Regulatory compliance – A little proactivity goes a long way

Regulatory compliance has historically been viewed by the majority of capital markets participants as an unavoidable cost of doing business. Refinitiv explores why it may be time for firms to change their perspectives and approach various compliance initiatives proactively and, in doing so, leverage those activities as a competitive differentiator

Traditionally, large numbers of capital markets firms have perceived regulatory compliance as a cost of doing business – a necessary evil that has had to be endured, but never enjoyed. And, while it’s unlikely any firm will reach the point where it relishes the prospect of complying with its inexorably growing number of regulatory mandates, for organisations that approach the task proactively with a view to using it as a competitive differentiator – and possibly even a catalyst for business-wide change – the benefits can be significant. These changes are as much a cultural shift and attitude adjustment as they are technology and data ones. Although, as with so many business processes across the capital markets, data invariably resides at the core of those challenges and solutions. 

Firms on both sides of the industry have, over the course of the past decade, become used to doing more with less. It’s now a universally accepted maxim, driven by bottom-line considerations and the need to focus on improved operational discipline and maximising efficiencies throughout the business. If the first six months of 2020 are anything to go by, this trend is likely to gather momentum as buy-side and sell-side firms feel the pinch after disappointing first- and second-quarter results, which in all likelihood will translate into appreciable job losses throughout the industry once the dust from the Covid‑19 pandemic has settled. 

What is clear is that what was already a tough, complex and highly competitive operating environment is set to become a lot tougher and more complex to navigate for large numbers of market participants. That said, the use of regulatory data and ancillary services from specialist third-party providers is a feasible and practical means of mitigating a range of operational, reputational and regulatory risks. Such services can also be leveraged as competitive differentiators rather than be seen purely as a sunk cost.

Light at the end of the tunnel 

From a regulatory and operational perspective, there is light at the end of the tunnel – and, in this instance, it is not an oncoming train. The obvious solution is for capital markets firms to lean on third-party regulatory and data specialists such as Refinitiv, which – over the years – has developed an intimate understanding of the practical implications of complying with large numbers of regulations from both a technology and a data perspective. The firm has the global reach, and the breadth and depth of expertise to address industry-wide, regional and local regulations.

“It comes down to the global nature of the business and the fact we have a global reach and are able to service our clients, regardless of the region they are in,” explains Russell Ironside, proposition manager at Refinitiv, on the issue of why Refinitiv is so well positioned to help its capital markets clients meet their regulatory obligations. “Refinitiv, born out of Reuters and Thomson Reuters, is global in nature and consequently has a broad range of regulatory solutions that we can offer our clients. There’s also the leading-edge technology we utilise, including the ability to provide solutions via the cloud, which is being more readily adopted by our clients as an important part of their infrastructure plans.”

According to Ironside, Refinitiv’s clients benefit through its global network because it has people in many different locations throughout the industry, which is key to its ability to serve its clients. “And, irrespective of where clients are located, we have people on the ground who can help them and who are able to understand the regulation – even if it is in a local language and whether it pertains to a local environment – allowing us to create our solutions so they work for clients in their specific locations,” he says.

Current regulations  

From a European perspective, the introduction of the revised Markets in Financial Instruments Directive (Mifid II) in January 2018 has had the greatest impact of any regulation across the pan‑European marketplace. However, that doesn’t mean to say firms not directly subject to its purview – in effect, capital markets firms based in North America and the Asia-Pacific region – are not already complying with its various tenets, given that Mifid II is now seen globally as a best practice playbook. It’s also pertinent to remember that capital markets firms located outside of the European Union but service EU‑based clients are required to comply with certain Mifid II rules. 

Mifid II, conceived as a means of introducing greater transparency and improved controls to the markets comprising the bloc, has long been in Refinitiv’s regulatory crosshairs for partnering with its clients on their compliance initiatives. To that end, Refinitiv provides the following Mifid II support: 

• Reference data 
• Pre- and post-trade transparency support by way of links to a number of approved publication arrangements for trade reporting purposes
• Systematic internaliser (SI) determination, allowing user firms to accurately monitor their SI thresholds
• Best-execution monitoring and reporting, including RTS 27 and RTS 28, support
• Research, permissioning and unbundling, including access to the firm’s StarMine investment research analytics and modelling tool
• Transaction reporting and record-keeping support, allowing clients to report transactions in any Mifid II financial instruments to their local regulator or approved reporting mechanism. 

When it comes to the Securities Financing Transactions Regulation (SFTR) –introduced by the European Securities and Markets Authority expressly to reduce systemic risk around securities lending and increasing transparency around collateral reuse – Refinitiv provides reference data fields that can be used to classify any underlying security or collateral referenced by a securities financing transaction. It is also creating new data fields to provide additional details about the quality of those underlying securities and/or collateral, as required by the regulation.  

With regard to the EU Benchmarks Regulation (BMR) – adopted in January 2020 in response to the Libor scandal to ensure benchmarks are reliable, transparent and administered without conflicts of interest – Refinitiv provides clients with a regulatory inventory that contains the full live universe of benchmark Reuters Investment Codes (RICs) in accordance with BMR. The inventory comprises 24 supporting fields, including RICs, permanent identifiers and associated administrator details.

Future regulations  

In terms of upcoming regulations on which Refinitiv is already focusing, the Fundamental Review of the Trading Book (FRTB) and the Libor transition are the two most prominent. FRTB, formulated by the Basel Committee on Banking Supervision and set to come into force in January 2023, is a prudential framework that defines the methodology by which banks must calculate their minimum capital requirements as a means of protecting themselves from excessive market risk exposure. Refinitiv has already developed a solution to deliver executed trades and committed quotes across multiple asset classes to help banks comply with the risk factor eligibility test (RFET), which assesses the liquidity of inputs into their risk models. The new Refinitiv Trade Discovery service, developed in conjunction with banks and market infrastructure providers, delivers access to real-price observations for bonds and cross-asset class over-the-counter derivatives.

From the end of 2021, UK banks will no longer be required by the Financial Conduct Authority to contribute to Libor, which means alternatives to the benchmark are currently being explored. To that end, regulators and central banks have released a series of overnight transaction-based risk-free rates (RFRs) in the interim, which Refinitiv aims to support by providing the necessary data itself or by publishing third-party content. It is also committed to creating new term-structure reference rates, starting with sterling, to replace the tenor-based Libor rates, which the overnight RFRs do not do.

These examples of Refinitiv’s regulatory initiatives are by no means the only regulations on its radar – Solvency II, International Financial Reporting Standard 9 and the Central Securities Depositories Regulation, for example, also feature prominently in the stable of regulatory services it currently offers clients. Refinitiv also has the capacity to focus on regional and local regulations by virtue of its global network of regulatory subject matter experts.

Summary 

Proactive compliance practices – underpinned by accurate and reliable reference data and other regulatory datasets that are centrally stored, managed and governed – not only allow capital markets firms to comply with their various regulatory mandates, but also lead to greater transparency across the business and increased levels of trust from investors and shareholders alike. Regulatory compliance is no trivial undertaking for firms, especially when it comes to the complexity of current regulations (such as Mifid II, SFTR and BMR) and those set to enter the statute books in the near future (FRTB, the Libor transition and RFET), although regulatory specialists such as Refinitiv not only are well placed to help their clients understand specifically what the regulators require of them, but also have the data, technology and personnel to alleviate much of their regulatory burden.    

Across the capital markets, firms’ reputations can either be enhanced or tarnished depending on the outcomes of the now relentless regulatory scrutiny from their competent authorities. And, while no regulatory body would admit to providing firms that have their regulatory houses in order with something of a light touch, showing investigators that compliance is a priority at the firm by way of proactivity and increased levels of transparency can’t hurt.

It goes without saying that the financial services industry is not an easy place to be right now, and that isn’t going to change anytime soon, although managing one’s regulatory obligations accurately and efficiently is likely to make it just that little bit easier. 

 

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