The last few years have been frenetic for firms as they prepared for implementation of new regulations including Uncleared Margin Rules (UMR), Securities Financing Transaction Regulation (SFTR) and Central Securities Depositories Regulation (CSDR). On top of these, the industry is now bracing for the waves of changes in the global derivatives trade reporting landscape that will continue to roll out in various jurisdictions in the coming years. Firms are now faced with an unprecedented degree of financial and operational challenges in 2021 and beyond.
Related: On the Path to Global Regulatory Harmonization in Trade Reporting
Increasing regulatory scrutiny, greater focus on accuracy and data quality, and readiness for upcoming rules changes are all clear and present pain points for firms today. And when a firm’s reporting infrastructure and related control framework is already a patchwork of functionalities from a decade of adapting to the regulatory evolution, that patchwork can spring leaks.
Since 2017, the Financial Conduct Authority (FCA) has fined firms nearly £100 million for failure to comply with Markets in Financial Instruments Directive (MiFID) and European Markets Infrastructure Regulation (EMIR) rules. Since 2019, the Commodity Futures Trading Commission (CFTC) has fined firms nearly $20 million for similar breaches in CFTC reporting*. Many of these breaches were exacerbated by a lack of a clear control framework and governance around remediation items.
Global Investor recently spoke to Chris Childs, Managing Director, Head of Repository and Derivatives Services at DTCC and Chief Executive Officer and President of DTCC Deriv/SERV LLC, about the importance of creating effective control frameworks as part of a healthy reporting infrastructure.
Global Investor: The ongoing evolution of the regulatory landscape has required financial firms, large and small, to dedicate tremendous human and financial resources to compliance. Why are effective control frameworks so important?
Chris Childs: In general, a robust control framework is critical for firms to ensure they report accurate data in a controlled, repeatable, and efficient manner. As firms prepare for the upcoming period of regulatory change, they may want to consider evaluating potential gaps and implementing improvements within their existing model.
Investing in an effective control framework helps mitigate the risks of undetected reporting issues. We are hearing that some firms are taking extra measures to establish a construct that focuses on early identification and prevention of reporting concerns to avoid the costs of remediation and potential regulatory fines.
DTCC’s post-trade experts have developed a propriety Reporting Control Framework Model, offered through DTCC Consulting Services. Leveraging this model, we assist clients in performing their diagnostic assessments and reporting control framework enhancement and implementation. Our experts pay very close attention to current and future legislation to build in updates to the model and reflect current regulatory changes.
Global Investor: How do your consultants go about identifying areas of improvement within firms’ existing infrastructure and recommending the appropriate remediation?
Chris Childs: We begin with a deep-dive analysis of the current state of a firm’s processes, including process maturity across jurisdictions. From there areas of improvement are identified against the Reporting Control Framework Model.
Once relevant gaps and inefficiencies are identified, our post-trade experts can help clients discover how more mature processes will result in reduced operational risk and higher levels of automation, independence, ongoing repeatability, and future scalability across a comprehensive set of use-cases. We can then help to implement a control framework that is fit for purpose based on the organization’s risk profile, trade volumes and other key factors identified to our consultants.
Our Reporting Control Framework Model also empowers clients with access to best-in-class examples of reporting control framework functionality, including access to a library of over 50 control assessments and best practices which can be applied to various reporting jurisdictions for G20, SFTR and MiFID reporting. Each observation has been categorized for thematic analysis and includes criteria developed by a broad panel of experts within DTCC.
Global Investor: Are there any key themes that have emerged from DTCC’s analysis of firms’ existing infrastructure and reporting controls?
Chris Childs: When it comes to our assessments of clients’ reporting infrastructure, controls and processes, we have seen a considerable need for assistance with pre and post trade reporting functions. One of the most common findings is the dependence on manual processes and institutional knowledge of exceptions. In this case, we urge firms to consider finding a service that alleviates this dependency and readies them for the regulatory changes taking effect in the coming years.
One such solution is the DTCC Report Hub® service, a highly efficient pre and post trade reporting offering that can help firms manage the complexities of meeting multiple regulatory mandates across 14 jurisdictions. With comprehensive jurisdictional and regulation coverage, the service can help firms mitigate compliance risks, enhance operational efficiencies, and drive down costs.
DTCC Report Hub’s robust functionality and its intuitive user interface provides firms with access to a wide range of capabilities including pre reporting data normalization and exception management, assessment of reporting eligibility, automated reconciliation, and compliance analytics creation. The cloud-hosted, API enabled service also interfaces with registered trade repositories – including DTCC’s GTR service – and approved reporting mechanisms) to facilitate trade submission and approved publication arrangements.
*Data derived from the FCA and CFTC websites.
This article first appeared in Global Investor on October 19, 2021.