Dec 11, 2015

A year ago, we looked back at 2014 and predicted what we thought would be the key areas of focus in financial services throughout 2015 (see 2014 look back, 2015 look forward). What is immediately apparent is that many of the areas identified are still being tackled today. Despite EMIR Category 1 clearing obligations being published in 2015, Clearing will not go live until next year. The requirement to calculate and post initial margin and variation margin on non-centrally cleared derivatives was expected to start from December 2015 but has been delayed to September 2016. Although the Regulation on wholesale Energy Market Integrity and Transparency (REMIT) applied some provisions in 2015, certain contracts do not yet have a reporting obligation until 2016. The various capital, liquidity and leverage requirements BASEL III invokes will not be fully implemented now until 2019; and the majority of MiFID II and MiFIR requirements have been delayed until January 2018.

What does this mean?

On the surface it would appear that all of these delays provide an opportunity for institutions to slow down. On the contrary, these delays represent the monumental scale of the changes that were being proposed and the tremendous stress the industry is working under to manage these changes. Almost two years on, firms are still struggling with regulations that are already in force and are reporting duplicate or inaccurate data. A vast array of media coverage has highlighted a plethora of fines for non-compliance; and yet, most firms do not yet have full control of the data required to adhere to current regulations, let alone the next wave of new regulations.

How should institutions take advantage of the extra time given?

Institutions must not only prepare and plan how they are going to deal with upcoming requirements, but also remediate and ensure that they are compliant with past deadlines. Firms should use the breathing space to their advantage, spending longer periods developing, testing and implementing their regulatory solutions ahead of deadlines. However, what we have learnt from previous years of change in the financial services industry is that one crucial issue still needs to be addressed – the control and quality of data.

For example, central golden stores of trade, documentation, client and market information would allow banks to know what information to report, to whom, and when. It would allow institutions to react much faster to new regulations and to reuse existing infrastructure, therefore getting a better return on their IT spending. Once the information has been sourced, it needs to be stored in a secure, interpretable and accessible format, to allow for specific data sets to be extracted for each, often quite different, regulatory requirement.

If institutions do not leverage the extra time given by the regulators to improve their internal data architecture, the implications could be serious. For example, if the data is not accurate, the likelihood of misreporting increases substantially, which may result in large fines. Furthermore, as data provides the knowledge which allows you take decisions, bad data will result in bad decisions, potentially undermining a key purpose of regulation in the first place.

A fresh approach to an old problem

Over this past year it’s become clear that the industry and institutions have started to shift their focus to identify and develop IT infrastructure capable of creating and storing large amounts of accurate data. Legacy IT systems created by banks were not designed to cope with the increased regulatory demands, the amount of data and the speed of creation and access required. Fortunately, innovation in the technology sector, with concepts such as “Block Chain”, are providing potential solutions to tackle the challenges and increasing pressures. However, there is a real risk that these solutions will neither be proven nor implemented within the regulatory timeframes, despite the regulations being delayed.

It will be interesting to see over the coming year how many institutions focus on redesigning their IT infrastructures, how many opt to invest in centralised industry initiatives to mutualise costs and share IP. For those who do not, this will hinder the accuracy and timeliness of their ability to meet regulatory deadlines. Equally, it remains to be seen whether institutions are able to leverage the new innovative technology solutions, or if these will a distraction and prevent actual change implementation. This would mean another tactical scramble to meet regulatory deadlines. Only time will tell when we look back at the end of 2016.