The shift from a tactical to strategic response to regulation

The pace of regulatory change is not slowing down: financial institutions realise they cannot just keep adding people and localised processes, most likely with yet more spreadsheets, just to meet its demands. By stepping back from the day-to-day focus on the next report, firms can take a strategic look at how their operations meet ongoing, evolving regulatory demands. Indeed, by re-engineering their approach, they can become more efficient in their reporting, reduce the cost of compliance and derive valued business insight from the data they process for regulators.

Post-2008, firms understandably may have anticipated the tidal wave of reform would eventually subside. Basel III was a milestone but now that is largely in place, at least initially, we see still more regulatory requirements coming down the pipe. 

Firms must take action on the Standardised Approach to Counterparty Credit Risk (SA-CCR) and the Standardised Approach to Central Counterparty exposures (SA-CCP) right now for January 2017. These are the two core changes to credit risk which already challenge the data quality and granularity firms need. 

In the medium term, FRTB (Fundamental Review of the Trading Book) will impact market risk. With the side-lining of internal models, the standardised approaches that take their place are being further fine-tuned, giving firms ongoing work on processes related to these risks. 

Firms also need to plan around data reporting, as already witnessed with transaction reporting demanded by Dodd Frank and EMIR. The US Federal Reserve has been collecting granular data for capital adequacy purposes for a number of years, and has now added granular cash flow data with the implementation of LCR (Liquidity Coverage Ratio requirement) with the FR 2052a report. In Europe, following an XBRL data model, vast quantities of data have already been gathered as well. With incoming regulations such as AnaCredit, reform of Money Market Statistical Reporting requirements (MMSR), MiFID/R and new requirements under the Securities Financing Transaction Regulation (SFTR), the march to detailed data reporting has no end.

To be regulated well and to benefit from it confers a competitive advantage. The faster and more efficiently firms move from a tactical to a strategic response to regulation, the better their competitive position will be. This means building an agile, future-proofed operating environment, going upstream to ensure data quality and availability with straight through flow of ‘clean’ data to regulators.  Human intervention in the reporting process needs to be by exception-only.

Firms that do this will be able to manage their time more effectively. Regulatory reporting needs to be an integrated part of a firm’s business process and - through effective reuse of the data for management purposes, firms can also generate business benefit from such an essential activity.