Regulations will tighten if regulators find themselves unable to identify industry issues, agreed panelists at the Securities Finance Technology Symposium 2022.
During the ‘Regulation’ panel, speakers discussed the current state of regulation in the industry, including the relationships between regulators and the market, what clients are looking for and what might lie ahead.
Jonathan Lee, senior regulatory reporting specialist at Kaizen Reporting, stated that central banks and regulators are “on heightened alert” when it comes to interest exposures, solvency issues, contagion and credit default risk. Predicting that the next financial crisis will be based on an inability to deal with increasing interest rates, Lee suggested that regulators will become more strict when they cannot deal with the aforementioned dangers.
Sam North, director and European head of product for repository and derivatives services at DTCC, noted increased regulator interactions with trade repositories on SFTR and EMIR data. This is due to increased technological capabilities on both sides of the equation, he said, along with improved resources for regulators to be able to understand the data that they are receiving.
Commenting on what clients are looking for in the current market environment, Fabien Romero, head of transaction reporting, managed services at S&P Global Market Intelligence Cappitech, highlighted the demand for data quality — something that is now expected as part of a provider’s service. This is a direct reaction to ESMA’s April 2022 EMIR and SFTR data quality report, he said, which identified key issues that remain in the regulations.
The focus of 2022 has been inaccurate data, argued Iain Mackay, product owner of RegTech Solutions at EquiLend. Work is being done with industry bodies to ensure that data is up to regulatory demands, he said, but the fact that clients are using different reporting methods means that the data output is often muddled. The speed and success rate of reporting is good, he assured, but there is still a need for improved quality.
Panelists agreed that pricing was a significant concern. Ed Oliver, managing director of product development at eSecLending, reasserted the problems that emerge from market participants using different vendors, all of whom have different prices – this will impact the reconciliation of
market value from January 2023 as there is a very low tolerance allowed. “The clients’ journey is ahead of the regulators’ journey” when it comes to how to use data, he said. Clients are already using appropriate oversight, while regulators are lagging behind. However, they are beginning to return data with analysis which should illuminate the problems that clients and vendors have already been noticing.
Lee commented that the fundamentals of the process need to be right — currently, prices are often expressed at the wrong category, with decimal and monetary misused. Additionally, a large proportion of trades are not subject to the reconciliation process and are therefore not regulated, which presents further problems.
Updates to regulations take place ‘incrementally’, said Romero. The current standards are not enough, he posited, adding that the large number of variations on similar regulatory ideas is unhelpful.
This was agreed on by the rest of the panel, with Lee explaining that the lack of global standardisation means that many investors base themselves where regulations are most beneficial to them. Regulatory arbitrage is ‘inevitable’ with global discrepancies, another panelist argued.
Focusing in on the Central Securities Depositories Regulation (CSDR), Oliver affirmed that it is working as expected, but questioned the efficacy of penalties. While he highlighted the preparation that the market had undergone in anticipation for CSDR’s rollout, Mackay countered that market participants and infrastructure were not as prepared as they could have been, which has resulted in an ‘unacceptable’ number of fines.
Data is inconsistent and hard to reconcile daily, he said, with costs difficult to manage. Settlement rates are “at best” equal to pre-CSDR levels, “maybe even worse,” he concluded. Despite this, he stated that he was “more optimistic” about the future now that the cause and effect of these low rates were being more thoroughly considered by the market. With vendors having developed solutions to address workflow, the industry has seen more transparent data and automated processes. These have helped to resolve some of the problems highlighted by CSDR, Mackay added.
Addressing the upcoming US move to T+1, North stated that this was a “number one priority” from an enterprise perspective. He anticipated a 2024 implementation, with building taking place in 2023. Technology and operations must be ready for the change, he warned, with Lee predicting bespoke models to be abandoned in favour of market simplification and standardisation.
The panel concluded that regulation still has a way to go, but reminded the audience that change can take a long time, with Lee suggesting that there will be five to ten years before any significant developments in standardisation are seen.