By: Elliot Burgess
Financial institutions are navigating an ever-shifting sea of regulatory compliance. This was the resounding theme at recent “Innovations in Regulatory Compliance and Navigating Global Shareholder Disclosure” roundtables, co-hosted by Broadridge Asset Management Solutions and Droit in Hong Kong and Singapore. These events brought together industry leaders to dissect current challenges and explore future trends across shareholder disclosure, trade reporting, and the burgeoning role of AI in compliance.
The Intensifying Spotlight on Shareholder Disclosure
A primary focus of the discussion was the heightened scrutiny global regulators are placing on shareholder disclosure and short-selling activities. Recent regulatory actions against prominent firms serve as stark reminders of the consequences of non-compliance.
Discussions highlighted common pitfalls causing firms to stumble:
- Flawed Aggregation Logic: Incorrectly calculating total positions across different entities or instruments.
- Lack of Automation: Over-reliance on manual processes, which are error-prone and slow.
- Inconsistent Rule Application: Difficulties in uniformly applying complex and varied rules across different jurisdictions.
- Data Silos: “Blind spots” where relevant data isn’t captured or integrated effectively.
The clear consensus was that firms must move beyond reactive measures. Firms can no longer afford “blind spots.” Key strategies emphasized include:
- Embracing Industry Best Practices: The discussion emphasized the critical need for industry best practices, enabled by a consensus-driven solution that reflects established, effective approaches
- Automating Controls: Firms discussed the need to implement robust, automated controls directly within portfolio systems to ensure continuous monitoring.
- Proactive Identification: Technology should be used to accurately identify and report aggregate positions before they become problematic.
- Ensuring Data Integrity: Firms should focus on the quality and completeness of data used for disclosure calculation
- Jurisdictional Nuance: With variances region to region, firms must develop systems capable of handling the complexities of varying disclosure thresholds and rules across different jurisdictions.
Mastering the Evolving Landscape of Trade and Transaction Reporting
Another pivotal area of discussion centered on the evolving requirements for trade and transaction reporting, particularly in light of the impending SFC/HKMA rewrite of OTC derivative reporting rules, set to go live on September 29th. This significant overhaul aims to align Hong Kong with global standards, introducing Critical Data Elements (CDEs), Unique Transaction Identifiers (UTIs), and Unique Product Identifiers (UPIs), alongside updated ISO XML reporting formats and enhanced validation rules.
For market participants, especially on the buy-side, this rewrite presents substantial challenges. It demands increased data granularity, necessitates system overhauls or enhancements, and requires the re-reporting of open positions and trades in the new format. While delegated reporting to brokers or bankers remains common, the ultimate responsibility for data quality and completeness firmly rests with the trading entity. Firms must ensure robust internal processes to capture, manage, and provide accurate data, and maintain diligent oversight of their delegated reporting arrangements.
The AI Revolution: A Double-Edged Sword in Compliance
The roundtable also delved into the “AI Revolution” and its potential to transform compliance solutions. While generative AI and LLMs offer immense promise in enhancing accuracy, efficiency, and scalability for complex tasks like aggregating positions and proactively identifying risks, their adoption in heavily regulated environments is still in its nascent stages.
A key concern raised was the “black box” nature of some AI models, which can hinder explainability and auditability – a critical requirement for regulators. Furthermore, generative AI’s effectiveness is heavily dependent on the quality of input data; “garbage in, garbage out” remains a significant caveat. Despite these considerations, generative AI is proving valuable in supplementing existing technologies, aiding in tasks such as building test cases, summarizing complex logic, and streamlining data processing. This indicates a future where AI will complement, rather than completely replace, human expertise in compliance.
A Call to Action for Proactive Investment
The insights from both the Hong Kong and Singapore roundtables converge on a singular imperative: proactive investment in modern regulatory reporting and disclosure technology is essential. By embracing industry best practices, ensuring data integrity, and strategically leveraging AI, financial institutions can effectively manage complex global and local obligations, thereby mitigating risks and avoiding costly penalties. The future of compliance is innovative, tech-driven, and collaborative.