Regulatory Reporting, Risk Mitigation, Central Clearing and Collateral management: Are you ready?

10 Sep, 2015

Regulation including MiFID II, MiFIR and EMIR, with its introduction of mandatory central counterparty clearing and derivative reporting, all present challenges for financial institutions. As such, financial institutions will have to deal with significant changes and indeed uncertainties going forward as the regulation begins to bite and impact their businesses.

Regulations: burden or blessing?

The history of financial crises can be traced back to the seventeenth century. However, government intervention did not become apparent until the late twentieth century. The UK Banking Act of 1979 declared that it was an issue of government policy and extended the Bank of England’s remit over banks. This was a significant shift in policy. Since then, authorities have been accused of over-regulating giving rise to a plethora of rules, guidelines and legislation, many of which have had unintended consequences.  Despite all of these rules and checks, regulators and policymakers were unable to prevent the 2008 financial crisis.

In the immediate aftermath of the 2008 financial crisis, various legislative reforms were introduced to address these flaws, with financial stability being at the forefront of the agenda. The G20 meeting in Pittsburgh in 2009 pledged to establish a single rulebook globally counteracting regulatory divergence and seeking to improve market transparency, efficiency and consumer protection.

The reality has, however, been somewhat different. Financial regulation is complex and fragmented. The industry has been arguing for years that over-regulation can be cost prohibitive and leads to competitive disadvantages. A number of inadvertent consequences also arise from such regulatory interventions. The overlapping muddle of legislations and regulations can confuse the most sophisticated experts, given the uncertainty and often contrasting messages being disseminated by regulators globally.

Regulations: What to expect now?

Today’s key drivers of change for businesses are the numerous regulations being implemented, and this is causing a number of challenges. Different jurisdictions are at different stages of implementation. These regulations are being introduced thick and fast. Firms face enormous challenges keeping on top of the rule changes and understanding how these changes affect their businesses.  EMIR, for example, imposes requirements on both financial and non-financial entities that enter into derivatives contracts. The requirements for central clearing of over the counter (OTC) derivatives and bilateral margining of non-cleared derivatives will most likely take effect next year and will have a major impact on firms’ operations.  

Risk mitigation techniques such as confirmation, mark-to-model, portfolio reconciliation, dispute resolution and portfolio compression have already been implemented. Entities that have entered into agreements with their counterparts to adhere to risk mitigation techniques would also have to ensure that they maintain appropriate processes in place to comply with the signed protocol. EMIR not only requires the counterparty entering into the derivative contract to report its transaction to trade repositories but also to ensure the accuracy of the reports. It demands an inter-operability model between six trade repositories and reconciliation requirements.

MiFID II and its regulation (MiFIR) add significant changes around market structure and the conduct of business. It also imposes additional transparency for financial institutions and transaction reporting requirements for financial instruments including derivatives traded on organised venues. The rules, which will be introduced from January 2017, also outline the organizational requirements for trading venues, rules around inducements, dealing commissions, third-country firms’ access and position limits around commodity derivatives. It aims to establish improved client protections through authorization of investment firms, pass-porting and certain best execution obligations.

Other rules include the soon-to-be-implemented Securities Financing Transaction Regulation, which requires financial institutions to report details of their securities financing transactions, such as securities lending, borrowings and repos, to trade repositories. It also forces fund managers to disclose to investors their policies on the use of client assets and requires investor permission to re-hypothecate any client collateral.

An empirical solution: What is our strategy?

Today the industry is on the verge of the implementation of a new set of regulations. The market faces significant development requirements over the next two years. The leaders of the world’s major economies came together to identify the root causes of the financial crisis and agreed a plan to redress this collaboratively.  Likewise, we have to work together to achieve the regulatory objectives. Service providers must be cognizant that a one-size-fits-all approach does not always suit the regulatory requirements of end users. There are concerted efforts being made to promote awareness of these regulations through seminars, webinars, breakfast and roundtable meetings, which is definitely the right approach but it is not completely sufficient.

We must identify, understand and address the regulatory requirements strategically rather than tactically. Tactical solutions work in order to meet the needs today but are not necessarily auditable and do not always address future requirements. One strategy could be to perform impact assessments at an organizational level and for the rules to be finalized or implemented in the next couple of years.

A five-year plan does not work here, as no one would even remotely know what he or she could be doing in three years’ time. The danger with these various regulations is that if they are not seen as a whole, there could be a tendency to create inefficient processes, duplication of efforts and tangled dependencies.  It is essential to have a clear structure to strip away any duplications or inefficient and fragmented ways of working when seeking to attain regulatory compliance.

A number of firms are looking to build, delegate and integrate many of these regulatory requirements with their service providers. Some firms will elect to use a provider offering a one-stop-solution with full transparency or one providing complete flexibility. However, firms must recognize that while they can outsource some of the critical functions, they cannot outsource the responsibility. Utilizing a service provider like SS&C, which houses huge swathes of its client data anyway, will help clients enrich and validate their data to the highest standards.

About SS&C Solutions

Many organizations choose to leverage SS&C’s considerable scale and expertise as a service provider, rather than spend precious internal resources on non-strategic activities. We offer a full suite of financial technology products and services to help our clients meet the challenges posed by regulation, improve the quality and scope of management reporting, reduce operating costs and produce the required level of transparency to regulators and investors.

SS&C technologies has proven scalability and provides broad platform support that covers MiFID Reporting, EMIR, AIFMD Annex IV Reporting, FATCA, Form PF, CPO-PQR and 13F. SS&C has built solutions that leverage the operating model i.e. the Middle Back Office technologies and processes in order to counteract the market challenges and ensure the completeness of a solution. SS&C’s regulatory offering, via our cloud based web portal, allows our clients access to the necessary data, calculations, controls and output to review and assess the status of completion and accuracy of their reporting.

Mastan Momin

Associate Director (Middle Back Office and Regulatory Expert), SS&C Technologies