Industry leaders gather to discuss the importance of consensus for regulatory obligations

By: Stuart Billingham

At the end of November, Droit and Goldman Sachs hosted an educational panel session on the importance of consensus around complex regulatory obligations and the role technology can play. The panel, “Endoxa and the Power of Industry Consensus for Shareholder Disclosures,” was convened to celebrate the newly launched industry consortium, Endoxa, made up of six leading financial institutions, including Barclays, BNP Paribas, Goldman Sachs, and HSBC.

The highlights that unfolded during the well-attended session are detailed below.

Importance of compliance
There was overwhelming agreement that in the realm of compliance, which market participants consider a domain of regulatory risk rather than operational advantage, there was great merit in establishing a consensus around complex regulations with other leading organizations.

Financial institutions clearly need to ensure they meet their regulatory obligations. Building a collective understanding of the nature of these obligations is extremely valuable to their compliance functions. Equally important is having a traceable decision process anchored in the regulatory obligations. With Endoxa, members take comfort in convergence to standardized rule interpretation, systematic and constructive regulatory engagement, mutualized legal support, and implementation of industry best practices. Droit’s Adept platform enables decision traceability with a visual representation of the rule logic that is annotated to underlying regulatory text or interpretive memos. Ultimately, there can be no gaps between theory (understanding of the law) and praxis (generation of reports) in regulatory disclosures.

Financial institutions using the Endoxa model have confidence they are taking decisions consistent with regulatory interpretation that has been reviewed and approved not only by their legal and compliance teams, but also by a quorum of industry experts. This consensus mitigates not only legal and compliance costs but, much more importantly, operational risk.

Why start with position reporting?
Global position reporting obligations provide a strong initial use case for Endoxa. Global position reporting rules require market participants to report securities holdings to regulatory bodies. There are several hundred rules covering multiple jurisdictions and falling under the remit of dozens of regulators, each of whom require submission in a different structural format. The process is complex, time-consuming, and creates duplicative effort across the industry.

Indeed, even the terminology around position reporting is complex since firms use widely varying nomenclature to refer to this set of obligations. Some names include shareholder disclosure, disclosure of interest, equity aggregator, large holdings, or threshold reporting. These obligations affect all financial market participants who hold significant positions in equity instruments or other publicly listed securities.

There is a lack of consistency when it comes to organizations’ interpretation and implementation across the industry. Complexity arises from the disparity in specification between rule definitions and the specific criteria essential for your internal systems to accurately determine each of your held positions. Consensus interpretation helps to determine the difference between what would and would not count as a disclosure, bridging the gap between regulatory specification and operationalized decision model. By establishing a forum to combine industry knowledge with legal best practice (aosphere analysis and Allen & Overy engagement), the Endoxa consortium has the opportunity to solve a problem that is both high-impact and well suited to a multi-tiered consensus model.

What is Endoxa trying to solve for?
The meaning of Endoxa comes from a concept discussed by Aristotle, referring to the opinion not of individuals but the consensus of the population.

The purpose of these six leading banks coming together to form the consortium is to establish consensus interpretations of complex regulations, with position reporting as the first use case. It is a collaborative venture underpinned by a technology platform that operationalizes the consensus view and provides transparency and traceability from the decisions made to the underlying digital regulatory text. It seeks to tackle problems that lend themselves to the pooling of resources, expertise, and cross-referencing of opinions, which can significantly reduce the cost and mutualization of risk while creating efficiencies and economies of scale.

A consensus approach is forged through the examination of observable text, followed by informed expert opinion and engagement. Remaining ambiguity may be addressed through direct and constructive dialogue with the relevant regulator in the case of any outstanding questions. The technological component of Endoxa’s consensus builder is harnessed through Droit’s award-winning, patented Adept platform, which can be embedded within an organization’s decision-making systems for disclosures. Consensus can drive primary decision-making, report generation, or simply clarify in-house understanding. If a firm needs to evidence its decision-making through a process of internal or external audit, the records generated by Adept provide direct and versioned source attribution.

What other industry challenges?
Similar to position reporting, there are other types of regulations suited to the Endoxa consensus model. Transaction reporting could be one such domain due to its broad industry impact, heavy regulatory scrutiny, complex decision space, and stringent requirements. Tax reporting represents another regulatory space where the consortium approach could provide value.

Uniting together
By uniting industry participants in a collective effort to standardize rules, the Endoxa consortium provides a framework for financial institutions to demonstrate a systematic, structured, and transparent decision-making process to their regulators. Consensus, in this case has become a very powerful tool indeed.

To learn more about the power of the consensus model or find out how to join Endoxa, reach out to us here.