By: Brock Arnason
In financial markets, regulatory rules mandate strict and complex post-trade reporting requirements for investors and asset holders who exceed certain threshold limits. These requirements, commonly known as position reporting, large holdings, or shareholding disclosure, are prone to misinterpretation. This often results in reporting failures and sometimes enforcement actions – including fines.
Unsurprisingly, some firms have struggled to keep up with their post-trade reporting obligations, especially in periods of volatility. However, a lack of success in complying with reporting obligations is not limited to extreme market conditions.1 It also results from misinterpretation and ambiguity in regulatory requirements. While certain financial institutions have already been fined between $1.5 million and $10 million for transaction reporting failures, a wider issue of misinterpretation and misreporting has also been identified.2,3
Aside from misinterpretation, technical deficiencies have also led to non-compliance. Such situations have included reporting engine failures and platform outages. The FCA has also issued fines on the basis of insufficient post-trade systems and controls.4
Historically, challenges with regulatory interpretation have also been costly, with significant associated spending on legal counsel. Additionally, while the importance of technology in compliance is widely known, its application and integration in this space is variable.
Collaboration and consensus in a competitive landscape
The highly competitive nature of global financial markets can make collaboration between firms seem unlikely. However, not only is inter-firm collaboration possible in this space, it is central to a number of emerging initiatives. The UK’s Joint Money Laundering Intelligence Taskforce (JMLIT) is a formal data sharing partnership between law enforcement, regulators, and over 40 institutions within the financial sector; FINOS5 is a non-profit foundation “whose purpose is to accelerate collaboration and innovation in financial services through the adoption of open source software.” Through FINOS, major financial institutions are already collaborating at the level of codebase contributions.6,7
Consensus, however, represents a deeper, more involved, form of collaboration which yields alignment not only on firms’ inputs but their outputs too. Where firms face a similar set of inputs, such as rules and regulations, and especially when those inputs exhibit complexity or ambiguity, working together and forming a consensus interpretation to manage this more efficiently is the incentive which surfaces collaboration rather than competition. Practically speaking, consensus-driven logic improves decision-making by drawing on a collective level of knowledge and understanding unavailable to any single firm in isolation. Additionally this knowledge can be offered to other firms if they wish to benchmark their existing approach on Position Reporting versus industry agreed practice. Therefore consensus reduces firms’ per unit cost of expertise, and provides the assurance of being aligned to an industry-agreed interpretation. A collaboratively derived, industry consensus interpretation on regulatory requirements is a relatively new and exciting progression in managing post-trade reporting requirements.
Leveraging technology to achieve & operationalize consensus
Technology is especially suited to consensus models given its ability to standardize, at scale, otherwise complicated inputs and outputs. For experts to come together and achieve a consensus view despite so much ambiguity, they must be able to speak a common language. By modeling inputs such as rules and regulations in standardized formats, technology gives a foundation for a common view of the underlying problem, enabling the experts to get to the crux of the problem faster.
Once a consensus is reached on a given topic, it can be operationalized so that the benefits can be realized at scale. This is possible when industry collaboration has defined clear regulatory interpretation and instructions and the technology is a consistent and automated means of execution. Standardizing a model of obligations is therefore another opportunity for the industry to get the most out of consensus through technology.
An Application: Position Reporting
On the interpretation of position reporting obligations, financial institutions have united. Working with Droit, five of the industry’s largest financial institutions have formed the Executive Committee of Endoxa, a consortium of institutions working together to form an industry consensus view of regulatory interpretations regarding position reporting. In the newly established consortium, industry participants are therefore leveraging technology to understand regulatory requirements and align on consequent obligations, enabled by Droit’s Position Reporting product. Droit’s technology platform will then be used to distribute the consensus views through machine-readable outputs for the industry as a whole to utilize. Furthermore, they will benefit from the best-in-class auditability, traceability, and transparency for which Droit has become known over the past decade.
This approach means
- Firms do not have to handle the complex and time-bound position reporting rules alone, helping to mitigate against fines due to incorrect submission of reports and notifications on voting rights
- A shift away from internal black box rules engines with no transparency on how and why positions were included within an aggregate holding / triggered disclosure
- Significantly reduced internal and external legal costs
The industry has a proven track record of delivery via collaboration models, largely through engagement with industry and trade organizations. Technology that is able to successfully join consensus models of interpretation with operational decision-making will enable the industry to adapt to evolving regulatory change. Nowhere is this more applicable than post-trade reporting, a perennial focus for global regulators. The combination of consensus and technology is a powerful means of responding to regulatory pressure in position reporting. We look forward to seeing the impact Endoxa has on the industry and how Position Reporting from Droit can help financial institutions break through regulatory complexity together.
- The Fintech Open Source Foundation