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Automating regulatory reporting - the case of IFR

Automation technology has changed the world in more ways than one. Smart phones can recommend music choices based on listening patterns, while self-driving cars are becoming reality. Better automation can also significantly transform supervision and regulatory reporting at financial institutions. With the regulatory burden increasing, new technology offers a solution that manual processes simply cannot hope to rival both from an accuracy and a speed perspective. The new regime for investment firms under the Investment Firms Regulation (IFR) and Investment Firms Directive (IFD), collectively referred to as the IFR regime throughout, offers an interesting use case that could be leveraged by firms to achieve end-to-end reporting automation.

With the IFR regime, regulators are, for the first time, introducing a regulatory regime specifically designed for investment firms. This presents investment firms with a unique opportunity. From a prudential perspective, the new regime ensures that calculations of risk exposures and corresponding capital requirements are tailored to the activities of investment firms. The K-factor for own funds requirements for trading counterparty default risk (K-TCD), for instance, introduces an exposure value specific to investment firms. Although principally like the standardised approach for counterparty credit risk (SA-CCR) under CRR 2, the exposure value under the K-TCD factor has a simpler approach to calculating both the replacement cost (RC) and the potential future exposure (PFE) than the SA-CCR. This way, the K-TCD accounts for differences in transaction activities between investment firms and CRR-regulated entities. By tailoring prudential provisions in this manner, regulators can ensure that the regulatory system is not too restrictive for investment firms without compromising on stability and soundness.

The right approach to regulatory reporting is key to making a success of the new regime for investment firms. Moving to a new regime brings its challenges for compliance, trading, finance, treasury, and legal departments at firms. Firms must be able to fully evaluate the impact of the new regulatory regime to ensure compliance in the first instance before making the most of the tailored provisions. Automated regulatory reporting produces the necessary data. Investment firms are in a unique position to act now to realise the following four key benefits to automating regulatory reporting for IFR.

Data and auditability

A central challenge to regulatory reporting is the data that goes into calculations and reports. Any effective reporting solution must ensure that the data is of excellent quality and standardise it. The open-source data standard FIRE achieves this, is unique, and widely recognised by regulators and firms alike. FIRE, short for financial regulation, is based on granular legal definitions in financial regulation. The data points in FIRE correspond to definitions associated with the K-TCD factor, for instance. This ensures that data stored at investment firms covers exactly what is needed for financial regulation. Importantly, the FIRE data standard also guarantees that the data at investment firms follows the requisite logic as per the regulatory provisions on RC and PFE in the K-TCD factor. Once data at an investment firm is mapped to FIRE, it is possible to deploy an automation tool to automate the regulatory reporting process. This equips investment firms with the necessary tools to meet increasing regulatory pressure for auditability.

As prudential regulation for investment firms changes, regulators will be keen to fully understand the calculations performed by investment firms for each report. If investment firms manage their data in Excel files, compliance and audit teams have no choice but to follow the chain of Excel files involved in a transaction and read corresponding documentation. With the regulatory burden increasing, this is simply not manageable and will increase the risk of errors.

If, on the other hand, regulatory reporting is automated, auditability becomes significantly easier. FIRE ensures that financial institutions cover the data as required in financial regulation. The data also follows the correct logic. With Suade’s automation solution, auditability is built in. Instead of clicking through several Excel files and reading lengthy documentation to decipher the logic, it is clearly set out in the automation tool and simple to follow. Effective auditability is, thus, possible.

Regulatory updates

A second key aspect to consider for deploying a reporting solution for the new IFR regime is the challenge of regulatory updates. Regulators regularly release updates of varying sizes to their reporting templates. Keeping on top of these updates with a manual process is resource-intensive, especially for IT departments, and any errors can be costly. Suade’s automation technology uses the data standard FIRE to quickly learn how to perform any new calculations and produce any new reports.

This capability to easily deal with regulatory updates is an important functionality for investment firms. Any investment firms exploring the new regulatory requirements can adopt an automation solution now to test its functionality under the existing regulatory reporting requirements. Because many of the new calculations in the IFR regime use the same or similar data as the old regime, existing data points and logic can be reused. This means that an investment firm could deploy an automated solution for regulatory reporting today and then easily transition to the new reporting requirements using the same automation solution. The technology adjusts itself to the new reporting requirements.

Granular data and complexity

As is the case across the financial services industry, new prudential standards with complex calculations often increase the regulatory burden. To calculate the own funds requirements under K-TCD, firms must multiply the correct risk factor with a credit valuation adjustment and a multiplier α. The result is then added to the k factor for daily trading flow (K-DTF) and the k factor for concentration risk (K-CON) to produce the own funds requirements for risk-to-firm (RtF). The RtF k factors, the risk-to-client k factors, and the risk-to-market k factors contribute to a firm’s own funds requirements on which a firm must report.

While much of the data to be produced for the reports is similar to existing reporting requirements under the existing reporting framework, the reporting under the IFR regime is significantly more granular. The RtF k factors are a good illustration of the complexity of the calculations to be performed by investment firms. Inevitably, this will require more granular data for regulatory reports than was previously the case under the COREP reporting framework. The only way to reduce the regulatory burden and ensure reports remain error-free and auditable is to automate the regulatory reporting process.

Real-time data for trading decisions

A final important benefit of automating regulatory reporting concerns the power of Suade’s automation tools to produce near real-time data. Because the risk calculations are built into the Suade software, the calculations are done with the same speed and accuracy as the regulatory reporting tasks. The risk calculators also draw on the same data in FIRE that is used to comply with regulatory reporting obligations. As a result, the data is of sufficiently high quality to allow for effective conclusions to be drawn regarding the effects of trading activities on RC or PFE. Thus, not only can investment firms rest assured that their data is as needed for regulatory reporting, but they can also use the data to inform trading decisions. Staff at investment firms currently tasked with performing risk calculations manually can instead use their expertise to assist colleagues with trading decisions. Thanks to Suade’s automation tools, it is possible to produce near real-time data through risk calculators to inform trading decisions and make the most of data produced under the IFR regime.

Automating IFR reporting

The new IFR regime offers a real opportunity for investment firms to take stock of their approach to regulatory reporting and data. Automating the process offers benefits through auditability, regulatory updates, and real-time data for trading decisions.


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Maximilian Dyck

Maximilian Dyck

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08 Mar 2021


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