Following its $23 million Series B investment earlier this year, Droit, the technology firm specialising in computational law and regulation, has been chosen by the Endoxa Consortium, a new collaboration of five major global banks, to develop a position reporting and shareholder disclosure utility. The consortium, which includes Barclays, BNP Paribas, Goldman Sachs, HSBC, and another tier one bank, aims to set a new industry standard for position reporting.
The background to the initiative is that historically, financial institutions have tackled compliance individually, leading to ambiguities and discrepancies in position reporting and shareholder disclosures. The Endoxa Consortium seeks to establish a unified consensus on position reporting obligations across pivotal regulatory jurisdictions, thereby streamlining regulatory interpretation.
“The significance of this is in the way that the Endoxa Consortium has come together and in the elevated goal of what the consortium is trying to set as a benchmark for the industry,” says Brock Arnason, CEO & Founder of Droit, in conversation with RegTech Insight. “The idea is to resolve some ambiguities and inform interpretation through their extensive experience, to make sure that grey areas are interpreted with consistency and with the closest adherence to regulatory intent as possible.”
The primary objective of the Position Reporting Utility, claimed to be the first of its kind in the industry, is to enhance the accuracy and consistency of position reporting and shareholder disclosures. Its goal is to mitigate interpretation and implementation errors by employing machine-readable rule logic, established through a consensus model, aiming to not only improve the quality of disclosures but also reduce the risk associated with misinterpretation.
“The initial focus is on shareholder disclosure, i.e. the disclosure of positions of traded securities when they are approaching a long threshold or a short threshold, along with the takeover panel reporting obligations that apply in some jurisdictions,” says Arnason. “Whenever these significant positions are built up, either directly by an institution or on behalf of their clients, they incur local reporting obligations where those particular securities are traded.”
The consensus views on the interpretative aspects of the disclosure rules will be combined with legal interpretation from global law firm Allen & Overy, including legal analysis from aosphere’s Rulefinder SD. Together, these insights will be integrated into Droit’s Position Reporting product, providing users with a codified decision logic for meeting their reporting obligations more effectively and uniformly, while also offering enhanced regulatory transparency and removing reporting uncertainties.
“The way that this normally works bilaterally at Droit is that we take the law as it is and we build a logical, digital reference model so that you can see a decision diagram that’s traceable through to the underlying text,” explains Arnason. “But whereas that process is fundamentally a bilateral one, for this project it becomes a form of best practice and consensus. The process is made more efficient because we start with this reference model, and we engage and explore with these institutions, to arrive at an informed consensus view, which is then underpinned explicitly through Allen and Overy, who write a position memo, enabling us to create a new version of the logic and annotate to that memo, evolving towards something that is faster and better than we could do in any other way.”
Droit’s selection was due to the unique capabilities of its Adept platform, which provides clients with the consensus view as to how rules and regulations are applied, automates the decision-making process, and provides a traceable audit trail for every position assessed. By generating pathways linked to the original source text, this transparency into the logic aims to provide enhanced clarity, increased operational efficiencies, and a repeatable, defendable and traceable process. Platform users can also raise queries regarding nuances in the logic implementation.
“This sort of methodology makes a lot of sense for shareholder disclosure simply because there are literally over 100 different regimes where this takes place, all with different reporting obligations,” says Arnason. “There’s a lot of complexity, but I’m very optimistic that this will be a template for how things could be extended into other domains to bring the same elevated level of compliance. Eventually we want to be able to take further questions and have the consortium as a whole actively engaging with regulators, so that there is an absolute best, good faith, interpretation of the rules.”
The Consortium is now working to find industry consensus on regulatory interpretations for even the largest and most complex financial institutions, with the aim of reducing risk and making organisations safer.
“The goal is not just to reduce institutions’ risk of being fined but to have better, more accurate reporting, which should improve the market transparency for everyone,” states Arnason.
Richard Hempsell, Managing Director and Global Head of Core Operations, Goldman Sachs, commented: “Creating this consortium will enable us as financial institutions to more effectively and efficiently navigate the regulatory complexity of the global Position Reporting rules while retaining each firm’s ownership of the underlying risks. The platform will drive unified standards and support transparent, consistent compliance across the industry.”
Kara Lemont, Global Head of Financial Markets Compliance, BNP Paribas, added: “Endoxa’s work ensures there is a market standard interpretation of the disclosure rules in all jurisdictions globally, which will give institutions certainty that we are meeting our regulatory requirements in a way that is consistent across multiple entities. Regulators and legislators should benefit from increased confidence that rules are being consistently applied. This represents a major step forward for our industry.”
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