3 ways towards smarter regulatory reporting

European financial institutions face an increasing number of regulatory reporting obligations. Many firms must cope with the new MiFID II regime, not to mention the implementation of transaction reporting under Article 26 of MiFIR.

The next challenge is coming nearer with the Securities Financing Transaction Reporting (SFTR) expected to go-live with a phased approach in 2019. In scope for this regulation are any transactions where securities are lent or borrowed for cash together with corresponding collateral provided. The regulation not only affects banks and investment firms (as with MiFIR) but CCPs, CSDs, insurance and pension firms, UCITs and AIFs and non-financial counterparties, too.

As a result of all of this, the amount of regulatory reports being issued by European-based financial firms is continuously increasing. In my view it is time to streamline the process of dealing with these regulations. This article introduces three initiatives to move towards smarter regulatory reporting.

Model-driven machine executable regulatory reporting

A widespread problem of all regulatory reporting requirements is the need for human interpretation of the new rules and implementation into IT systems. This has been pointed out in a recent paper by the Financial Conduct Authority (FCA)¹. The paper explains the initiative by the FCA and Bank of England aiming at “using technology to achieve smarter regulatory reporting.” For this, the FCA conducted TechSprints to bring together different market participants and technology firms.

The recent TechSprint named ‘Model Driven Machine Executable Regulatory Reporting’ has been based on one reporting rule for the banking sector in the FCA Handbook. It showed that it is possible for software systems to execute a rule change automatically – under the precondition that the meaning of the regulatory statement is precise and unambiguous.

It is clear from these findings and initiatives that the closer regulators come to understanding technology, the more automation can be achieved. Precise and unambiguous regulatory statements, together with technology, leads to benefits for both sender and recipient of a report. It leads to increased clarity and efficiency, quicker adoption of new rules and higher data quality.

SimCorp’s Compliance Manager supports business rules and investment restrictions². It is possible to enter rules manually with an intuitive user interface, but it also allows for the export and import of rules in XML, too. Based on the rules engine it is possible to import new regulatory rules and apply them automatically – as long as the regulatory text is written in a formal language.

Until this is the case, compliance officers must still rely on human interpretation. To help them, SimCorp provides the Legal Rule Set Service (LRSS) a standard mapping from the regulatory text to the investment restrictions of the Compliance Manager³.

XBRL and ISO 20022

The precision of the regulatory language is vital to avoid the need for human interpretation. The move from paper-based reports and templates to XML has been a major step to get the syntax of reports correct. A natural next step is to define business meaning unambiguously and that is the mission of the international XBRL standard for the electronic representation of business reports⁴. It is mainly used for financial statements and is based on so-called “taxonomies”. These are specific hierarchical dictionaries for a certain reporting area. They define unambiguously the tags or fields to be populated with data such as <TaxAmountWithheldFromPayout>.

A similar global standard is ISO 20022, a universal financial industry message scheme for payments, trade processing card transaction and FX messages⁵. The origin of this standard is trade processing and settlement and it replaces the old SWIFT MT message with an XML-based format. But it is more than this, it is a universal ISO-based message scheme that has been selected by ESMA as the backbone communication scheme for MiFIR Transaction Reporting. All EU National Competent Authorities (NCAs) use this standard to accept and acknowledge transaction reports.

SimCorp supports the ISO 20022 standard for Swift and MiFIR Transaction Reporting. The ISO 20022 standard will also become mandatory for the Securities Financing Transaction Regulation for all market participants. In my view this could mean that the EMIR reporting moves to an ISO 20022 standard, too.

Compared to the technical standard XML, the international XBRL standard adds taxonomies that unambiguously define a business or regulatory meaning. This avoids double reporting and discrepancies in meaning.

Smart Cubes

In the banking sector, it is typical that the regulatory reporting requirements are based on European Union regulations, domestic legislation and local interfaces to NCAs with overlapping requirements for both supervision and statistical purposes. To cope with this the Austrian National Bank implemented a common reporting data model that utilizes Smart Cubes. The approach is part of a project for a European Reporting Framework (ERF) for the banking industry⁶.

This seems to be an innovative approach moving away from the traditional reporting templates to a data model based on ‘cubes’. A cube in general is a multi-dimension matrix with facts like ‘earnings’ that can be sliced and diced according to several dimensions like country, economic sector or currency.

Banking firms in Austria deliver data on a record-by-record level to one dedicated regulatory reporting hub with every single contract together with a set of attributes⁷. Together, this leads to a regulatory data container that can be analyzed by the regulator.

The advantage of this approach is that all the transaction and security details are preserved. The traditional reporting template-based approach asking for aggregated data under a certain perspective contains less detailed data. Several variants of the regulation like a European and domestic reporting-template in parallel require facts to be sent twice and maybe aggregated differently. In my view only the reporting of detailed and not aggregated data out of source systems avoids these discrepancies and additional effort for reconciliation.

SimCorp supports regulatory reporting both with internal operational data marts and data marts based on the SimCorp Dimension Data Warehouse Manager⁸. For Solvency II, pillar 1 and 3, dedicated subject areas are provided based on a general data model with facts and dimensions⁹. The subject areas for Solvency II contain all investment data in a star scheme with dimensions defined in the regulation.

Automating regulation…

The efficiency of supervisory reporting has been discussed recently in a public consultation of the European Commission with the name, ‘Fitness check on supervisory reporting¹⁰. The questionnaire focuses on issues like overlapping reporting requirements, lack of clarity and insufficient use of international standards. The results will be published soon, and I expect the feedback from stakeholders directly or indirectly involved in supervisory reporting will be annoying for the regulatory bodies.

In my view, the three initiatives for a smarter regulatory reporting introduced above should be welcomed by all financial market stakeholders. Bringing together the three concepts of machine readable regulatory rules, using international standards for data dictionaries and reporting protocols, and reporting of detailed data out of core systems. The consistency and flexibility of the EU supervisory reporting framework could be improved considerably. These initiatives and recent activities of regulators clearly show that the financial industry is already on the way towards smarter regulatory reporting. SimCorp supports this process with its IBOR system, data marts and standard solutions for regulatory reporting.

1 https://www.fca.org.uk/publication/call-for-input/call-for-input-smarter-regulatory-reporting.pdf.
2 /en/solutions/by-product/compliance-manager
3 /en/insights/simcorpblog/european-money-market-fund-reform
4 https://www.xbrl.org/
5 https://www.iso20022.org/
6 https://www.bis.org/ifc/events/ifc_isi_2015/010_turner_presentation.pdf
7 https://www.aurep.at/
8 /en/solutions/by-product/data-warehouse-manager
9 /en/insights/simcorpblog/solvency-two-and-competitive-advantage
10 https://ec.europa.eu/info/consultations/finance-2017-supervisory-reporting-requirements_en