Yesterday, in London, an august crowd assembled to discuss the future of technology in banking. We were privileged to participate in a session that focused on whether there is light at the end of the ‘data dilemma’ tunnel.
Our conclusion: even though it’s been nearly 6 years since the G20’s plans were put in motion, we’re probably still too close to the start of this journey to know whether we will bask in the blissful light of transparency before we retire.
In our second reporting article, JWG focused on the push from 12 trade associations to adopt new consistent and harmonised reporting requirements and the costs of the current infrastructure. In this final article of the series, we explore what a future state for managing regulatory change could look like, and how firms could navigate their way to a 2020 target operating model.
Going forward, the transparency standoff will be resolved in one of three – fundamentally different – ways:
- Stalemate: Regulators continue to release more and more requirements and firms continue to respond tactically, rather than strategically. Firms’ cost income ratios continue to suffer and regulators are forced to make judgements on poor quality data but, at the end of the day, the ‘status quo’ is acceptable.
- Escalate: As regulators continue to receive poor quality data from the industry as a whole, they respond through increased fines, capital charges and withdrawn authorisations. Firms behind the curve respond by hurriedly, and expensively, upgrading their approaches – at great cost to the industry. We lurch toward a new ‘status quo’.
- Evolve: Regulators, firms and the supply chain work together to define what exactly is required to identify microprudential or systemic risk or other policy objectives, together with what can be delivered over appropriate timescales. We define ‘what good looks like’ and establish standards, common artefacts (e.g., data models), capability maturity models and accepted practices.
This places firms in a tough situation. What should they assume the result of the stalemate is? How should they navigate their way through it? Placing your bets on scenario ‘1’ means being left exposed in the eventuality of scenario ‘2’. There are significant advantages to a more strategic approach, such as leveraging regulatory data for internal MI or business decisions but going with scenario ‘2’ means investing significant resources on a compliance driven effort.
If you choose scenario ‘3’, you will engage with trade associations, standards bodies, vendors and the many regulators involved to define the problem from an ‘end-to-end’ perspective, in which identifying the right data is just one piece of the puzzle essential to making this work.
This is easier said than done, perhaps, but it is not blue sky thinking. Industry organisations, such as ISDA, are aware of these problems. As you can see in their recent paper, “Improving Regulatory Transparency of Global Derivatives Markets: Key Principles”, they identify several principles that could help – harmonisation, common data standards, data sharing and benchmarking reporting progress. But “lack of commitment … among stakeholders in the process to drive and achieve consensus in these areas” is cited as a key obstacle.
Engagement across the various ‘tribes’ involved in regulatory reporting would help. Collaboration, internally to firms, is essential in making informed decisions. Working front to back, the business needs understand the benefits of deeper insight into their market and clients and the competitive advantages that could result from investment in better data quality, and convey that vision to operational and IT colleagues. Through better internal communication, alignment between all stakeholders can be accomplished in a way that gives clarity over the common challenges and ‘roadblocks’ that exist and, as a result, defines ways to overcome them.
Regulators will need to put in place the right mandates, skills and resources to make cross-sector, cross-regulator data collection a workable reality. The EU has the power to engage in radical agenda-setting to specifically address many of the underlying ‘level 1’ data collection issues, which it has already had a start on. But clearer assessments of ‘what good looks like’ internationally will be invaluable in communicating how firms will need to structure themselves going forward.
Understanding what a ‘transparent financial system’ is and how it will be achieved is still very much in its initial stages but, without significant change over how we approach providing data for systemic risk analytics, we will continue to live in an opaque and murky system where risk remains unmeasurable, untraceable and the ability to prevent future crises is non-existent. What you decide to do now to meet the increasing demands of transparency will matter – not only to the short term list of projects for this year, but for at least the next five.
Ultimately, when the next crisis hits, the question will be asked by voters, politicians, shareholders and banks: why didn’t this get fixed? Only then will the stalemate be broken.
The bottom line is that, whatever side of the standoff you are on, it behoves you to place your bets now. Ducking for cover once the shooting starts is unlikely to protect your stakeholders.
To keep up to date on the transparency landscape, join our MiFID II LinkedIn Group and read up on our trading articles on RegTechFS. Also, there are still places available to attend the 7 July City & Financial Global workshops on MiFID II implementation.