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Avoid Fines by Incorporating Independent Validation of Regulatory Reporting

Sarva Srinivasan

More than a decade removed from the financial crisis, financial institutions are still struggling to accurately report data to regulators in a timely, consistent, and accurate manner resulting in considerable reputational damage and hefty fines from tens to hundreds of millions of dollars. They continue to work on multiyear, multimillion-dollar projects to comply with Dodd-Frank, MiFID I & II, EMIR, CAT, CSDR, BSA, and AML directives.

Financial institutions either lack systems that can facilitate real-time monitoring and timely processing of transactions to determine over, under, or misreporting or cannot systemically check documentation completeness before initiating trading activity with a new client or entity. Such challenges result in increased processing and compliance costs, reduced profit margins, damaged brand equity, and poor customer experiences. Banks lack systems that provide a front-to-back view of all transactions with integrated compliance rules, workflow, reconciliation, and reporting capabilities.

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Impact on Financial Firms

In particular, MiFID II reporting requirements have increased focus on data transparency related to client information and the speed at which it needs to be reported. Reporting takes two forms, trades that need to be reported near real-time and transactions that are reported T+1.

The near real-time reporting of trade information improves pricing transparency and enables a better understanding of the market dynamics. This data is often published to APA (Approved Publication Arrangement), who then disseminate it to the broader market – typically within 15 minutes of publication.

T+1 transaction reporting is meant mainly for the regulators, who can then use the reported data to detect and prevent market abuse by focusing on the counterparties and operating personnel. The data is sent to the Approved Reporting Mechanism (ARM), who then validates the data and, in turn, reports to the relevant authorities.

The complexity of the reporting mandates, evolving rules, and guidelines, combined with lack of clean data within the financial institutions (FI’s), have meant that the error rate of reporting (under, over, and misreporting) by the FI’s have not been up to the benchmarks mandated by regulators. For example, just under MiFID II, NCAs (National Competent Authorities) imposed a total of 613 sanctions and measures in 2020 for an aggregated value of about €8.4 million. Multiply this by the various regulations and the regulatory bodies, and one can get an idea of the magnitude of the problem facing the industry.

For example, with CSDR expected to be effective by 1st February 2022, the fines that non-compliant firms face can add up quickly - a penalty will be charged daily, depending on the asset class, security type, and notional value of transactions until the buy-in process is initiated.

Need for Independent Validation

FI’s have been mandated to have an auditable, independent approach to validating the data that is being reported. This is to ensure that there are checks and balances are in place to ensure the integrity of the primary reporting process and associated systems.

FI’s have invested significant effort and money into implementing reporting solutions that address the regulatory mandate. However, they often lack a truly independent process or solution to validate the data that they report

Having such a process incorporating a Data Control and Automation solution have shown to improve the accuracy and completeness of the reporting by over 30% (mid 80% accuracy to high 90%) - often the difference between being in the good books of the regulators and having to pay onerous fines.

Key Components of Independent Validation

Integration to Source Systems & Transformation of Data: Every FI captures the trades and transactions in their own proprietary ways, even if they use industry-standard applications, driven mainly by the internal processes and the needs/capabilities of the upstream and downstream systems. Any solution deployed should have the ability to support both file-based and message (XML, JSON, FIX, etc.) based data while providing the flexibility for business users to write transformation rules without having to depend on IT teams. Standardized integration with widely used trading applications can save time and effort.

Enrichment of Data & Eligibility Rules: Reference data plays a vital role in enriching data reported to the regulators. Given that reference data systems vary by institution, this adds additional complexity to deriving eligibility and reportability rules. Over 80% of the reporting errors can be attributed to incorrect or inconsistent reference data resulting from the manual process of updating and maintaining the data, multiple reference data stores/systems within the banks, and uncoordinated operational processes. A solution that offers out-of-the-box templates with these rules is critical from a time-to-market perspective and to ensure that business users can continue to modify these rulesets as the regulatory guidelines evolve. These capabilities can help FI’s save over 50% of their budgeted spend that goes into ongoing support of these applications.

Transmission Recon: One of the key elements of ensuring that the correct data has been provided to the regulators is to carry out a “control” recon between the source systems and reporting framework. This ensures that all the trades and transactions sent by the source applications have reached the reporting framework.

Accuracy and Completeness Checks: Once the data is enriched and the eligibility and reportability rules have been applied, it is prudent to reconcile this data set and the data reported to the regulators and data repositories. This reconciliation will provide visibility into under, over, and misreporting of data. A bank or FI that can get this information in time can fix the issues in the upstream system and “playback” any reporting, thereby getting ahead of the regulatory mandates for compliance.

Reporting: The ability to review any data issues as they go through various systems and have visibility into the reporting status is extremely critical from a management standpoint. A solution that offers a flexible reporting framework that can solve these ever-changing requirements is a must.

Maintaining Compliance & Avoiding Fines

CXO’s of banks and FI’s have had to deal with a large set of regulatory mandates since the 2008 Financial Crisis. The number of resources spent on regulatory compliance has been significant, and there are no signs that this will reduce soon.

Firms can prepare for newer regulations like CSDR and work towards better compliance around existing regulations like AIFMD, MiFID II by identifying errors closer to the source, in near real-time, and automating the resolution of the errors before the transactions are reported to the regulators.

This can be achieved by leveraging an integrated platform that supports self-service data transformation with the ability to modify regulatory rules swiftly, real-time matching, and reconciliation capabilities to look at data errors. These standardized workflows can be easily adapted to each client’s specific situation, machine learning capabilities to isolate anomalies and predict break reasons. The dashboard’s ability to track compliance and metrics across the organization and automation capabilities allow for easy replay of transactions and rectifying inaccurate data points.

A robust independent validation framework can improve compliance and reduce the costs associated with these mandates, thereby ensuring peace of mind to these executives.

How Can EZOPS Help Your Firm?

The EZOPS platform is a full-service regulatory reporting solution, tracking conformance for compliance rules by tracking real-time messages from trading systems to check for documentation prior to trading with new counterparties to ensuring accurate and timely data submission to CFTC, FINRA, NFA, FCA, and ESMA and tracking SLA violations for Part-43 (RT and PET) and Part-45 (confirm) submissions.

The platform makes it easy for banks to be and to stay compliant. Delivering real-time pre-submission trade and account updates, EZOPS ARO presents users with the most current and relevant data and increases auditability by automating data flow monitoring across systems, including trade processing, reference data, and compliance monitoring systems. It also validates reporting eligibility by cross-referencing pre- and post-transaction rules with details from the front office and other internal or external systems, and so much more.

Book a demo with us today or contact us to learn more about our platform!

About the Author:

Sarva Srinivasan is the President and Co-Founder of EZOPS. He is a serial entrepreneur and a fintech ideator. With over two decades of experience in early-stage companies and founding startups in the US and India, he has harnessed emerging technologies to solve complex problems for financial enterprises across the globe. Through his years of experience in financial services, Sarva, along with Co-Founders Bikram Singh and Dutt Chintalapati, realized that they could harness the power of AI and implement automated workflows to solve many of the challenges their clients faced every day. Combining their industry experience with machine learning and automation knowledge, they developed EZOPS ARO to eliminate the longstanding redundancies and inefficiencies that have plagued the industry for decades. EZOPS ARO helps transform how data is controlled at large financial institutions, including supporting independent validation of regulatory reporting.

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