest in longer term solutions planning. Hard though it is to take that time, it is necessary for longer term gain. Not only can firms make efficiency savings by elevating their approach to regulation from tactical to strategic, they also stand to turn regulatory reporting from a cost-only centre to one that also delivers business benefit.
There are no signs that change in the regulatory environment is going to abate any time soon. The industry is more than aware of that. The legislative framework now looks beyond Basel III and this means that preparations have to be made for the next round of impending changes.
Change on the horizon
As the remaining impact of Basel III hits, companies must take swift action to be ready for the Standardised Approach to Counterparty Credit Risk (SA-CCR) and the Standardised Approach to Central Counterparty exposures (SA-CCP), scheduled for January 2017. These core changes to credit risk challenge the quality and granularity of data that companies need. Depending on the range and spread of asset classes that a firm trades, SA-CCR could mean a reduction in credit risk exposure, or an increase. Once a firm understands the new exposure levels of its affected asset classes it will need to consider what that means for its overall portfolio. To mitigate the impact of the change, some firms may consider changing their business models.
Then there is the Fundamental Review of the Trading Book (FRTB) and its impact on market risk. As internal models are side-lined, standardised approaches take their place and firms have ongoing work to do to re-engineer their processes related to these risks.
Firms also need to plan around data reporting. The US Federal Reserve has been collecting granular data for capital adequacy purposes for a number of years, and has now added granular cash flow data with the implementation of the FR 2052A Liquidity Coverage Ratio requirement. With incoming regulations such as the reform of Money Market Statistical Reporting requirements (MMSR), MiFID/R and new requirements under the Securities Financing Transaction Regulation (SFTR), the movement towards detailed data reporting continues to gain momentum.
As the number of regulatory requirements grow, as the frequency and complexity of demands increase and as expectations are raised for more granular level reporting, so it becomes even more essential that financial institutions ensure that their reporting infrastructure is scalable and future-proofed. Firms need to stay up-to-date with what is on the regulatory horizon, how it might impact them and what they need to do, and be able to respond.
Tactical solutions to meet regulatory demands, such as the constant addition of human resources and the introduction or adaptation of localised processes – many of them already manual, spreadsheet-based, and overstretched – can’t be maintained. Firms that take a step back from the immediate need of fulfilling the data and analysis demands of the next report can take a longer-term view of how their operations and processes are geared up to meet ongoing, evolving regulatory requirements. By re-engineering their approach they can become more efficient in their reporting, reducing the cost of compliance and can and do derive valued business insight from the data they have to process for regulators.
There are specific areas where firms can make improvements, for example in the way they prepare and manage data, meet regulatory data labelling requirements and handle internal approvals and workflow. To compete, firms need to look at all areas where costs can be reduced, regulatory risks can be managed, and operational efficiencies can be increased.
Regulatory reporting is a mandatory priority. It has to be done, but by doing it well firms can not only mitigate risk and meet their obligations, they can also minimise any disruption reporting causes to their business. As with all long-standing business practices, a strategic approach is needed to ensure economies of scale and efficiency. Without this, costly workarounds and temporary mechanisms will remain an institutionalised norm.
In assessing how regulatory obligations are met, firms will gain the most long-term benefit from a solution that is flexible enough to adapt to change and that provides maximum automation of data handling. An agile, future-proofed operating environment with straight through flow of ‘clean’ data to regulators can reduce human intervention in the reporting process to by exception-only.
Regulatory reporting shouldn’t be treated as an ‘add-on,’ something that’s separate from core business. Firms that effectively reuse the data they process for regulatory reporting purposes can generate insights to drive business decisions. It makes good business sense to make optimal use of all internal resources, including business data; data analysis undertaken to meet regulatory obligations can have other uses too.
Those firms that operate the most effectively and efficiently and make best use of market and business insight place themselves in a strong competitive position. As firms move from a tactical to a strategic response to regulation, the better their competitive position will be.
By James Phillips, Regulatory Strategy Director, Lombard Risk.