Making an asset of reported information
Regulatory reporting requires a lot of workflow and data collation. Much of the information gathered has considerable value to the institution that holds it and as memory and processing capacities increase, that value can be realised.
The universe of business intelligence is being transformed by big data analysis. What was once heavy and expensive processing is now becoming far more accessible to most capital market participants. That means – in theory – firms can get more insight, and monitor data in real-time, recognising patterns and problems at a fraction of the cost they might have expected a few years ago, knowing asset liabilities or recognising opportunities on a minute-by-minute basis.
Larger capital market firms typically know that a data warehouse, for the purposes of regulatory reporting, is not only a smart business idea but produces efficiencies as they need the same information when reporting to multiple jurisdictions covering multiple regulations. Tier two firms have also looked at data warehousing and master data management, so they will usually have a golden copy of all the trade activity to produce reports for different jurisdictions.
Smaller firms typically try to outsource as much of this as possible. Those firms will usually still have a copy of all of their trades, but that copy will sit in a trade repository, not in a data warehouse. However the ability to gain insight from this information is not restricted to those firms with proprietary repositories. Smaller firms can gain value-added services and insight into that data even though it resides in a third party repository.
How trade repositories can support firms
Trade repositories are explicitly prohibited from commercialising any of the data they collect but they can look at data that is reported by a firm and provide it with business value back. For a market participant that might mean measuring its reporting accuracy, by identifying exceptions, delays to reports and frequency of data problems.
As regulators such as the UK’s Financial Conduct Authority (FCA) enforce legal guidance around systems and controls for reporting, measuring accuracy is valuable. By understanding how a firm’s reporting splits between different markets and asset classes and by time of day, refection reasons, etc. the firm can improve its reporting accuracy.
Furthermore, the organisation can compare its transaction reporting with its peer group to give it a sense of how ‘good’ its reporting is and highlight any key areas where it my be out of step with its peers. This can provide an early warning system for any required changes it may need to make to improve its reporting processes and stay the right side of the regulator.
An important aspect for a financial institution seeking this analysis will be the need for anonymity in order to avoid information disclosure, which requires a trusted third party. Furthermore the institution needs assurance it is being compared with peers – for example, a reporting pattern of a high-frequency trader is not comparable with those of an investment bank. However a peer-to-peer, anonymised comparison against the relevant community is valuable.
Regardless of whether the firm itself or a third party stores the data for compliance purposes there is no reason why it should not use an additional line of defence on that data before it gets to the regulator. Under MiFID, over-reporting of trades is a problem, and firms can also use that data to detect suspicious MAR insider trading and market manipulation scenarios. Large banks might run their own transaction monitoring service so that they can catch suspicious transactions before the regulator; equally smaller firms could source that service from a third party provider. Rather than rely on expensive installed transaction surveillance systems, firms can now outsource parts of that surveillance to the repositories they use for regulatory reporting.
Internal vs External
Firms with internal data warehouses can establish key performance indicators, but it would be hard for them to conduct peer-to-peer comparisons because they only have their own data. Analysis of performance between regions and business units will give greater insight to any firm. Most big players have transaction monitoring systems that they apply to their trading activity. Smaller players may not be able to afford that. However by using the very same data that they provide for reporting, which has been collected and validated, they can turn that burden into an opportunity.
However the data needed for a single line on a report will not come from a single source. It will require some front-office data to know who executed the trades; customer relationship management (CRM) system data to know who the counterparty is; and back-office data to evaluate the economics of a trade. With multiple systems and multiple departments providing the data, the process of extracting, transforming and loading data from several platforms into one is an IT challenge that many firms are looking at. That is where a third party with IT resource to put into data processing can provide a real advantage.