The implicated firms admitted to the facts outlined in the SEC orders, acknowledging that their conduct breached record-keeping provisions under federal securities laws. Collectively, the firms have agreed to pay $392.75 million in civil penalties and are in the process of implementing measures to enhance their compliance policies. Three firms that voluntarily self-reported their infractions will face significantly reduced penalties.

“As today’s enforcement actions against more than two dozen firms reflect, we remain committed to ensuring compliance with the books and records requirements of the federal securities laws, which are essential to investor protection and well-functioning markets,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Among this group of firms, there are several that differentiated themselves by self-reporting prior to the staff’s investigation, demonstrating once again the real benefits of proactive cooperation.”

The SEC’s investigations revealed pervasive use of unapproved communication methods, referred to as off-channel communications, across the firms. These off-channel communications included records that should have been preserved under securities laws but were not, impeding the SEC’s ability to conduct effective investigations. The violations were found to involve personnel at various levels, from senior managers to supervisors.

The firms were charged with breaches of record-keeping provisions under the Securities Exchange Act and the Investment Advisers Act, in addition to failures in supervising their personnel to prevent such violations. Alongside financial penalties, the firms were ordered to cease and desist from further breaches and received formal censures.

Reacting to the announcement, Matt Smith, CEO of integrated surveillance solutions provider SteelEye, commented: “The SEC’s recent hefty fines dispel any notion of a softer stance on off-channel communications breaches. Its crackdown remains in full force. The SEC is clearly expanding its focus beyond large tier-one banks, continuing to target investment advisers and broker-dealers. With fines posing a growing threat to firms of all sizes, it’s crucial they invest in the necessary measures, embracing smarter, more efficient approaches to supervision to navigate the evolving regulatory environment more effectively. Only then will they be able to keep pace with the SEC’s unforgiving scrutiny.”

Oliver Blower, CEO of London-based communications surveillance specialist VoxSmart, added: “It has been eerily quiet on the watchdog front of late, particularly when it comes to instant messaging record-keeping penalties. But this barrage of fines offers a stark reminder that the regulator will continue waging its battle on off-channel communications for the foreseeable. While this will alarm US firms ill-equipped to monitor staff use of platforms like WhatsApp, financial institutions operating beyond the SEC’s reach should also pay close attention. Overseas regulators certainly will be, and we expect a domino effect as watchdogs worldwide follow suit.”

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By Suman Rao, UK Managing Director, Avaloq.

A year on from the implementation of Consumer Duty, its impact on the UK wealth management industry has been undeniable, causing a positive cultural shift across the industry as firms modify their practices and behaviours to ensure they provide fair value for clients. Navigating the regulation’s requirements has also brought challenges, and applying Consumer Duty principles consistently across value chains has proven to be complex and time-consuming.

Impact on client relations

Consumer Duty has reshaped client relations by making ongoing advice reviews crucial and extending compliance to closed products, necessitating re-engagement with inactive clients.

The role of technology in compliance

Technology has been crucial in aiding Consumer Duty compliance, enabling firms to evidence the value they deliver to clients. It has been particularly important for firms in the lead up to the 31 July Consumer Duty annual board report deadline. These reports – in which firms are required to demonstrate they are complying with the regulation and delivering good outcomes for clients – have led to an increasing emphasis on CRM systems for capturing and using data within the advice journey. With firms expected to identify issues and areas for improvement, they are required to consolidate large amounts of data, likely turning to their data warehouses as the only place to get a holistic view of this information.

As wealth managers look to evolve their Consumer Duty compliance and deliver long-term value to clients, it is important that they regularly assess their progress, using means such as the annual mandatory board reports to establish what they could be doing to better serve their clients. In addition to this, they should speak to their clients to determine the level of engagement they desire and provide options in the preferred format.

Wealth managers should also look to leverage technology for compliance with Consumer Duty. For example, technology can allow firms to enhance their client portal, enabling clients to use self-service features without needing to speak to an adviser, while providing advisers with access to a 360 view of their clients and their portfolios.

Additionally, firms should evaluate the integration of their CRM systems to support clients more effectively. Improved CRM integration would enable wealth managers to enter data into a single system, creating a more streamlined experience for clients.

The outlook for closed products

As we approach the deadline for the implementation of Consumer Duty for closed products and services, firms should now have a view of their clients with closed products – and should have developed a strategy to ensure that these are assessed, and that clients are receiving fair value.

Looking ahead, wealth managers will need to focus on putting these strategies into action. In some cases, this may involve re-engaging with the client, and this might require recruiting additional staff to support with ongoing advice reviews.

In addition, firms still reliant on legacy systems for closed products may need to embark on a data migration exercise to ensure all products are on the same systems and that clients with closed products can be serviced consistently.

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By Kifaya Belkaaloul, Head of Regulation, NeoXam.

With just over 150 days until the Packaged Retail and Insurance-based Investment Products regulation (PRIIPs) changes, the financial industry must confront a looming implicit costs conundrum – and fast.

The update to the regulatory framework on January 1 seeks to ensure that asset servicers undertake a more detailed and standardised approach to calculating implicit costs. It is difficult to argue with the EU’s rationale behind the change. In an era for markets regulation characterised by transparency, these hidden costs – which are often buried within the fabric of highly complex financial instruments – are inherently opaque.

Demystifying them seems a sensible move, at least on paper. In practice, it presents a major challenge for asset servicers and may prove insurmountable if the necessary precautions are not taken well ahead of time.

Time to choose

Historically, implicit costs have been difficult to quantify for asset servicers, let alone disclose with precision. Using the updated PRIIPs method, referred to as the ‘full PRIIPS’ or ‘arrival price’ method, implicit costs are calculated as the difference between an asset’s arrival price, also known as its mid-price, and its execution price. These costs stem from various sources, such as bid-ask spreads and the impact of trades on market prices. Accurately capturing them requires detailed historical trade data.

Asset servicers have traditionally relied on people to provide the necessary oversight and elbow grease to manage and report this data. But this approach is fraught with the potential for mistakes and inconsistencies. Human error, varying interpretations of data, and the sheer volume of information to be processed can lead to inaccuracies that undermine trust in the disclosed figures. In a landscape where precision is paramount, the traditional methods simply cannot meet the heightened regulatory expectations. To put it frankly, the change presents a fundamental choice for asset servicers: embrace automation or risk obsolescence.

Automated systems can process vast amounts of data with unparalleled speed and accuracy, ensuring all relevant information is captured and analysed consistently. By leveraging advanced algorithms and machine learning, patterns and anomalies that might evade the attention of human analysts are easily identified. This not only enhances the reliability of cost calculations but also ensures disclosures are consistent and transparent.

Compliance and beyond

The benefits of automation also extend beyond mere compliance. For asset managers, gaining access to accurate and reliable cost information fosters greater trust and confidence. They can make more informed investment decisions, knowing that the cost data they rely on is both precise and consistent. This, in turn, strengthens the overall integrity of the financial markets, promoting a healthier investment environment.

In addition, automation frees up human resources to focus on the more strategic elements of their role. Rather than being bogged down by the humdrum of data processing, analysts can concentrate on higher-value activities, be it interpreting trends, refining investment strategies, or enhancing client relationships. This shift not only enhances operational efficiency but also delivers greater value to clients.

Some will inevitably argue automation comes with its own set of challenges. Securing the funding for its initial implementation and upkeep springs to mind. But these costs are dwarfed by the benefits. After all, the alternative – continuing to rely on manual processes – risks non-compliance with regulatory standards, potential penalties, and a dent to client trust, not to mention brand credibility.

The upcoming PRIIPs regulation amendments must be viewed as a clarion call for asset servicers to modernize their operations. Reliance on human oversight is no longer sufficient to meet the demands of the new regulatory landscape. Automation offers a robust solution, enhancing the reliability of cost calculations and disclosures, while fostering greater trust among asset managers. As we march towards this new era of financial transparency and accountability, embracing automation is not just an option; it is a strategic necessity.

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RTI: Can you describe the decision-making process within the DSB, particularly in terms of setting strategic priorities and responding to regulatory changes?

ROC is a group of more than 65 G20 financial markets regulators and other public authorities from more than 50 countries).

Briefly, the key principles the DSB follows are:

• Cost recovery: The numbering agency services for OTC ISINs and UPIs are provided on a cost-recovery basis with costs are allocated fairly among stakeholders
• Unrestricted data: OTC ISINs, UPIs and their associated reference data have no licensing restrictions on usage and distribution for any purpose
• Open access: Access to the DSB archive for consumption of OTC ISINs, UPIs and associated reference data is available to all stakeholders
• Economic sustainability: The DSB funding model must be sustainable – lean, efficient, and reliable
• Equal treatment: The DSB ensures parity and efficiency in delivery of services. following standardised processes and procedures with exceptions to terms are only introduced on the basis that they can be consistently applied across all users without imposing a risk on the DSB services.
• Separate service provision: Access to the UPI and ISIN services are not tied or bundled with any other service offered by the DSB

These principles guide, and are threaded through, all DSB decisions which are taken by the DSB’s Board of Directors with three Industry Representation Groups (see Q2 below) acting in an advisory capacity to the Board and providing industry stewardship.

In terms of responding to regulatory changes, the current reforms in progress in the EU provide a good ‘case study’.

The European Commission recently issued draft rules in June 2023 for consultation which propose modifications to the OTC derivatives ISIN to facilitate price transparency. The DSB has assisted with technical and explanatory clarifications as required for both industry and regulators. During the European Commission’s consultation, the DSB hosted two webinars for industry providing an overview of the draft rules and how the DSB can support implementation, with the Commission speaking at one webinar and regulators attending to observe. The Commission will issue its final rules later in 2024 and the DSB will implement the changes through collaboration with its industry representation groups.

RTI: How do you balance the needs and feedback from a diverse group of stakeholders, including regulators, market participants, and internal teams?

Kalliomaki: Collaboration is at the core of the DSB’s approach, and it operates three industry representation groups which each cover both the UPI and OTC derivatives ISIN. These committees comprise representatives from DSB’s user organisations, independent experts and regulatory observers – members, minutes, agendas are all published on the DSB website for transparency:

• The Product Committee (‘PC’) supports the evolution of the DSB’s product definitions. (Product Committee (PC) – DSB (anna-dsb.com)
• The Technology Advisory Committee (‘TAC’) guides the evolution of the DSB’s technology and operations. Technology Advisory Committee (TAC) – DSB (anna-dsb.com)
• The Governance Advisory Committee (‘GAC’) advises on governance matters, including the subscription terms and policies, control frameworks such as threshold monitoring and considerations to the structure of the DSB’s cost recovery fee model. Governance Advisory Committee (GAC) – DSB (anna-dsb.com)

These committees are forums for industry to put forward their views on how to evolve the services and how to best implement changes with regulators present to enable dialogue. The DSB also issues an annual industry consultation on aspects of the DSB’s services that users have highlighted for development consideration and optimisation, or to address evolving market practices and technological advances.

RTI: Can you talk about how DSB is planning to leverage newer technologies generative AI (GenAI), LLMs and Distributed Ledger Technology?

Kalliomaki: The DSB is considering how it can use GenAI and open source LLM’s to assess data quality and define quality metrics in the reference data managed by the DSB with the objective of enhancing DSB’s understanding of how clients use the service and how it can improve data quality and the service in general.

AI tools are actively used by the DSB: from co-pilots supporting generation of code to minute writing are used in delivery of the service.

The DSB’s Technology Advisory Committee (TAC) is discussing the topic of DLT technologies towards the end of this year as part of its remit to monitor evolving technologies.

RTI: UPI having been live since January, what challenges, if any, do you see firms struggling with?

Kalliomaki: The UPI Service went live on 16 October 2023 with the first UPI reporting mandate coming into force in the US on 29 January 2024. This meant firms which had to meet the US deadline of 29 January had 3 months to integrate the UPI services including search for and create UPIs in readiness. Moreover, the DSB launched its UAT (user acceptance test environment) in April 2023 which allows prospective users to test connectivity and access options free of charge for 6 months from the date of entering it. We saw firms using the test and live environments from day one which was great

So far in 2024, two jurisdictions have gone live with their UPI reporting – the US In January and the EU in April. In advance of each start date, the DSB looked at its onboarding data and found that in the main, organisations were prepared

• Data shows number of firms prepared for UPI regulatory reporting in the US is in line with DSB expectations – DSB (anna-dsb.com)
• DSB releases details of industry readiness for UPI Reporting in the EU – DSB (anna-dsb.com)

Following the regulatory compliance dates coming into effect and having experience that the practical adoption and implementation of standards is a journey, the DSB tracks support cases and ensures queries are referred and discussed in the relevant industry representation groups.

For example, the Product Committee is instrumental in discussing product related queries and publishing Best Practice FAQs to assist the broader user community. This ensures that users that are yet to onboard can learn from the experiences of those who have gone before them. The DSB’s collaborative forums of public and private sector participants assists in solutions being deliberated and developed in cooperation.

RegTech Insight is grateful to Emma Kalliomaki for taking the time to share some of the key DSB operating principles that have underpinned the successful rollout of the UPI and the ongoing support for industry-wide standards adoption. Emma also participated in the recent Data Management Insight webinar that addressed “How to maximise the use of data standards and identifiers beyond compliance and in the interests of the business.”

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The findings of an A-Team Group Data Management Insight poll showed that 40% of respondents said they are using the resources to a “great extent”, while another 33% are using them to a “good extent”. Just 13% reported they aren’t utilising them at all.

The poll illustrates how financial institutions are seizing on the consistency that identifiers bring to data to turbo-boost use cases such as know-your-customer (KYC) processes and risk management, as well as bring broad operational efficiencies, according to speakers at DMI’s most recent webinar, during which the poll was held.

The webinar, entitled “How to maximise the use of data standards and identifiers beyond compliance and in the interest of the business”, gathered leading participants in the data management and identifiers space. To confine the use of identifiers to satisfying regulatory obligations would be a waste, Emma Kalliomaki, managing director of the Derivatives Service Bureau (DSB) told the webinar.

Broad Strategy

While they are critical to bringing “efficiency and harmonisation”, their broader deployment has become part of data management best practices, Kalliomaki said. Having a data strategy that recognises the applications of such resources to data uses throughout the entire business is critical, she said, adding that this necessitated robust governance models.

Among the speakers was Alexandre Kech, chief executive of the Global Legal Entity Identifier Foundation (GLEIF), which recently devised the Legal Entity Identifier (LEI) standard that’s used by companies and financial organisations around the world. Its latest iteration, the virtual LEIs, or vLEI – a cryptographically secure digital representation of LEIs – has been adopted by a large number of companies, especially within global supply chains, Kech said.

The consistency that standards and identifiers bring is also crucial to enabling organisations to “stitch” together datasets across an enterprise, enabling them to identify patterns and outliers in those pools of information, offered Robert Muller, senior group manager and technology product owner at BNY. This, he added, can create the foundations on which AI can be applied and on which the accuracy of analytical models can be improved.

Despite recognising the wider benefits of identifiers, many companies are encountering challenges in realising them. Chief among them, according to another poll during the webinar, is their integration with existing applications and systems. Two-third of respondents cited this as their chief impediment to broader utilisation.

Integration Challenges

Laura Stanley, director of entity data and symbology at LSEG said she was unsurprised by the polling. The multiplicity of systems and software deployed by modern financial institutions makes integration of their technology difficult and imposes an obstacle on the sort of joined-up thinking that is enabled by identification standards.

Another key challenge facing organisation, according to the poll, was the variety of, and regular creation of, identification standards. As well as LEIs, other standards include Unique Product Identifiers (UPIs), the International Securities Identification Number (ISIN) and the ISO 20022. These join proprietary naming codes, which companies use internally.

Kalliomaki said that companies should not be deterred by the apparent complexity of these different codes because they are largely complementary. When making a business case for their wider application, they also have the benefit of being low-cost resources, she said.

Further, she added, their wider use also provides organisations the opportunity to help national standards committees play a part in the evolution of identifiers, making them even more useful and bringing greater benefits to financial institutions.

Stanley agreed, echoing a point stated by Muller, that the application of AI, and in particular Generative AI, was likely to simplify the currently complex process of switching between standards. This, the panel agreed, would require a programme of educating market participants on the benefits more broadly using identifiers.

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The session was presented by Jefferies’ executives Sudhakar Paladugu, SVP Corporate Technology, and Manish Mohite, SVP Global Head Public Cloud.

Despite the best efforts of the International Swaps Dealers Association (ISDA) the middle office OTC derivatives confirmations (confirm) process has remained largely manual due to variations in templates across counterparties. Under the original process, middle office staff had to read through each third party confirm and manually check the details against the internal trade records.

Every counterparty would have a slightly different format and presentation, some were scanned photocopies of screenshots. With email attachments being the dominant communications platform, completing the confirm process manually was cumbersome and the prospect of automating received an enthusiastic response from the middle-office team.

Jefferies’ journey with AWS began in 2022 with the goal of modernizing the firm’s infrastructure by migrating to the cloud. A CRM platform, data-driven investment advice and applications across front, middle and back offices have followed.

The part of the trade lifecycle in focus for this case study begins after the trade, when trading desk and counterparty have agreed the terms and the middle office receives the counterparty’s trade confirmation. The manual step of reading, deciphering and checking has been automated through an orchestrated set of AWS tools.

Process Overview

This process begins when a user or an application uploads a confirmation image or PDF file to an Amazon S3 bucket. This initial upload action sets off a series of automated processes designed to analyse and extract data from the document accurately.

Once the document is uploaded to the S3 bucket, an Amazon S3 event notification is configured to trigger on detecting this action. This notification sends a message to an Amazon SQS (Simple Queue Service) queue. SQS acts as a decoupling agent that ensures the uploaded document is processed asynchronously. By placing the event notification in the queue, SQS helps manage the workload and ensures that the processing service is not overwhelmed by sudden spikes in uploads.

Upon receiving the S3 event notification from the SQS queue, an application or an AWS Lambda function invokes Amazon Textract’s StartDocumentAnalysis API. This API call initiates the process of extracting text, tables, and forms from the uploaded document. Textract uses advanced machine learning powered OCR to accurately analyse and extract structured data from the document for later matching.

After initiating the document analysis with Textract, the system saves the job ID and the S3 document key into an Amazon DynamoDB table. When Amazon Textract completes the document analysis, it sends a notification via an Amazon SNS (Simple Notification Service) topic. SNS ensures that the notification is delivered reliably and can trigger further actions in the processing pipeline.

Additionally, the extracted results from Textract are placed back into the designated S3 bucket. This structured data is now ready for further downstream processing.

An AWS Lambda function is triggered by the SNS notification to perform a fuzzy Sørensen-Dice match. This function compares the extracted data from Textract with pre-configured mappings stored in DynamoDB. The Sørensen-Dice coefficient, a statistical measure of similarity, helps in identifying and matching the relevant data fields even if there are slight variations or errors in the extracted text. This step returns a confidence interval for all extracted fields to facilitate the human-in-the-loop process.

After performing the fuzzy match, the Lambda function reads the merged JSON data from DynamoDB, which includes the mappings and matches identified in the previous step. It also accesses the original uploaded documents from Amazon S3 to cross-verify and ensure consistency. This integrated approach ensures that all data points are correctly aligned, and any discrepancies are resolved before the data is used in subsequent steps.

AWS API Gateway facilitates secure and efficient interactions between the web UI and the backend processes, allowing users to interact with the document processing pipeline seamlessly.

The final step involves a human-in-the-loop (HITL) interface where users can review the document processing results. This UI allows human operators to analyse the output, verify accuracy, and make any necessary adjustments to the mappings in DynamoDB. This step ensures that the system continuously improves and adapts to new document formats and variations, maintaining high accuracy and reliability in data extraction and processing.

Impact and Next Steps

The AWS powered process passed the T+1 test and is delivering and 80-90% reduction in processing time with further performance improvements expected as the solution is expanded to include additional asset classes. The goal is to convert the current build into a robust generic product API.

The Jefferies AWS roadmap includes leveraging AWS Bedrock to build an Operations Assistant with AI/ML and Generative AI (GenAI) as well as leveraging GenAI to boost efficiencies and performance across post-trade operations generally.

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This webinar brought together experts from the practitioner and RegTech communities; Jehangir Abdulla, Head of Back Office Development at Schonfeld Strategic Advisors LLC., and Joshua Beaton, Head of Non-Financial Regulatory Reporting (NFRR) at Wells Fargo.

The RegTech sector was represented by Paul Rennison, Director Corporate Strategy at deltaconX, and Fausto Marseglia, Head of Product Management, FRTB and Regulatory Propositions, LSEG Data & Analytics.

The first webinar topic kicked off with an audience poll asking, “What is the state of play on regulatory reporting at your organisation?”

The poll results (‘Good, a number of improvements required’ at 64% and ‘Okay, lots of improvements required’ at 27%) were largely aligned with panellists’ observations where financial institutions are facing regulatory challenges on multiple fronts.

The state of regulatory data and reporting has been characterized by continuous change and increasing complexity. Financial institutions face a relentless flow of new regulations and rewrites of existing ones, creating a constant state of flux. This situation is compounded by frequent regulatory exams and inquiries, making this “the new normal” for the industry.

The 2007-2009 financial crisis and the following recovery period led to a global surge in financial regulations aimed at ensuring market stability and consumer protection. The resulting changes in policy, processes and new internal controls created a significant increase in the volume of data that global financial institutions must process.

These changes are happening whilst compliance teams are operating with finite resources, and the challenge is balancing mandatory regulatory changes with other critical business improvements. These global regulatory rewrites stretch the industry’s capacity to comply within tight timelines.

The lack of consistency across the regulatory jurisdictions adds significantly to the complexity of an already fragmented process. In one case, a lack of clarity on precisely what’s being asked is creating stress on the system.

“Regulators themselves are trying to figure out what this means for them in certain cases. Case in point, the MAS in Singapore is going live with the rewrite in October, and we’re three months away, and they’re still releasing new specs of what they want, which is a challenge, because you’re chasing a moving target at that point.”

The EMIR Refit introduced enhancements and simplifications in regulatory requirements, focusing on data quality and promoting data standards like ISO 20022. It also emphasizes the principles of simplification and proportionality, making compliance more manageable for smaller entities.

However, the implementation has been challenging, expensive, and time-consuming, with persistent data quality and testing issues. Despite its best efforts, the industry has not significantly improved its ability to handle these changes efficiently. The process has exposed the need for readiness and proper control mechanisms to handle regulatory updates.

New Approaches

Jehangir Abdulla describes the importance and advantage of focussing on data quality and standards as a business value driver and more than a compliance requirement.

“One of the challenges that we see with data quality is that we are collecting data specifically for regulatory reporting. The approach that we want to take is having multiple eyes inside the organisation looking at the same data.”

“So, when you have your backtesting algos looking at the same data that is being reported, because ultimately the compliance data of today is the backtesting data for tomorrow. When you’re using the same historical prices for your research, when your portfolio management systems are looking at the same data that is being used for regulatory reporting.”

“And lastly, when your risk management systems are al looking at the same data, you kind of have several iterations where people are going to tell you when ‘this data looks incorrect’. So, as you iterate, you start to improve the quality of the data that’s being reported to the regulators. I believe that’s the new approach.”

“And ultimately, looking at compliance and regulatory reporting, not as a cost centre, but as a means of generating alpha, generating revenue by using this for research and using this for backtesting, etc.”

One of the upsides from the regulatory rewrites is emerging data standards across the jurisdictions. This opens up opportunities for firms to accelerate their data quality and standardisation efforts. Paul Rennison notes that “there are a lot of institutions that have multiple different suppliers on multiple different processes and controls for what is now becoming a very similar data set, because we’ve got the common data elements, and we’ve got the harmonization and standardization across the rewrites.

Deployment Choices

A second audience poll asked, “What types of technologies and solutions is your organisation implementing or considering as a means to improve regulatory reporting? (Multiple choices)”

Poll results were varied but two clusters emerged with 36% preferring a single internal digital platform for automation with 27% considering outsourcing some or all of the regulatory reporting workload.

Implementing RegTech solutions should be done cautiously, involving compliance teams from the start and maintaining open communication with regulators. Failures of communication between implementation teams and business stakeholders are frequently observed omissions in projects that run into trouble.

Fausto Marseglia stresses the importance of maintaining an open dialogue with regulators. “It’s important to maintain open communication with regulators to make sure that you understand; sometimes there are issues in terms of interpretation of the rules. And it’s important that you get feedback from the regulators, you maintain this open communication with them.”

A phased approach is recommended, starting with lower-risk regulations and expanding gradually. Continuous monitoring and feedback collection from all stakeholders are crucial to ensure solutions meet compliance requirements.

Regular compliance audits and maintaining alignment with regulatory expectations are also important. Institutions should plan strategically and engage external experts when necessary to support the implementation process.

Business Benefits

Modernizing regulatory reporting offers several benefits, including reduced complexity, lower costs, improved agility and decreased risks. Improved data quality enhances confidence in reported data. Standardizing data definitions and workflows across different jurisdictions reduces complexity and the potential for errors and omissions to creep in.

The modernization process, though challenging and ongoing, ultimately supports better operational efficiency and operational business agility. Upgrading data management infrastructure should be evaluated through the wider lens of enhanced business value.

A third audience poll asked, “What extent of business and operational benefits does your organisation gain, or expect to gain, from modernising regulatory reporting?”

Poll results indicated a lot of potential for improvement with significant operational benefits at 64%, some business benefits at 55%, significant business benefits at 27% and some operational benefits at 27%.

Key Takeaways

Practitioners working on regulatory data and reporting should focus on several key strategies to ensure effective compliance and operational efficiency. First, it is crucial to thoroughly understand and continually improve the control framework. This involves identifying and addressing gaps in the system and maintaining a process of continual improvement. By doing so, organizations can enhance their compliance processes and better manage regulatory requirements.

Developing strong relationships with business stakeholders is another critical aspect. Ensuring that these stakeholders understand the risks associated with compliance is essential for securing their support. Effective communication and collaboration with business units can help in aligning compliance efforts with broader organizational goals, thus fostering a more cohesive approach to regulatory challenges.

Lastly, the principle of “always be remediating” should be a guiding mantra. Identified issues should be addressed promptly to prevent backlogs and ensure timely resolution of compliance problems. Regulators don’t expect perfection, but they do expect a proactive approach to managing and correcting issues as they arise.

The post A-Team Webinar: Best Practices in Regulatory Reporting – Data Quality, Standards and Stakeholder Communications appeared first on A-Team.

The facilities are aimed at helping firms address the post-trade implications of a Securities and Exchange Commission (SEC) July 2023 rulemaking that mandated central clearing for a wide range of U.S. Treasury (UST) securities transactions including cash, repurchase agreements (repos) and reverse repos.

The UST market sees daily transactions averaging over $700 billion in cash and $4.5 trillion in financing, making it vital for U.S. government funding, monetary policy, and as a safe haven for global investors. The market has grown rapidly and disproportionately where currently, 87% of this trading activity is cleared bilaterally.

Several liquidity events over the past decade highlighted vulnerabilities in the treasury market where the systemic risk of a non-participant failing required mitigating. The SEC’s final rule, adopted in December 2023, aims to expand central clearing to mitigate such counterparty and systemic risks.

The new rule seeks to transition a substantial portion of the daily US $4.9 trillion treasury market activity to central clearing through a central counterparty (CCP). Currently, the only authorised CCP for the UST market is FICC. However, other CCPs have expressed interest, among them London Clearing House (LCH).

Tools of the Trade

The first of the new FICC tools, a Capped Contingency Liquidity Facility (CCLF) Calculator, is designed to increase the transparency into the financial obligations associated with membership in the FICC Government Securities Division (GSD).

The CCLF is a critical risk management facility designed to provide FICC with additional liquidity resources to meet cash settlement obligations in the event of a default by the largest netting members (see DTCC Risk Management Tools). By allowing firms to estimate their potential CCLF obligations, the calculator aids in better liquidity planning and risk management. This can make FICC membership more attractive and manageable for a broader range of market participants, including smaller institutions and buy-side firms.

The calculator helps firms anticipate and plan for the liquidity commitments required under the new SEC clearing mandates. By providing upfront attestations regarding their ability to meet CCLF obligations, firms can ensure they are prepared to comply with the expanded central clearing requirements for U.S. Treasury securities.

Tim Hulse, Managing Director of Financial Risk & Governance at DTCC, emphasized that VaR is a key risk management concept and a primary component of GSD’s Clearing Fund requirements. The calculator uses historical data, volatility, and confidence levels to estimate VaR, thus enhancing market transparency. It allows market participants to calculate potential margin obligations for given positions and market values using FICC’s VaR methodology.

Hulse highlighted the urgency of evaluating firms’ risk exposure with the expansion of U.S. Treasury Clearing, noting that the VaR calculator offers increased transparency into these obligations.

These tools are public and not restricted to member firms This means that as firms consider their optimal approach to access central clearing for compliance with the the new clearing rules, these risk tools can provide the necessary transparency and support as firms evaluate the different types of membership and models with GSD.

The SEC has introduced several measures to make FICC access more inclusive. FICC offers multiple membership models, including Netting Membership, Agented Clearing, Sponsored Membership, and Centrally Cleared Institutional Triparty (CCIT) Membership, catering to a wide range of market participants from large banks to hedge funds. The SEC has provided temporary regulatory relief to address custody and diversification concerns for registered funds.

CCIT membership primarily benefits institutional cash lenders such as corporations, asset managers, insurance companies, sovereign wealth funds, pension funds, municipalities, and State treasuries. It allows these entities to engage in tri-party repo transactions with enhanced risk management and operational efficiency provided by FICC. The central clearing of these transactions helps reduce counterparty risk, ensure the completion of trades, and potentially offer balance sheet netting and capital relief for participants.

The Securities Industry and Financial Markets Association (SIFMA) is actively coordinating multiple work streams that involve both buy-side and sell-side members. These efforts aim to accelerate the necessary transitions for the clearing mandates. Key aspects include engaging with the SEC and other regulatory agencies to address market access issues, particularly for registered funds and margin transfers, which are crucial for ensuring a smooth transition to central clearing.

Developing an operations timeline with key milestones is another critical task. This timeline will guide the transition to full central clearing by June 2026 for repos. Addressing issues related to market plumbing and connectivity is also vital to support the increase from 13% to 100% clearing. This involves ensuring that all participants can effectively connect to and use the central clearing infrastructure.

Regular communication with market participants is planned to keep them informed about progress and strategies for meeting the clearing deadlines. This will include updates on the status of various strategies and the overall progress towards the deadlines. SIFMA will also engage in regular discussions with the SEC and other agencies to ensure they are aware of the progress and any potential needs for timeline adjustments or phased rollouts.

Legal and enforceability issues will be addressed by obtaining netting enforceability opinions in relevant jurisdictions to support large-scale clearing. This step is closely tied to the development of market standard documentation. Additionally, new documentation approaches that leverage modern communication methods will be evaluated to increase efficiency.

Stakeholder engagement is essential to confirm the status of various strategies and ensure alignment with the clearing deadlines. SIFMA plans to reach out to market participants regularly to keep them informed and engaged. This will help ensure that all participants are on track to meet the clearing mandates.

Lastly, future planning includes preparing for additional publications and podcasts to keep the membership and broader public informed about ongoing efforts around Treasury clearing. This will ensure that everyone remains updated on the progress and any developments related to the central clearing mandate.

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The Adaptive Intelligent Document Processing product will enable financial institutions to automate the extraction of unstructured data for ingestion into their systems. The London-based company said this will let market participants automate a choke-point that is often solved through error-prone manual processes.

Duco’s AI can be trained on clients’ specific documents, learning how to interpret layout and text in order to replicate data gathering procedures with ever-greater accuracy. It will work within Duco’s SaaS-based, no-code platform.

The company won the award for Best Transaction Reporting Solution in A-Team Group’s RegTech Insight Awards Europe 2024 in May.

Managing unstructured data has become a key goal of capital markets participants as they take on new use cases, such as private market access and sustainability reporting. These domains are largely built on datasets that lack the order of reference, pricing and other data formats with which it must be amalgamated in their systems.

“Our integrated platform strategy will unlock significant value for our clients,” said Duco chief executive Michael Chin. “We’re solving a huge problem for the industry, one that clients have repeatedly told us lacks a robust and efficient solution on the market. They can now ingest, transform, normalise, enrich and reconcile structured and unstructured data in Duco, automating data processing throughout its lifecycle.”

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Corlytics is Byrne’s fourth company. He describes how, after the 2018 financial crisis, experiences at his prior company shaped the insights and innovation that would become Corlytics.

“If you look back at the early 2000s, banking was about the P&L but after 2008, banking and the capital markets became about the balance sheet and risk. Compliance and operations practitioners were seeing risk in lots of different places that they’d never seen before.”

This shift in the perception of critical success factors revealed the importance of understanding and managing the settlement risks of complex financial instruments. Regulators globally began looking deeper into the activities of banks and financial service companies, particularly those considered to be systemically important financial institutions (SIFIs).

With an extensive background in fund accounting and post-trade operations, Byrne recognised a growing gap between the understanding of how regulations should be interpreted versus their operational implementation, and a new venture was conceived.

Corlytics launched in late 2013 and Byrne’s aim was to bridge that gap by treating regulation as a class of risk requiring careful management. By risk-ranking regulations and updates into a clear set of obligations, firms could use this to shape and maintain policies that reflect the latest regulatory expectations.

Cognitive Dissonance

Byrne describes the emergence of a “cognitive dissonance” in the financial sector, where “the lawyers could understand the regulation but couldn’t implement them, and the people implementing the regulations didn’t fully understand them and the resulting exposures.”

To address this, Corlytics adopted an alternative approach to regulatory compliance. As Byrne explains “I wanted to look at regulation as a class of risk, rather than just something that had to be done. In many parts of banking and post trade, people take a risk-based approach to credit risk, market risk and counterparty risk. And I felt we should take a risk-based approach to legal and regulatory risk, hence the name Corlytics (compliance risk analytics).”

Corlytics’ foundation was also rooted in Byrne’s desire to combine expertise from different fields, and, like his previous company, he chose to start Corlytics in a university setting, as a campus-based company. This setting fostered an interdisciplinary collaboration with PhDs in law and data science, aimed at building a robust business capable of tackling the complexities of modern regulatory compliance.

Byrne’s previous experience in operationalizing various aspects of banking and post-trade processes, such as fund accounting and corporate actions, provided a strong basis for Corlytics’ mission. In his words, “I wanted to bridge the knowing-doing loop, ensuring that regulations weren’t just understood but effectively implemented.”

Growth Strategy

Last year the company acquired regulatory lifecycle platform ING Sparq and policy management platform Clausematch. Earlier this year, specialist growth investor Verdane took a majority equity stake in the company and has committed to accelerating both organic growth and M&A.

In May the company acquired a RegTech platform from Deloitte UK adding considerable breadth and domain expertise to further Corlytics’ capabilities, from interpreting regulatory change, to mapping and validating policies and implementing controls.,

Corlytics has established strong relationships with 12 of the top 50 SIFIs. Corlytics has also established a strong presence with non-bank payment processors. Byrne points out that “most of the top 10 payment companies in the world are not banks, but technology companies.” These include giants like PayPal, Amazon, and Google. Corlytics has secured about 50% of the market share in this space.

Regulatory Coverage

At the same time, the scope and depth of regulatory scrutiny continues to increase. In the UK, the Financial Conduct Authority (FCA) has introduced the Senior Managers and Certification Regime (SMCR) that requires senior managers to have statements that clearly outline their regulatory responsibilities. These managers are permitted to delegate certain responsibilities to other individuals within the firm, provided they ensure that these delegations are appropriate and properly overseen?.

This is having organizational impacts as Byrne has observed, “if you look at the senior persons regime, it’s very typical now within an enterprise, not just to organize regulations by business units, but actually to start organizing regulations, policies and controls by ‘accountable executive’.”

This has huge implications on the technology, since accountable executives must now be able to demonstrate that the controls they supervise reflect the latest version of the regulations and that these are clearly defined in the latest version of their policies.

Data Science

Corlytics keeps an open mind on the adoption of new technologies but the primary criteria for selecting the latest AI and ML techniques is model accuracy. “We try to work to a level of accuracy of 99% or greater because if a firm is going to automate compliance, it needs very high levels of accuracy. Human error is about 98%, so, by setting a target above the level of human error, ensures you’re automating to a high standard” explains Byrne.

Corlytics combines extensive backtesting on historical data with regulatory subject matter expertise to validate model accuracy.

One consequence of prioritising high accuracy is the need for detailed examination of use cases, in particular when considering advanced AI techniques – GenAI and LLMs. Corlytics approach is to use Gen AI in combination with other techniques rather than just on its own. Byrne sees the value-add of these techniques as a new search technology, particularly for the higher volume, lower risk use cases e.g. ‘can I accept that gift?’, or ‘does this comply with the expense policy?’

Byrne continues “but for a more complex, high-risk use case – e.g., a swaps trader asking, ‘can I put on this trade?’ – we might use something else”

GenAI and LLMs become extremely expensive in compute and storage cost compared the traditional AI when deployed at scale. Also, there’s a growing awareness of the carbon footprint these technologies generate, and Byrne cautions to not fall into the trap of “using a sledgehammer to crack a nut.”

Regulatory Convergence

The convergence of events on the regulatory calendar and regulators adopting a big-bang approach across multiple jurisdictions is creating severe stress on global firms governance risk and compliance (GRC). In some cases, firms are being forced to consider whether it makes economic sense to remain in certain markets.

Regulatory harmonization is a worthy goal but it’s hard enough getting alignment across the regulators within a single jurisdiction, let alone globally. In the meantime, it will be up to the RegTech sector to take the lead as Corlytics has demonstrated with two significant projects.

One of Corlytics’ early projects, making the FCA Handbook machine-readable, was a major step in bridging the gap between text based regulatory content and implementation by the covered entities. Corlytics created the taxonomy (a mechanism for classifying and categorising information) which is structured into sourcebooks and manuals and covering the various sectors and compliance aspects including conduct standards, prudential standards, and reporting requirements.

Byrne’s recounts his experience in creating a regulated subsidiary at his previous firm and being confronted by the original version of the handbook. “If you were to print it out on double-sided paper, it would stand about seven feet tall.”

Each section is methodically organized into modules, sub-modules, and chapters for easy navigation. The handbook’s machine-readable features include XML and JSON formats, enabling automated compliance checks and integrations with RegTech solutions. Byrne recalls, “the FCA CEO at the time describing the initiative as the democratisation of the handbook.” The project went live in 2017.

Corlytics completed a similar project at the Financial Industry Regulatory Authority (FINRA) on the FIRST Rulebook that went live in 2022. With many small firms among its members, FINRA wanted to make sure these smaller players could get value from the website recalls Bryne. “So, we created the taxonomy and redesigned all of the documents making them easy to tag and search. Both FINRA and the FCA have a competition mandate so creating a level playing field for both large and smaller firms is important.”

There are indications that other regulatory authorities are starting to embrace the idea of making their regulations machine readable, but for now, the FCA and FINRA are the thought leaders in this space and Corlytics innovation helped make that happen.

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