2023 Regulatory Reporting Trends and Predictions
2023/24 will be busy for the global regulatory reporting community with many focus areas, including EMIR REFIT, CFTC Rewrite Phase 2, SEC 10C-1, ASIC update, MAS Update and the JFSA. With so many changes in the pipeline, we asked our esteemed colleagues and RegTech experts to share their predictions for the year ahead.
# 1 – Data quality and assurance
Tim Hartley, Director, EMIR Reporting, Kaizen Reporting
2023 is a crucial year for data quality and assurance testing. With so many reporting regimes facing rewrites/refits/re-do’s poised for go-live in 2024, firms will use 2023 to ensure that the quality of their regulatory reporting is fit for purpose ahead of these major regulatory changes.
Most derivatives reporting regimes such as EMIR, ASIC and HKMA are all facing major changes. For MiFIR reporting, the changes proposed by ESMA were set out in its final report in March 2021 and are awaiting review by the European Parliament. The UK’s review of MiFIR reporting is pending, yet the FCA recently reminded firms of its significance in MarketWatch 70. Securities Financing Transactions Regulation (SFTR) reporting firms are also expecting change, with the revised validation rules schemes expected early 2023.
Independent, high quality assurance testing is the clear route to check that reporting is fit for purpose and to ensure that firms are not ‘marking their own homework’. High quality data is the bedrock for accurate reporting and with so many upcoming regulatory changes, assurance testing will be more important than ever throughout 2023 and 2024.
Firms with reporting obligations would be unwise to leave such reviews until after regimes have been updated. EMIR Refit in the EU and UK adds a large book of change management work to European firms. Many firms are using the increased explanation and guidance provided in the vast consultation papers and ‘final reports’ as an opportunity to assess the quality and understanding of their own reporting. Such firms know that completing any back reporting or historical amendments will be substantially harder, once the number of fields increases to 203, existing fields change and the volume of matchable fields inflates rapidly after go-live. Finding correct reference data is notoriously hard for legacy submissions, especially those long since closed.
Firms will also need to ensure that the major reporting changes implemented in 2022 for CFTC, SEC and Canadian reporting have not introduced major data quality issues to their reporting. Independent assurance testing helps firms uncover reporting gremlins ahead of regulators. After a six-month delay for example in the CFTC rewrite, it is unlikely that there will be any grace period for firms to have their reporting up to scratch.
Whether testing for recent major updates in CFTC reporting, or performing pre-emptive data reviews ahead of the many derivative reporting changes in 2024, improving data quality continues to be an unshakable motivation for regulatory authorities.
#2 – EMIR REFIT: The clock is ticking
Thomas Steimann, Head Regis-TR, SIX
The main priority for the Trade Repositories (TR) industry in 2023 must be EMIR Refit. With the official start date at 29th April 2024, the “clock is ticking”. This applies not only to the TRs but the entire community involved in the regulatory reporting chain, i.e. market participants as information generators, intermediaries as solution providers, the Competent Authorities as data receivers, as well as ESMA as the Supervisory Regulator, need to concentrate their efforts to ensure their readiness of the entire eco-system.
Although a lot of preparatory work has already been done by many of us, the bulk of activities to achieve the goal of a successful roll-out and implementation will need to be executed and completed during the next 16 months. And yes, not all details and questions have been clarified and assumptions for some scenarios need to be made, which is clearly not ideal and makes the development process suboptimal and somewhat inefficient.
For sure, the intermediating solution providers can – and will – help and REGIS-TR, via our dedicated Relationship Management and Client Services teams, will continue to support our direct and/or underlying clients to ensure they understand the impact of Refit and the actions they need to take to be ready for the reporting start date.
EMIR Refit opens the opportunity – or better said: the need – to look intensively once more at data quality; not just a review of formats or technical data correctness, but an analysis of the correctness of all business-related information to be reported.
#3 – The time to implement is now: Preparing for derivatives trade reporting changes
Priya Kundamal, CFA, Head of DDRS, Derivatives, Singapore, DTCC (Depository Trust & Clearing Corporation)
Over the next 24 months, nearly every jurisdiction that mandates OTC derivatives reporting will implement revised rules – some of them even more than once. These global rule rewrites will introduce significant changes including the adoption of harmonized data fields (CDE), standardized message formats (ISO 20022 XML) and the reporting of key reference data (including UPI). Adapting to and complying with each of these new and revised requirements will impact in-scope firms’ trade reporting infrastructure, operations and technology.
To best prepare, firms must ensure they have the right understanding of the rule changes and address their technical readiness to ensure compliance with the forthcoming mandates. We are hearing that many industry participants may not be familiar with the developments around UPI and ISO. In 2023, we plan to continue to educate the industry on the global derivatives rule revisions to promote better understanding and overall readiness. We also look forward to continue working closely with key stakeholders, including industry organizations, standards bodies and regulators as rewrites are introduced.
Ultimately, with the successful implementation of the rewrites anticipated to be behind us by early 2025, the industry can then begin its next key task: evaluating how this newly standardized derivatives trade data can be amalgamated and used by the global regulatory community to help better monitor and manage systemic risk.
#4 – JFSA – Significant changes on the horizon
Masaki Ogawa, Sales Director, S&P Global Market Intelligence Cappitech Business in Japan, Cappitech
The JFSA Rewrite is due to go live in April 2024. This is the first major change in JFSA reporting since the reporting requirement went live in 2014. Currently, a majority of approximately 80 firms are reporting to JFSA directly and a handful of firms are reporting through DDRJ. Going forward, all firms will need to report to DDRJ and therefore will be forced to change the destination of their reporting, which means a different reporting specification. Some of the other upcoming regulatory changes include the frequency of reporting, data fields, addition of valuation, margin and collateral reporting as well as the format of reporting. Through public consultation, JFSA has already published a draft of requirements which clearly shows 137 data elements to be reported.
At this stage, those in scope are recommended to commence analysis, by looking at the required data elements and source for them internally. Once the DDRJ reporting specification is published, they could readily convert what they have gathered to the required specification. Another big topic in Japan will be finding a solution for Sharing and Pairing of UTIs, ideally by allowing firms to be able to match their trade details and subsequently share their paired UTI with their counterparty electronically. 2023 will be a busy year for Japanese firms to get themselves ready to meet the 2024 compliance deadline.
#5 – Derivatives data harmonization to gather pace
Tara Kruse, Global Head of Infrastructure, Data and Non-cleared Margin, ISDA (International Swaps and Derivatives Association)
Following implementation of the first phase of revisions to the US Commodity Futures Trading Commission’s (CFTC) swap data reporting rules on December 5, there will be a continued focus on data harmonization in 2023 as the industry prepares for the next phase of reporting rule changes. With new rules set to take effect under the European Market Infrastructure Regulation (EMIR) Refit on April 29, 2024, as well as a host of other key jurisdictions’ rule changes expected during the course of 2024, consistent implementation will be critical to achieving a globally harmonized reporting framework.
Through the first stage of the CFTC rewrite, we have shown the benefits of taking a digital approach to implementing those rules with ISDA’s Digital Regulatory Reporting (DRR) initiative. By developing a mutualized, industry-agreed interpretation of regulation and expressing that interpretation as human-readable, machine-executable code using the CDM, the DRR creates a whole new way of implementing the rules, significantly reducing the potential for inconsistencies and inaccuracies. The DRR is already being adapted for the EMIR Refit and will also be tailored for other countries where reporting rules are being updated, and this will be a key priority in 2023.
#6 – 2023 is the year for tackling ESG and sustainability data, frameworks and compliance – from front-to-back
Janine Hofer-Wittwer, CFA, Senior Product Manager, Financial Information, SIX
With increased interest from end investors for sustainable investments, backed by a growing number of changing regulatory developments, the role of data in financial markets is constantly evolving. As the next level of the Sustainable Finance Disclosure Regulation (SFDR) comes into force in early January 2023, this is forcing market participants to further get to grips with the requirements for ESG compliance and the opportunities this presents. Meanwhile, other global regulatory developments are taking shape, first and foremost in relation to climate risk management and TCFD (Task Force on Climate-Related Financial Disclosures) alignment.
On the whole, the industry has seen a significant move forward in the past 5 years in terms of streamlining and automating the process of data aggregation, processing, as well as regulatory reporting. One example is the European ESG Template (EET). With the help of the EET, the disclosures for investment funds and structured products are being standardized, the data becomes comparable and can be processed more easily. In addition to building transparency, this helps to address the risk of greenwashing.
From a firm perspective, data is driven by the requirements of the front and middle office. But the need for greater transparency and at the same time efficiency, brings in the IT, operations and reporting teams and opens the door for greater collaboration across the different areas. In combination with the growing need for sustainability data, we are seeing increasing demand for a multi-source approach to ESG data. Being able to pool together and funnel what are very broad, wide ranging data sets across a complex landscape through one provider and in pre-defined delivery formats is the next logical step for the industry.
The benefits of alignment across front- middle- and back-office teams and a centralised, procurement-led approach for data and operations management with multi-vendor access, are not only cost-savings, but also a better functioning business output as a direct impact of this investment. Therefore, a properly thought through and executed ESG data and compliance strategy could result in a paradigm shift for greater collaboration within firms, a more unified business strategy for ESG and beyond, and a positive impact on the bottom line.
#7 – What does 2023 look like for compliance professionals?
Todd Spillane, Senior Director, and Shankar Subramanian, Principal – Public Funds, Compliance and Risk Management Cutter Associates
This next decade will bring significant change to our industry, with the endless parade of new regulations and requirements across the globe continuing into 2023 and beyond. As a result, many asset managers and asset owners will need to adapt to these changes and future-proof their businesses.
Investment management firms should not expect any slowdown in new regulations in 2023 and need to be properly resourced to address these requirements. After all, in 2022, the Securities and Exchange Commission averaged one new rule per month for compliance professionals to implement!
Hiring and Business Transformation
In 2023, we will continue to see a shift in mindset that will alter hiring practices and how firms view opportunities for transformation. For one, compliance departments will start to hire data and technology specialists to join compliance – not the IT department. Compliance will become a consumer of more data – both in the investment part of monitoring as well as other areas, particularly electronic communications – and regulators will continue to demand more data disclosures with shorter reporting cycles.
While compliance historically has not been a big user of technology, CCOs must now find ways to leverage new technology to automate processes and leverage AI to keep pace with the sheer volume of data to review.
A Good Time to Explore Managed Services
Some investment management firms will also explore managed services, and rightly so. With the emergence of new opportunities for transformation and more options available in the market today than in the past, the lines that once separated software and service providers are now blurring.
Vendors known for software now offer managed services that extend into traditional areas of investment operations, compliance, and regulatory reporting. These services can help firms augment their staff and keep pace with our changing industry.
In 2023 and beyond, investment managers will explore new opportunities for transformation that leverage new staff, technology, and managed services, or a combination of all three, because the stakes are simply too high not to consider every option.
#8 – Exploring the complexity of achieving transparency in transaction reporting
Vinod Jain, Senior Analyst – Capital Markets, Aite-Novarica Group
There is uniformity and diversion at the same among the regulator’s approach to achieving transparency in the transactions reporting. Though the regulator’s overall objectives are aligned, the regulatory rules and then subsequent guidance has created a jurisdiction-specific set of rules for market participants. This has created a sub-set of regulatory reporting solutions, sometimes under a larger program within firms.
The uniformity in approach can be viewed in the adoption of unique trade identifiers, counterparty identifiers, and many economic terms of the trade mandated for reporting. The adherence to a common reporting framework via trade repository, swap data repository, or approved publication mechanism/ approved reporting mechanism provides the required guidance to market participants. Such a high degree of correlations in reporting across multiple jurisdictions globally has not been seen in other markets such as equities and fixed income. There is a demand from the regulators to receive granular data on a real-time basis and end-of-day positions collateral and valuation to be able to recreate the entire sequence of transactions.
But at the same time, the diversion in approach can be observed in reporting life cycle events, product taxonomy, and providing guidance to the industry on regulation. There is no uniform approach across regulators in the reporting of trade life cycle events and the trade booking model adopted within the firm to clearly tag a trade when ready for reporting. Similarly, the rules of reporting obligations make it more complex to identify reporting obligations under a specific jurisdiction. A lack of acceptance of new identifiers such as ISINs has clearly limited the use of the ANNA-DSB generated ISINs to MiFID II. Similar, observations are in prime broker trades and collateral data.
Finally, the cases of diversion override uniformity, and thus regulation specific logic on the same transaction is being applied end to end to meet compliance requirements. Maybe there’s a time now for the regulators to re-visit one more time and add an innovative approach to reporting. Like using electronic platforms for reporting, electronic confirmation platforms can be used to create a baseline end-of-day record. Similarly, valuation reporting could be from end-of-day balance sheet accounting platforms. A simplified approach and reliance on a smaller set of fields ~ 15 fields could bring the required good and consistent quality data in the reporting process.
# 9 – Disclosure disguised as transparency
Daniel Austin, Director, U.S. Policy and Regulation” for AIMA (The Alternative Investment Management Association)
A trio of proposed rules from the SEC, if finalized in their current form, will subject a number of market participants to new, granular reporting requirements. Although the three rules are intertwined, each contemplates a different framework of public disclosure, which could have a profound impact on markets and market participants – particularly in the aggregate.
A November 2021 proposal to require the reporting of securities loans to FINRA appears to contemplate disclosing data on securities lending activity that takes place in the wholesale market as well as data on individual borrows to facilitate short transactions. Fast forward to February of this year when the Commission specifically addressed short sale reporting. There, the Commission proposed to aggregate and anonymize reported data prior to its publication. Finally, in a rulemaking to require the reporting of certain security-based swap (SBS) positions, the Commission proposed attributed public disclosure of reporting persons’ positions.
In sum, you have one rulemaking (short sales) that, in limiting the scope of public disclosure, the Commission acknowledges and explores the drastic consequences that can result from too much granular and attributable disclosure. The other two rulemakings (securities lending and SBS), however, take almost completely opposite stances without an acknowledgement of the same drastic consequences that can materialize from too much disclosure. Will the Commission heed its own rationale in the short sale rulemaking and limit the scope of data it publishes on securities lending and SBS? We’ll know over the next few months as the SEC looks to finalize these proposals.
#10 – Looking towards a more efficient future in the regulatory reporting landscape
Alexander Westphal , Director, Market Practice and Regulatory Policy , ICMA (International Capital Market Association)
It’s not difficult to predict that CSDR Refit and the saga around mandatory buy-ins (MBIs) will continue to keep us busy in 2023. This year has been a rollercoaster in relation to MBIs with the suspension in February, followed by the CSDR Refit proposals in March and the subsequent legislative discussions. These discussions will head towards their pinnacle in the first half of 2023 with the trilogue discussions which will finally give us clarity on whether or not MBIs will remain on the table. While the Commission proposal for a two-step approach was met with some relief across the industry, ICMA along with most other industry stakeholders continues to strongly believe that MBIs are not the right tool to improve settlement efficiency in Europe. The inclusion in the text, even in the current form, would create unnecessary uncertainty, damage the competitiveness of the European market, and it also continues to be a distraction from more important and meaningful discussions around other means and tools to improve settlement efficiency. We will continue to convey this message to all sides involved in the discussion.
Beyond CSDR, there are of course numerous other files on the ERCC’s regulatory plate for 2023. From a reporting perspective, our SFTR work continues more than 2 years after the initial go-live. Participation in ICMA’s SFTR Task Force remains high, which should probably not come as a surprise given the long list of outstanding reporting problems that firms are still facing and that we have been documenting since the beginning in our SFTR issues log. We know that some improvements may be on the horizon as ESMA is looking to review the validation rules in early 2023. And ESMA might even launch the full SFTR review later in the year, although it is quite likely that this will get further delayed. Looking further ahead the growing digitalisation agenda may provide a silver lining to the existing complexities and inefficiencies. The Common Domain Model (CDM), which ICMA is working on in close collaboration with ISDA and ISLA is hopefully a first important step in this direction, with important use cases in the reporting space. We are looking forward to engaging closely with regulators on this topic in order to facilitate a more efficient future regulatory reporting landscape.
#11 – Significant changes on the horizon
Karl Wolohan, Senior Consultant, S&P Global Market Intelligence, Cappitech
While the initial headlines around the talent shortage may have started to recede as 2022 progressed, the challenge of finding and retaining the best talent still exists in the regulatory reporting space and will likely continue to present a challenge in 2023 with regulatory change creating pressure points and demand.
With this, we see it becoming more difficult for clients to retain talent and maintain resilience in their regulatory reporting processes and BAU, especially for smaller teams with knowledge concentrated in individuals. Attrition may rise and the competition for talent will impact search times and talent quality alongside an increased training burden.
#12 – Increased industry collaboration around new regulations
Ronen Kertis, Head of Cappitech at S&P Global Market Intelligence, Cappitech
EMIR REFIT will go live on 29 April 2024. With its increased reporting complexity, we expect to see market participants collectively working together to formulate solutions to the issues being faced. Unlike in the early days of regulatory reporting, whereby firms tried to muddle through new regulatory requirements and challenges on their own, today the industry is at a point where collaboration is more common and welcomed. This is partly due to several regulators working towards unifying reporting across the globe, for example, by introducing the ISO XML 20022 format.
One such method for collaboration is working groups, where industry participants, clients and SMEs are pulling together to better understand what, as an industry, is needed, focusing efforts and ensuring the ultimate solution covers industry use cases. An example of an identified upcoming industry challenge is UTI matching. UTI matching requires multiple data sources and a need to reconcile UTIs across counterparties, making it complex, time consuming and often manually intensive. The challenge will be trying to find a solution to reduce UTI pairing breaks and make it easier for reporting firms to correct and replace incorrect trade details prior to TR submission. Based on our success in bringing a solution to the market for SFTR pairing and matching, we are spearheading a strategic design group to tackle this industry challenge head on for EMIR REFIT and other dual-sided reporting regimes. The involvement and interest we have already seen from clients and partners, demonstrates the changing winds around industry collaboration. We certainly expect this trend to continue and gain momentum.
Disclaimer: This blog is for informational purposes only. Any views expressed are those of the authors and should not be taken as a substitute for legal advice, nor advice on specific regulations.