At present, regulatory reporting exists as a subsidiary function within operations departments including front office, risk and collateral management and accounting within a particular geography. Key tasks including data extraction, enrichment, report creation, validations/adjustments and subsequent routing are handled in silos. As a result, there is no enterprise-wide strategy for regulatory reporting, nor separate budget for development of reporting systems.
The focus is on short-term compliance and the submission of reports in response to requests from compliance departments. This fragmented reporting approach exists across functions, geographies and asset classes and leads to the following:
- Proliferation of applications including duplicates
- High total cost of ownership (TCO) and maintenance efforts
- Limited scalability of technology architecture
- Compromised data integrity through the use of duplicate, stale or incorrect data
- Substantial manual effort, work-arounds and process breakpoints
- Increased regulatory incidents
Business Drivers: Thinking Beyond the Regulations
It is clear that changes in the regulatory environment will affect reporting functions. Cost considerations, data quality concerns and, more importantly, emerging regulatory reforms will mean the function has to look to new operating models.
- Complying with regulations: While Dodd-Frank and EMIR are already in place, detailed rule making and interpretation is an ongoing process. To complicate matters, the rule-making timelines and implementation deadlines for each regulation are inconsistent. The reporting requirements of some of these regulations are overwhelming and affect global operations and transactions across various asset classes.
- Addressing internal inefficiencies: Current reporting setups tend to be fragmented across functions, asset classes and geographies. This results in the duplication of applications, effort and associated costs. Firms’ TCO hits the roof due to the number of applications needing enhancement and support. Silos in the organization impair a banks’ ability to identify a strategic response.
- Enterprise-wide data quality focus: Most regulatory infractions are caused by the unavailability or inaccuracy of data. These problems are caused by dependency on multiple source systems and issues of data integrity across applications. Use of legacy spreadsheets and stale data compound the problem. Data quality (correctness, completeness, timeliness) across applications and functions becomes a critical concern for the organization.
- Establish controls and governance: If the reporting function is to be efficient it must operate within a sound control framework. A structured process must be established to verify that the regulatory reporting data is accurate and complete. This includes the following:
- Interpreting the regulations
- Data sourcing and delivery
- Exception management
- Workflows associated with all these
There exists a direct relationship between operational objectives and effective controls. Integrating the control framework and reporting
Key Success Indicators
We have seen how regulatory change on such a scale presents banks with profound strategic and operational challenges. Those that can deal with the challenges effectively will reap valuable benefits. Even if time and resource constraints restrict banks’ ability to implement all aspects of the model described they can adapt best practices to improve efficiency and the effectiveness of their reporting.
- Regulatory risk reduction: Accurate data, timely reporting and suitable controls ensure that compliance incidents are reduced significantly.
- Cost optimization: Consolidation of the application portfolio and data framework centralization will reduce the number of applications to be supported. This will bring down the TCO. Compliance costs can be reduced substantially if regulations are analyzed holistically, and existing capabilities, processes, data sets and resources are utilized.
- Business change adaptability: A scalable process and technology framework means future requirements across geographies can be met swiftly. Flexible business and technology architecture ensures compliance with local regulations. New regulations should not be looked at simply as costs. They can also create new business opportunities. Banks should invest in infrastructure that can support value added client services and new revenue streams.
- Robust control framework: A robust framework can support the introduction of new reports and interpretation of emerging needs. Exception management and failure management are critical when multiple new reports, accessing data from multiple sources, deliver reports to regulators across geographies.
Conclusion: An Opportunity to Transform
Emerging regulations will fundamentally alter the way investment banks view their reporting requirements. The impact on technology, systems portfolio and data strategy will be immense. As new infrastructure is created, existing systems and operating models will need to be rationalized or repurposed. The winners will be banks that look beyond basic compliance. These changes present an opportunity to transform the reporting function and achieve much greater benefits. The real opportunity is to make their reporting functions more responsive to regulatory changes, to improve operational efficiencies through automation and to reduce the TCO. Those investment banks that transform will retain competitive advantage in the new business environment while simultaneously reducing compliance costs and minimizing incidents of non-compliance.