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Compliance in the cloud for a demanding regulatory environment

Compliance in the cloud for a demanding regulatory environment

The cloud has fundamentally altered the economics and time to value of risk management and regulatory reporting. By allowing banks to handle the real-time, daily and periodic nature of regulatory reporting in an elastic manner, cloud computing has also provided cost-effective, long-term (and immutable) data storage to respond to queries from regulators.

 With automation becoming a priority, access to analytics and other software tools to optimise risk operations are now equally necessary. Finextra spoke with James Beattie, vice president of product management, and David Campbell, vice president of strategy and business development, at Broadridge about balancing regulatory compliance with business growth. Broadridge is an Advanced Technology Partner in the AWS Partner Network (APN).

New regulations require firms to collect, store, process and report more granular data across multiple products and asset classes. Expansion into new geographies as well as the increased use of complex over-the-counter (OTC) derivatives and alternative asset classes create additional challenges.

Broadridge’s Campbell believes that these challenges can be remedied with cloud solutions: “Complex regulations, and the sophisticated OTC instruments many apply to, require event storage for long time periods. This can be cost-prohibitive as the data sets grow. Cloud solutions with pay-as-you-go analytics services, flexible data storage tiering and rapid access can reduce this cost.”

Furthermore, to focus specifically on event-driven standards such as the Consolidated Audit Trail (CAT), Beattie points out that these standards “require computing resources to handle volumes that can dramatically spike based on market activity.”
The CAT tracks orders throughout their life cycle and identifies the broker-dealers handling them, which allows the US Securities and Exchange Commission to track activity throughout the US market. He continues: “Reporting against hard deadlines means, in non-cloud solutions, that hardware needs to be sized for peaks and is often under-utilised. Cloud allows for an elastic footprint to handle lower than usual volume days, high volume days and infrequent processing cycles.”

The new CAT timeline

After CAT changed its Plan Processor and a new long-term plan was revealed to industry members, firms were advised to study the announced changes as well as understand the implications of implementation and the operational models that will need to be put in place once CAT is live.

Broadridge’s recent report, ‘The New CAT Timeline: Rethinking Your Implementation Plan,’ highlights that while regulatory deadlines result in uncertainty and time pressures, the CAT multiple parallel testing windows in 2020, and production reporting in April 2020, removes a period a time when firms could apply lessons learned from equities testing and production of all validations to the options test environment.

Parallel priorities

How can broker-dealers balance the parallel work required for reporting both equities and equity options for CAT?
Broadridge advises them to work with expert partners to get in the best position for the December 2019 test environment. Within the report, Broadridge recommends: “If firms focus on ensuring their solutions are strategically delivered with maximum functionality and have all validations ready for early December, then any necessary adjustments will be easier to make.
“Establishing solution integrity as a key part of the plan will also reduce the stress on firms’ key resources and the key staff who will be integral to completing the work for Phases 2c and 2d. This will help keep solution development on the right track by eliminating significant and costly rework that would otherwise intensify the strain on parallel work requirements.”

Delegated vs. assisted reporting

As the markets move away from uncleared trades with the implementation of The Markets in Financial Instruments Directive (MiFID II), the need for delegated reporting has often been debated in the past due to the unreliability of solutions built on traditional infrastructure. New regulations result in the introduction of more data and in turn, financial institutions are forced to comply with regulators’ requests but struggle due to the fragmentation of the requirements.

Campbell asserts that in the case of delegated reporting, cloud solutions prove to be beneficial as they provide a cost-effective foundation for greater reliability by leveraging multiple availability zones within regions and cross-regional deployments where useful. He continues: “Clients need to be given access to information on reports that have been submitted on their behalf. Providing clients with the ability to log into a dashboard running in the cloud environment simplifies this process, removing the need to generate static reports or provide access over the organisation’s infrastructure.”

Campbell adds that assisted reporting can also be supported in a similar way, “where an organization provides the information they hold and then allow the client to log into a dashboard to complete the missing data so that the report can be submitted.”
Because of the detailed nature of data required under MiFID II, assisted reporting will encourage firms to hand over more information to brokers than before, but will also allow regulators to ensure market stability and investigate market abuse, identifying patterns of behaviour and making issues easier to detect in the future.

Accelerating adoption among asset class laggards

Implementing assisted reporting across several asset classes may be a convoluted process; while the industry is ahead in the reporting of equities, other asset classes are lagging behind due to a need for a greater understanding of market operations and instrument behaviours. Beattie highlights that cloud solutions have the potential to remedy some of the associated issues.
“As new regulations are implemented, changes are frequently required as there are clarifications to the requirements and as core providers, such as the TRs, update their systems. Whilst thorough testing is still required by the organisations, the effort of this is reduced as elements such as connectivity to the Trade Repository, submissions and responses can be tested by the team supporting the cloud platform using rapid provisioning of test infrastructure,” Beattie says. However, while regulations are considered, financial institutions must ensure that they are not the only priority and also work towards balancing compliance with business growth and reducing costs.

Beattie points out that this may not be as easy as it seems. Banks are operating in an environment in which they must deal with a range of pressures: the increasing number of asset classes moving to electronic trading and other changes in market structures that compress fees represent two of these pressures. While electronic fixed income trading has been boosted by MiFID II going live, Beattie suggests that these changes require increased investments in technology in order to be competitive, which impacts cost-effectiveness.

At the same time, while banks have focused on the front office, core post-trade solutions have seen underinvestment, which “leads to inefficiencies, risks and the need to transform to reduce the cost of operations.” Campbell reiterates that financial institutions are also under pressure due to “increased requirements as regulators globally work to increase the transparency, efficiency and fairness of markets, whilst attempting to reduce overall risk in the financial system.” It’s a classic case of technical debt coming due.

Moving past the obstacle of cost

How can banks move past these obstacles? It is a matter of ensuring that all cogs in the systems wheel are turning at the same speed, at the same time.

“This means that firms must invest in their operations and regulatory compliance at a time when they are under fee pressures. The imperative for firms becomes how to utilise investments in technology, operations and regulatory compliance to lower costs, increase efficiencies and expand business opportunities. Overall, it means that firms must create right-sized technology capabilities that scale to the needs of the business and can set the groundwork for future efficiencies and growth,” Campbell explains.

Cloud computing can also cut down costs dramatically through shared core services, as Campbell explores. When sending a report to a Trade Repository, the deployment of infrastructure for production, development and testing as well as the provisioning of connectivity could be shared with other participants. Alongside this, those with low reporting volumes also have the opportunity to reduce costs with the cloud: “If a firm only books a small number of reportable transactions, for a particular regime, the cost of building and maintaining a reporting solution in-house can be prohibitively expensive.”
“In this case, a vendor solution may be the best option. If the solution is installed onsite, however, the cost per reported transaction is also likely to be high when licensing, infrastructure and support costs are considered. If the firm is able to use a vendor solution in the cloud, they will benefit from the use of shared services, whilst still getting the benefits of using a solution that is tried and tested by other firms."

Digital transformation

Other than cutting costs, Campbell summarises that cloud computing solutions can help financial institutions rise to the challenge and support regulatory reporting requirements through speed of deployment, flexible architectures, tools for analysis, the mutualisation of regulatory interpretation and the ability to offer additional client services. But what does this mean for digital transformation, and does the cloud have the capability to fuel automation and in turn, innovation in risk management?

Enterprise risk management practices need to have versatile frameworks, and as Campbell states, the cloud is changing the perspective “by underpinning an organisation’s need to enhance risk management capabilities by providing resiliency and access to pooled data (particularly external data) that can then be analysed to create new insights into risk.”
On the innovation point, Campbell concludes that the cloud allows small and medium-sized businesses to ship new products to market far more quickly and leverage leading-edge technology such as artificial intelligence and machine learning. For all institutions, “cloud-based automation schemes will allow risk executives to focus more on strategic and high-value activities as routine work is automated, leading to fewer exceptions requiring manual handling.”

Learn more about this topic by downloading Broadridge’s paper: The New CAT Timeline: Rethinking Your Implementation Plan.


Part of the AWS Cloud Series: providing visionary insight and practical guidance for financial institutions moving to the cloud.

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