Meeting the challenges of global Trade and Transaction Reporting

AxiomSL | Inside View - Mifid II
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August 11, 2016 – by Joshua Rosenberg, Regulatory Analyst, EMEA

The global burden of transaction reporting in 2016 is staggering and is set to significantly increase in the coming years. UK banks spent on average £17 million building in-house transaction reporting solutions for European Market Infrastructure Regulation (EMIR) and the Dodd-Frank Act, but have been plagued by poor data quality and heavy fines for non-compliance. In the US, firms spent 73 million paperwork hours in 2015 on Dodd-Frank compliance, up from 61 million hours the previous year. The estimated cost of Markets in Financial Instruments Directive and Regulation II (MiFID II/MiFIR) implementation is expected to dwarf any previous transaction reporting requirements when it goes live in 2018. Firms will be under a great deal of pressure to have robust solutions in place well before the go live date of 3 January of that year.

There are several reasons why in-house solution development has been so costly. Developing new technology for Trade and Transaction Reporting has a high upfront cost. In-house solutions, which are developed one at a time as new regulations emerge, tend to be built for one specific task making them inflexible. When changes in regulation occur, entirely new solutions need to be developed thereby multiplying the cost of compliance many times over. As the thresholds for reportable volumes of market activity are lowered, the heavy costs of compliance are set to fall next on medium and small firms. Firms need to find ways to improve reporting accuracy to avoid fines whilst keeping costs down and so far this has eluded them. Market data shows that on average firms can halve the cost of compliance by outsourcing the development of their transaction reporting solution to third-parties.

Banks need a single transaction reporting solution that addresses the manifold complexities of multijurisdictional transaction reporting. They need a single platform that can simultaneously handle multiple Trade and Transaction Reporting regimes including EMIR, Regulation on Wholesale Energy Markets Integrity and Transparency (REMIT), MiFID I/II, Securities Financing Transactions Regulation (SFTR) and Dodd-Frank to name a few. The challenge is to keep the cost of compliance low by eliminating the need to produce and maintain multiple transaction reporting solutions simultaneously. Industry research shows that the data produced by third party regulatory solutions is of a higher quality requiring fewer resubmissions and error reporting. By increasing the accuracy of reporting, the risk of fines for misreporting is also significantly reduced.

Firms need a solution that can identify in-scope trades and transactions required by each reporting regime and also the regulatory bodies and third-party entities to which they need to be reported. Accordingly, the solution should be completely compatible with any and all Trade Repositories (TRs or Swap Data Repositories in the US), Approved Publication Arrangements (APAs) and Approved Reporting Mechanisms (ARMs) to which firms will report. The solution should also ensure that any validations that are required by the relevant regulator are undertaken.

Firms must also report in a very short time frame. Transactions must be reported by midnight the day after a trade is made under most reporting regimes. MiFID II will also require real time reporting of trade data to APAs which presents its own significant set of challenges already encountered by market participants in the US when trying to meet the real-time challenges of Dodd-Frank. Platforms that support both real time and batch processes simultaneously while also allowing for reconciliation between the two are hard to find.

The aim of transaction reporting is to increase transparency and mitigate against systemic risk. With this in mind, firms should be looking for solutions that are in step with this ethos. The data lineage framework and data architecture should be integrated with the clients’ existing IT infrastructure to provide scalability and transparency throughout the entire workflow. Each and every change in the solution, data or metadata, needs to be logged in the system so that it can be accessed by relevant authorities to ensure utmost compliance and data integrity.

AxiomSL has produced a robust universal Trade and Transaction Reporting solution keeping all of these industry challenges in mind. With MiFID II and SFTR just around the corner, and updates to EMIR and Dodd-Frank ongoing, industry participants should be looking to firm up their reporting solutions soon. Many firms have already begun outsourcing their Trade and Transaction Reporting solution development after their in-house solutions became too expensive and cumbersome to maintain. Firms that are newly eligible to report are taking note of the difficulties experienced by others and taking steps to avoid the trouble all together. We expect many more firms to follow.