Regulatory reporting is increasingly complex, and many see it as an additional burden on top of reviewing strategy, profitability, global footprint and rebuilding trust. New legislation is ongoing and different jurisdictions have different requirements, such as the reports required by regulators in the US and Europe. This all adds to the complexity of the process.
Because of frequent changes of reporting rules, from minor adjustments to fundamental rewrites of the regulation, the scope of regulated aspects of financial markets has expanded rapidly over the last decade. Furthermore, regulators have not held back in handing out fines if rules were broken, to avoid another financial crisis like in the late 2000s. In fact, between 2009 and end of 2017, regulators in the US and Europe imposed over USD 340 bn of fines on banks for misconduct, including violation of AML rules. Estimates suggest that this has now exceeded $400bn.
Financial institutions on both the sell and buy side, like banks, insurance companies, investment firms and virtually everyone else are continuously and increasingly facing challenges around regulatory reporting, e.g.,
- Constantly growing complexity in the reporting regimes
- Keeping up with ever-changing regulation and being able to correctly interpret regulatory requirements accurately, swiftly and translate them into configuration or code
- Comply with a multitude of diverging regulations, across jurisdictions/regions at the same time.
- Dependence on manual processes, multiple isolated systems to meet various complex requirements
Such a changing and demanding environment requires market participants to focus on technology-driven improvements in their operating model and collaborate with regulatory experts to help them stay compliant with regulatory reporting obligations now and in the future.
The financial sector has been leveraging innovative technologies for years. The ever-growing relationship between technology and financial services has brought significant changes to the financial industry. Moreover, the COVID-19 crisis was the catalyst of digital transformation for many companies. According to KPMG’s 2020 global survey: 67 percent respondents say they have accelerated their digital transformation strategy because of COVID-19 and 63% say that they have increased their digital transformation budget as a result of COVID-19. Regulatory reporting requirements in the banking, financial services and insurance sector are creating exceptional demands on the technical and functional infrastructure of all organizations.
Key market trends driving innovations include:
- shift from on-premises software to cloud hosted operations and adopting cloud reporting tools,
- collaboration with FinTech to leverage expert resources in niche areas like reg reporting,
- integrate advanced technologies with existing processes, have the “old” and the “new” complement each other with their individual strengths,
- implementations and/or expanding the use of Robotic Process Automation (RPA), workflow tools and visual analytics platforms.
FinTech is already having an impact on the financial industry, with the Financial Conduct Authority (FCA) describing it as ‘The adoption of recent technologies to facilitate the delivery of regulatory requirements’. Companies are still investing in existing infrastructure, but they also start to utilize new technologies that enables them to rearchitect the existing regulatory reporting model.
The main trend of the ISDA Derivatives Trading Forum: Post-trade Operations, Services & Technology; from December 7, 2021 was the ‘changed approach’ to cloud solutions. Before the Pandemic, the industry already understood that cloud computing is an important part of the latest technology trends. However, Covid-19 changed the approach from ‘accepting’ to ‘adopting’ cloud solutions, and it is expected that in five years, most clients will use cloud in their reporting. According to Eurostat, the adoption of cloud computing services across enterprises in Europe increased to 36% in 2020 compared to 24% in 2018 and compared with 2020, the use of cloud computing increased by five percentage points in 2021. The cloud computing industry in Europe had reached USD 35 billion in 2020 and will expand at a 15% CAGR (Compound Annual Growth Rate) up to 2028.
Using cloud solutions in the regulatory reporting world therefore, is undoubtedly a key trend now, and for the next few years at a minimum. Cloud reporting services give clients more time to focus on their core business and creating alpha. A dedicated team of experts keeps up with regulatory change and handles their interpretation and implementation more efficiently whilst keeping the client, the one responsible for the reporting content, always informed and in control of their data. One major change in the not-too-distant future will be the implementation of EMIR Refit, which will be one of the biggest challenges in coming years; a perfect example of how demanding regulatory updates are. SimCorp’s Regulatory Center of Excellence is already in the middle of analyzing the impact of EMIR Refit for our clients and what changes in the system are required to be compliant with the regulation. EMIR Refit reporting will be handled in the cloud solution as we already observed that new EMIR and SFTR clients preferred cloud reporting and more and more EMIR existing clients are moving from on-premise to a Software as a Service model.
Thanks to utilizing standardization and system enhancements, clients can be sure that they will be ready for the new requirements coming into force like in the case of SFTR EU January release and SFTR UK April release. The Regulatory Center of Excellence is already working on them and impact on the client will be minimal.
Maintenance service, often offered with cloud solutions, alleviate client from day-to-day and technical change management, whatever the cause of the change may be. That solution supports clients to not only deal with huge changes like EMIR Refit but also with all modifications announced by Trade Repositories.
The financial industry’s focus towards innovation will be increasingly driven by technology and this is an unstoppable process. Market participants should re-define themselves as agile technology companies to easily adjust to the changing regulatory world. Fortunately, companies like SimCorp are here to support clients in this challenging task.