Financial firms face the prospect of reducing the cost of reporting their swaps positions while supervisors should see big improvements in data quality and the ability to tweak rules in almost real time. By Justin Pugsley.

What is happening?

At the centre of this revolution is a digital regulatory reporting (DRR) initiative led by the International Swaps and Derivatives Association (ISDA). November saw a real-world live test of DRR involving BNP Paribas submitting data to the US Commodity Futures Trading Commission under its amended swap data reporting rules. Other supervisors are to follow from 2023 onwards. 

Reg Rage Zen

Some in the industry declared that this was a major milestone in the annals of reporting. Now there is light at the end of the tunnel for banks struggling with continuously escalating reporting costs. 

The origin of this cost spiral is the flurry of tough new rules emanating from the 2007/09 global financial crisis reforms. One particular corner of financial markets that caught the eye of supervisors was the opaque over-the-counter (OTC) derivatives market. They drove as much of it as they could into centralised clearing. But a huge chunk has remained bilateral out of practical necessity. The price for that is extensive reporting by counterparties to supervisors to increase transparency. However, meeting those requirements has been a long, arduous and expensive struggle for banks. And supervisors are far from happy about the results. That is borne out by the increasing number of fines they have been dishing out to firms over failures to properly report data. 

Why is it happening? 

Supervisors may well be receiving tonnes of data on OTC derivatives transactions, but much of it is unusable. Apart from the normal errors that occur, there are all kinds of issues that create problems, such as basic formatting. Reporting a value as ‘percent’ rather than ‘%’ can create problems for a supervisor trying to decipher the data they receive. 

In an attempt to bring order to the reporting chaos, the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions stepped in. They drafted a common set of critical data elements (CDEs) for use across jurisdictions for reporting OTC swaps data. This is a great help to banks reporting OTC swaps transactions across many jurisdictions as it creates greater commonality in terms of the specific data that is required. 

In response, ISDA got together with some of its members to build a reporting model that would help banks more easily conform with this CDE initiative. Just as importantly, DRR is built around its well-established common domain model (CDM), which is used to transform interpretations of the requirements into open-source, human- and machine-executable code.

What do the bankers say? 

It is estimated that banks spend around $10bn a year on overall regulatory reporting and hundreds of thousands of employees are committed to the activity.

Implementing DRR will cost money upfront, but could generate huge savings down the line. Finally, it is a chance to escape the ‘cul de sac’ of continuously escalating regulatory reporting costs. Apart from creating a more standardised approach to reporting, DRR is also highly collaborative as it is open source. That means the work of one bank can be used by all the others, which massively reduces duplication costs in the industry. 

Also, as DRR is digital and relies considerably on machine-readable coding, it opens the prospects of regulators making tweaks to the rules and having them implemented much more quickly and painlessly by the industry. Currently, even relatively small rule changes can take months for the industry to implement, and is done so in various degrees of quality. 

Will it provide the incentives? 

ISDA’s DRR could be a template for other regulatory reporting initiatives, paving the way for better quality data without imposing enormous growing cost burdens on the industry. Indeed, the International Capital Market Association and the International Securities Lending Association are eagerly exploring the use of the CDM in their respective corners of the industry. 

Overall, this development is good news for the financial sector. DRR lowers important operational costs across the swaps sector, while supervisors will have better quality data with which to make sounder judgements about financial stability.

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