JWG’s recent series on the emerging regulatory barriers and issues in FinTech, does an excellent job of setting forth the main issues for what is sure to be a busy few years of calibration for regulatory compliance and reporting.
The emergence of RegTech, roughly the ways in which the adoption of new technologies can help regulators and market participants fulfill their regulatory mandates more effectively, is a critical and needed development during a period of exploding compliance and technology budgets amongst firms both large and small. But it’s also important to focus on the real issues hindering the use of tools like data analytics and globally consistent taxonomy from improving firms’ bottom line both in costs and compliance. As touched on in the recent RegTechFS series, the overwhelming majority of these issues are policy and legal-related.
The new regulatory data framework
MIFID I sought to establish a dual-purpose reporting regime for equities, transaction reporting for market conduct and transparency for market structure. While the transparency aspects didn’t go as far as policymakers hoped, they did set a precedent and use case for data analytics as a regulatory tool to improve markets for investors.
The regulatory data framework today is underpinned by repositories set up initially by Dodd-Frank and extended in all save two of the G20 (as of 2015) to collect OTC swaps data and provide access to regulators. There is some infrastructure overlap in major jurisdictions (US, EU, Singapore, Australia and Canada) but largely, most of the data in the G20 remains fragmented, leading to the reemergence of the same issues the CFTC faced in implementing Dodd-Frank around access and confidentiality.
During my years working as Counsel at the Commodity Futures Trading Commission (CFTC), we struggled with setting up a proper regulatory framework for the reporting of transactions in what was then an unregulated OTC swaps market. The statute and mandate were clear but there were many unforeseen issues relating to access and data protection that we as regulators were forced to contend with after the laws were passed. This was all the more frustrating because the market had already set up a functioning framework for some OTC products under the auspices of the OTC Derivatives Regulators Forum (ODRF).
One critical issue was the indemnification provisions in the Dodd-Frank Act, which prevented the CFTC from authorising foreign regulators to receive data stored at swap data repositories (SDRs) directly without providing a legal liability indemnification, a concept that was and is anathema to most regulators. At the time we worked with global regulators on a solution that provided access but respected confidentiality concerns and the statute. The indemnifications provisions in the CFTC regime were recently tweaked further by Congress to provide greater access.
Overall, a lot of good came out of our efforts, including the registration and supervision framework for SDRs, which set the tone for similar provisions in the European Market Infrastructure Regulation (EMIR) regarding trade repositories, and the genesis and governance for the legal entity identifier (LEI) framework and other taxonomy initiatives.
As the recent fine for DTCC and other hiccups such as the EMIR data reporting validation process illustrate, there is still a long way to go. RegTech is needed to make these and other roadblocks less burdensome in the face of much tougher global reporting requirements. For example, MIFID II expands both aspects of its dual-purpose reporting regime in terms of in-scope products and activities but without a coherent data analytics strategy, all this information will fail to serve either purpose.
Legal and regulatory roadblocks to a working RegTech agenda
Outwardly, most regulators and market participants pay lip service to the idea that reporting and data should be as streamlined and accessible by as many regulators as possible, reducing the need for duplicate systems and processes. Inwardly, however, there are opposing and strong concerns about confidentiality, trade secrets and regulatory overreach when it comes to data access. In some jurisdictions, there are also competition concerns where governments could be major investors themselves or viewed as protective of national champions.
Viewed this way, the indemnification provisions in Dodd-Frank aren’t wholly without merit but at the same time they highlight a great irony of increased regulation, which is typically less regulator access to information. The ODRF had developed a framework with infrastructure to provide unfettered access to all the G20 regulators but this was only possible in an unregulated market. In a regulated one, tensions between market versus prudential regulators, confidentiality versus open access, domestic versus international infrastructure, begin to surface.
With the emergence of the trade repository as a common infrastructure across major markets, and common taxonomy in the form of the LEI and other initiatives, the tools exist for effective data analytics. There’s no technical reason why a counterparty trading in Australia cannot report to a trade repository in Singapore and this same report be used to fulfill requirements via access by regulators in the EU. The only roadblocks are the access and confidentiality issues that can only be resolved by regulators.
Going beyond trade repositories and OTC reporting, the same issues loom large in other emerging areas as well. For example, the potential for distributed ledgers to simplify AML and data access will remain thwarted if regulators can’t agree common standards and access.
What regulators can do to ensure the RegTech agenda is meaningful and useful
There are several steps regulators can take to ensure RegTech takes off as more than a useful concept. The first is clear and consistent industry engagement. In the UK, the FCA has taken the right approach with its recent consultation and upcoming roundtable. While not focused on the RegTech agenda, regular meetings held between CFTC staff and market participants focused on Dodd-Frank trade reporting is another example of ongoing dialogue about data issues. Regulators need to develop forums to take questions, tackle implementation issues, and hear suggestions about how technology can be better utilised. Such forums can also be used to raise questions around emerging products and technology such as distributed ledgers.
The second is agree the FSB/IOSCO report and recommendations on “Authorities access to trade repository data” at the G20 level. This will push G20 governments to make these recommendations binding and allow for the proper airing and debate of confidentiality and privacy concerns such that a workable framework regarding data that can be accessed and data that cannot be would be put in place. This will also provide a coherent basis from which to extend these principles to other developing areas.
Third, regulators should develop guidelines for the interoperability of trade repositories similar to the interoperability guidelines being developed for identifiers by the Legal Entity Identifier Regulatory Oversight Committee (LEI ROC). In the absence of common access and oversight provisions, trade repositories should be able to share data and information with each other and counterparties should be able to report to different trade repositories in different jurisdictions and have this information collated. This is in line with the anti-fragmentation aims of the MIFID II market structure and transparency requirements and ostensibly should be developed at the G20 or FSB level.
Finally, as mentioned in the JWG series, the fourth should be continued work on common taxonomy and a common regulatory timeframe. Coordinated access and advanced analytics is meaningless if fragmented data cannot be brought together.
Adedayo Banwo is a Legal Counsel and Vice President at Deutsche Bank AG London Branch. Previously he was Counsel in the Office of General Counsel at the Commodity Futures Trading Commission in Washington and before that, an Associate at Simpson Thacher & Barlett LLP in New York.