RegTech 2017: Taking FinTech the Extra Mile

Those who think that RegTech is only about technology geared to meeting regulatory requirements should think again.

The term, say operations consultants and IT specialists, also represents a new state of mind, oriented toward maximizing the use of current applications, eliminating unnecessary ones, and reducing data discrepancies. “Whereas financial technology, or FinTech for short, focuses strictly on fulfilling trading and post-trade processes, RegTech also focuses on how the necessary information residing on multiple systems can quickly turn into reportable and actionable data for regulators,” says Todd Moyer, executive vice president at regulatory reporting technology provider Confluence in New York.

Since the economic crisis, regulators have focused on identifying and managing systemic risk. Requirements such as MiFID II , EMIR and Solvency II in Europeas, well as the Securities and Exchange Commission’s Form PF and new investment company reporting rules, offer regulators deeper visibility into asset holdings, transactions and liquidity. European fund managers tell FinOps Report they are most concerned MiFID II because of the amount of pre-trade and post-trade data they must report to prove they have complied with best execution requirements. US fund managers appear worried about the SEC investment company reporting rules, because of the difficulty of categorizing the liquidity of their assets and meeting unexpected redemption requirements.

Regulators aren’t the only ones demanding transparency. Savvy institutional investors want all or part of the same data to improve decisions on asset allocation. Fund managers too may leverage the data to eliminate unprofitable business lines and add revenue-generating ones more efficiently.

What’s Effective

Construction of the RegTech framework hinges on understanding what works and what won’t. Manual procedures and unnecessary redundant or antiquated systems need to be eliminated. “Fund managers, which remain wedded to their legacy systems and processes, will only create higher technology costs. An updated technology framework will also provide a strong foundation to support data management,” says Aliana Greenberg, an analyst consultant with technology consultancy GreySpark Partners in London in a new report. “Firms that don’t consider data as an asset will ultimately incur data debt — or high costs from poor data architectures, processes and cultural bias.”

Among the tsunami of regulations fund managers must tackle, there is at least a 30 percent overlap in the type of data required, fund management operations directors tell FinOps. Therefore, using a solid technology framework and data architecture to generate correct data and metrics can help reduce repetitive work done by multiple specialist teams focused on individual regulations.

Unfortunately, the most effective gameplan is what fund managers dread the most — adding overhead costs. Asset managers claim to be adverse to regulatory risk, but they are also not eager to invest in new third-party platforms or data management infrastructures. They may also hesitate to oursouce reporting tasks for fear of disclosing their secret trading sauce.

However, change is a necessary evil when it comes to complying with multiple reporting mandates. “Asset managers typically want to spend money to make money, but the volume of regulatory rules will require a new thought process,” says Mary Kopzynski, chief executive of regulatory compliance consultancy 8of9 in New York. “They can’t simply rely on calling their external legal counsel, buying some new applications and hoping for the best.”

What to do? For starters, fund managers need to figure out whether their front, middle and back-office technology will allow them to easily find the information they need. Knowing where the data resides is the first step. Positions held by the asset manager, the types of assets and their range of liquidity, and the counterparties involved are just the beginning of what the asset manager needs to understand and convey to regulators. Obviously the information is needs to be consistent and accurate. Data sourced from multiple applications presents higher risk of inconsistence or errors. Relying on the wrong data can only spell trouble if the wrong inputs, such as risk calculations, are used for regulatory reports.

The next challenge is to evaluate applications and third-party services to determine which are required and which are redundant. Using best-of-breed systems isn’t always the best approach, because they can be costly in terms of integration and central data models. An alternative solution: using IBOR, short for investment book of record, which maintains a unified view of positional and other data.

“Instead of separating data between a trading book of record in the front office and an accounting book of record in the back office, buy-side firms can have intraday real-time knowledge of what they own and what it is worth by adding data from the middle office,” says Carsten Kunkel, head of the regulatory center of excellence at financial tech firm SimCorp in London, whose front-middle and back office platform allows for an IBOR strategy.

There are three basic approaches to IBOR, one of which involves using a front-office order management system to access to all trades and positions. Alternatively, a data warehouse would offer a single location for trade, market and client data, but it needs real time info on  trades. An enterprise bus would allow all systems to have quick access to data at the same time but implementation could be costly. Yet another alternative would be to combine a data warehouse with an enterprise bus.

Data Infrastructure

However, technology alone isn’t a panacea. It is simply facilitates broader data governance.”The notion of chief data officers setting the overall policies of how data will be cleansed, who will have access and who has the rights to update or change it is slowly gaining acceptance among some of the largest asset managers,” says Kunkel. “The selection of data stewarts, typically data experts within each business line who will be responsible for implementing the fund manager’s policies, also become critical.” High quality data aggregated and reconciled correctly can be fed into real-time information analytics and workflow systems.

Naturally, data experts can’t work in a vacuum when it comes to regulatory compliance. Chief risk officers and chief compliance officers also have a role in meeting regulatory requirements. “CROs will naturally be responsible for ensuring that risk metrics are calculated correctly while chief compliance officers will likely have the final say when it comes to setting policies and procedures as well as reviewing regulatory reports before they are shipped off,” says Gary Kaminsky, a regulatory compliance consultant in New York.

Although RegTech requires efficient technology, IT directors will for the most part take a back seat to CROs, predicts Haider Mannan, head of the buy-side practice for enterprise data management firm GoldenSource in London. Ultimately, the buck stops with the CCO as the regulatory enforcer, but CROs will have a more elevated role. “The best CROs will be centralizing data involved with risk metrics into a single warehouse to decide which lines of business to exit and new products to introduce,” says Mannan.

Fund managers who find they can’t handle regulatory reporting tasks or costs have the option of outsourcing to a third-party provider. “As driving down costs becomes critical, RegTech will provide an impetus to look outside the firm for answers,” says Moyer. Those external sources include broker-dealers, fund administrators or specialist reporting technology firms such as Confluence.

Oversight Management

Regardless, legal liability rests with the fund manager, so making the right choice is critical. As a result, RegTech won’t only mean that the fund manager fulfills its legal obligations, but so must any external helper. “Regulators require that vendor risk management becomes part of the RegTech program because the CCO will ultimately need a way of monitoring not only the workflow process of its own employees, but those of third-party providers,” says Kaminsky.

Those third-party providers are de facto extensions of the firm’s team and must be managed just as closely. oversight by emails, telephone reminders and meetings is far too time-consuming and error prone. “Even the most capable CCOs at fund management firms know that at least one of the necessary steps could be overlooked or performed incorrectly,” says Frank Caccio, managing partner of OpsCheck in New York. “Worse, regulatory examiners could find an analysis isn’t one hundred percent accurate.” OpsCheck helps tighten up compliance oversight by tracking required assignments along with maintaining the necessary documentation to prove what has been accomplished and what is still pending.

Keeping regulators at bay requires not only proactively upgraded data strategy, but also the defensive attention to giving them what they want. Even when perfect performance is impossible, proving that everyone at the firm made a 100 percent effort with the right process, controls and technology should go a long way.

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