Dec 19 2017 Henry Engler, Regulatory Intelligence
With the European Union’s trade reporting rules set take effect in January and having an impact on banks worldwide, technological weaknesses in how banks report required information functions will come into focus as never before. This is prompting a need for many to accelerate their overhaul of legacy systems and establish new reporting regimes. The ideal end game, say many, is adoption of blockchain technology, creating a golden source of data throughout an organization.
But how does a global bank, with numerous legacy systems, stitched together over years of acquisitions and mergers, get to future promised land of blockchain? Some industry experts see banks taking tactical steps before jumping headlong into the blockchain world, building a technological bridge, so to speak, that can transition an institution into the new world more easily.
Under the EU’s looming MiFID II rules, the challenges are daunting, and tactical fixes may prove costly if not implemented properly. Banks will be required to report both pre-trade and post-trade details of orders submitted to, and transactions conducted on, major trading venues. The reporting is close to real-time and the scope includes the trading of equities, bonds and derivatives on regulated markets (RM), multilateral trading facilities (MTF), and organized trading facilities (OTF).
In addition to the challenge of meeting these rules, as demands from regulators become ever greater and reporting requirements evolve and dig deeper into a firm’s processes, a longer-term strategic view may be necessary.
“A lot of companies are struggling to achieve some basic form of compliance of just gathering and updating their repositories of information . . . and not thinking strategically about how MiFID II will evolve in the future,” said Alexander Tsigutkin, chief executive of AxiomSL, a regulatory compliance solutions provider.
“We see this type of tactical work that companies are doing to comply with regulations which are going to get much more intrusive and tedious when it comes to the second stage of regulation, and when secondary information needs to be supplied to regulators in the case of inquiries,” he added. “Financial institutions need to worry more about a strategic approach.”
No single source of truth
The core of the problem, which extends across numerous businesses, functions, and processes, is that data is dispersed and changeable. Originating through the front-office and customer facing activities, data, whether about a client or transaction, moves through numerous internal systems and ultimately comes to rest in back-office systems, often after a series of changes or reconciliations.
When the data sits across an organization, housed in various silos, each with its own set of underlying technological systems and processes, the challenge of bringing everything into a single source or picture becomes considerable. This is what experts call the “data lineage” problem, and it becomes particularly acute in meeting regulatory reporting demands.
There are currently a broad range of solutions in the marketplace to address this need, and many firms employing technologies that can help “orchestrate” the disparate data and bring it all together under one roof. But with blockchain or distributed ledge technology offering what many see as the ultimate solution, providing a single, unalterable source of truth or “golden copy” of data, the question becomes how quickly firms should move towards incorporating it into their processes.
Grainne McNamara, a principal in PwC’s capital markets group, says applying blockchain technology with so-called “smart contracts,” essentially digital agreements between buyers and sellers that is written into the code and exists across a distributed ledger, can bring about the type of data orchestration firms are searching for.
“People might say why would I want to use blockchain when there are other technologies used to join data and provide lineage around data,” said McNamara, who has years of experience in running front-to-back programs across divisions at firms such as Goldman Sachs and Morgan Stanley.
“What we’ve seen is that because of the combination of smart contracts and the underlying infrastructure of the blockchain, you have the notion of the continuity of the record being in the chain itself, and you have an address for the data,” McNamara added. “So you have a reference point in time that gives the data integrity over time. You have a sequence, you have auditability, and you have continuity.”
In moving towards a blockchain solution, each firm must evaluate where it currently stands in terms of its data aggregation and orchestration abilities. Developing the internal infrastructure where the data is one place can ease the path to blockchain.
“Once you have the infrastructure where the knowledge base and all the versioning of data is in place, it will be an easier transition to blockchain,” said Tsigutkin of AxiomSL.
Industry efforts underway
Some of the world’s largest banks are collaborating on using blockchain to enhance their reporting processes. In Europe, a group led by Swiss bank UBS is testing a blockchain platform to help comply with MiFID II rules.
The group, which includes Barclays, Credit Suisse, KBC, and Swiss stock exchange SIX, is testing an Ethereum blockchain to help ensure data accuracy and consensus.
“The project is getting market participants to collaborate using blockchain to improve regulatory reporting,” Peter Stephens, head of blockchain at UBS, recently told Reuters News.
Meanwhile, New York-based software company R3 CEV has partnered with Britain’s financial regulator, the Financial Conduct Authority (FCA), and two large banks to develop a blockchain-based application to improve the regulatory reporting of mortgage transactions.
The system would enable banks to generate automated delivery receipts for the FCA each time a mortgage is booked. The organizations hope that it can reduce the cost of the process and the risk of error.
“People are doing a lot of innovation in this space across ledgers, across industry infrastructures, and across platforms. You have to sit up and pay attention to that and figure out what does that mean for me inside my own walls, inside my own data infrastructure,” said McNamara of PwC.
This article first appeared in Thomson Reuters Regulatory Intelligence