The challenges of gaining oversight over the financial system are not going unnoticed. We come back from the summer holidays with 5 leading indicators that suggest we are on the brink of bad news. Bad news that is likely to spread far and wide.
Firstly, in a new report, the US Government Accountability Office (GAO) faulted the Financial Stability Oversight Council (FSOC) for failing to enact certain reforms that were recommended in a similar oversight report issued two years ago.
“FSOC still lacks a comprehensive, systematic approach to identify emerging threats to financial stability,” wrote GAO staffer, A. Nicole Clowers.
The second big piece of news is that LEI registrations have tailed off to far below expectations this summer. Even though the new risk reporting regime is requiring ever more registrations, thanks to the bold move of the EBA to mandate the LEI, the numbers of registered legal entities just aren’t there, and there are the statistics to back this up.
Comparing UK LEI registrations to those in Luxembourg demonstrates the point; there are 16,594 in the UK and 16,246 in Luxembourg, which ultimately means that, while 9% of entities are registered in Luxembourg, only 0.1% are registered in the UK. This raises the questions why, and will anyone fix it?
The third newsflash comes from an HM Government report published this summer looking at the ‘Balance of Competences’ between the UK and the EU. In it, they cited JWG’s 2012 research conclusion: “EU financial services industry will spend €33.3bn on complying with regulation between 2012 and 2015”.
We note that the figure they cited was based on an optimistic set of assumptions about the clarity and timeliness of reporting rules. The actual number is far bigger. Regardless, they are clearly concerned by the cost of European regulation to UK financial services.
The fourth big story covers research published by Rachel Wolcott, a UK based risk management and financial regulation correspondent, writing for Compliance Complete, who has been reporting on these issues. Here are some highlights:
► In the U.S. and Europe regulators have failed to implement sufficiently strong trade reporting standards and systems to gather information about over-the-counter derivatives trades, one of the core G20 goals
► Global regulators are now seeking to regroup and address the data quality and collection problems related to over-the-counter trade reporting. A lack of clear standards for reporting data, together with insufficient information technology spending by regulators, has been blamed for what is in fact a failure of OTC trade reporting
► There has been much back and forth on data quality problems and standards between regulators and firms covered by the European Market Infrastructure Regulation. Sell-side firms, market infrastructure providers and trade bodies have lobbied the European Securities and Markets Authority for more guidance on trade reporting. Simply put, the industry repeatedly asks for more guidance on how OTC trade reports should be completed, and ESMA refers it to the existing regulatory technical standards and the Q&A section of its website
► Those involved in OTC derivatives reporting might look at the ECB’s new approach to stress testing and its asset-quality review (AQR) as an example of what it might take in terms of investment and people power to get decent data into regulatory reports. Following a series of less-than-rigorous stress tests that saw some EU banks pass only to run into serious trouble days and months later, the ECB’s AQR and new stress-testing regime may end up being the most expensive exercise in the history of regulatory reporting
► If regulators do not develop more descriptive standards for regulatory reporting, particularly for OTC derivatives trade reporting, financial institutions may have to do it themselves. In the run-up to EMIR OTC trade reporting there were some attempts to find some common ground and define a standard way of delivering what the regulator requires. However industry collaboration did not get very far
As part of the same report, JWG’s CEO, PJ Di Giammarino, has been offering his insight into these reporting issues:
► “You get what you pay for. Every dollar you spend designing the system right upfront saves six dollars downstream when you implement. That’s exactly where we are now. They didn’t spend the buck up front and now they’re all chasing after the result trying to make some sense of it.”
► “It could be that masking [data protection, data privacy] has been an issue when the regulators are trying to use the data. I wouldn’t dismiss this out of hand, but that presumes that the data is actually useful in the first place. The real problem is they didn’t fulfil the mandate to the specification required with well-articulated and thoughtful use cases well in advance of when the reporting was initiated. They got something out, checked the box and presumed it would be cleaned-up at a later date.”
► “[The CFTC] didn’t produce detailed use cases to specify what precisely they were looking for in which particular fields under a variety of trading scenarios. They didn’t get the technical infrastructure right. In addition, they didn’t size the infrastructure to be able to take in all the data,”
► “Unless there’s a better rule-making culture that promotes collaboration between technical specialists in the investment firms, the problems will only get worse. We need more informed political decision-making and a practical industry dialogue on how we get to reporting standards that make sense. We can’t keep doing it piecemeal. To have a fragmented approach across OTC derivatives trade reporting, equities trading, risk and stress testing makes it difficult to make decisions about a fast-moving and complex system.”
Clearly, much remains uncertain in terms of how these data problems will be resolved. What is certain is that we are still at the beginning of this story.
The final news item? As reported at a conference in London this week, and confirmed by JWG’s trip to the continent, Germany is starting to get tough on reporting infractions. Rumours abound about the pharmaceutical CEOs that are facing fines of €500,000.
The bottom line is that the reporting problem is only just starting to make itself known. If you are one of the parties that can be held accountable for it, watch out!
Note: For Compliance Complete’s article please visit: https://www.complinet.com/profile/login.html?target=%2Fcompliance%2Farticles%2Findex.html