RegTech Intelligence 
One of the things we’ve learnt the hard way in 2013 is that the sell-side need better ways of communicating with their clients. Maintaining a web of communications between increasingly complex, multi-entity organisations and many thousands of clients is never going to be easy, but new regulatory data demands are making it even harder.
EMIR added to the complexity this year, with its new counterparty classification regime. As of yet, firms cannot rely on a single solution – whether a portal, KYC utility, or simply bilateral confirmation – in order to classify their counterparties under EMIR. However, EMIR is not the only classification regime out there, and between the pre-existing ones (e.g. Basel II and Dodd-Frank) and the many new ones in the pipeline (e.g. FATCA and MiFID II) firms will need to be thinking about a wider strategic approach to counterparty classification in the context of reference data as a whole.
Overall, the cost of KYC reference data is spiralling upwards quickly. For a large institution with several thousand entities or counterparties regulated under EMIR or (if the EBA’s recent consultation goes through,) CRD IV, the registration costs of the identifier alone are in the millions. And the ongoing maintenance costs are not insignificant either. However, the LEI is just one part of the puzzle; JWG research recently identified 300+ pieces of information, from 24+ key regulations, that firms operating in the US and Europe will need to know and report about their counterparties over the next three years. Half of them involve some form of dynamic counterparty classification system invented by regulators.
For example, EMIR forces firms to classify their counterparties as FC, NFC or NFC+. These classifications are then re-used in CRD IV for the purpose of calculating capital (CVA) charges on derivatives exposures. However, the same derivatives counterparty will be classified differently under Dodd-Frank (as an SD or MSP). And, what’s more, all these classifications are threshold-based and thus dynamic as counterparties can move over or under the thresholds based on their business activity levels. Therefore, firms trading derivatives now have a much greater requirement to know the status of their counterparties’ business activities that they did not previously have. An this example only covers 2 regulatory regimes…
But regulatory classifications aren’t the only reference data fields that need to be shared. Using EMIR as an example again, firms now have to exchange large volumes of information of complex documentation throughout the trade lifecycle. For example, before trading even begins, firms have to exchange a host of information relating to contractual arrangements (e.g., protocols), dispute resolution, and portfolio reconciliation. For reporting purposes there is the exchange of LEIs and the decision on which of the parties is going to report. At or before trade confirmation there is more information to exchange on the execution, including the UTI. And finally, there is an ongoing exchange of information around open positions, such as valuation and margining. Though ad hoc processes might suffice for all this reference data storage, when into the context of an increasingly complex KYC landscape the business case for rationalising and streamlining the way data is exchanged becomes clear.
At a recent meeting of JWG’s Customer Data Management Group (CDMG), firms were of the consensus that counterparty classification was still a top 2014 challenge and that many were still pursuing the same inefficient blend of solutions that they have been since the ‘deadline’ of 15 March 2013. As a result, the name of the game remains ‘compliance at any cost’, but this is clearly unsustainable.
However, staying ahead of this change programme, and predicting what data firms will need to exchange tomorrow, is proving hard for solutions providers. Firms using fixed-field protocols and pre-populated KYC data will find themselves fighting a running battle trying to fill their data gaps with time-consuming bilateral confirmation efforts. For example, a regulatory-focused approach will often miss out incidental data, such as the currency in which values are quoted, or individual counterparties’ preferences. With this in mind, a more flexible platform, that finds the middle-ground between bilateral confirmation and more structured solutions, is required. All of this means that if a more holistic method of data sharing is not compelling at this stage, it soon will be.
To sum up, what we see over the next few years is an exponential increase in the number of moving parts: the number of entities in the marketplace is enormous; the reference data required to be held on those entities is expanding rapidly; the velocity and business critical nature of the information exchange has increased; and regulators’ transparency demands are increasing daily for new purposes.
What’s required in this environment is a better framework for sharing information. This will necessitate a tie-up between established data providers, including utilities and FMIs, and the more flexible platforms, such as NotiFide’s social media-style approach, if firms are to achieve efficiency in the new market landscape.