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Financial Services Firms Challenge Regulatory Process During FIMA Debate

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Financial services firms called for a bigger picture of market regulation to help them avoid short-term and resource hungry tactical system changes at last week’s Financial Information Management (FIMA) Conference in London.

A panel discussion, entitled ‘Developing new business approaches and bringing value to customers in the newly regulated world of legal entity identifiers, consolidated tape and central counterparty clearing’, addressed regulatory issues noting the need for longer-term visibility of finalised regulations and a standardised approach to regulation. It also conceded that market participants must push back with their own needs and ideas if they are to influence regulatory processes.

Nick Skinner, senior vice president, data management consultancy, operations and technology at Northern Trust, said: “We are at the coalface and the gap for firms like Northern Trust is forward visibility to plan and support new regulations. We need to plan data infrastructure changes. Tactical changes mean we throw money away as they are made before we see the full regulatory picture that may emerge in five years’ time. We need a bigger picture to make better investments today.”

UBS’s David Berry, representing the Cossiom market data user group, added: “We see issues in IT project planning. Firms sign up with vendors, but then regulation implementation is delayed or changed, and that costs money.”

Chris Johnson, head of product management, market data services at HSBC Securities Services, said: “Working out regulators’ expectations in terms of specific data content can be very difficult. We have worked collaboratively with our competitors to consider the challenge, but if a regulator needs a report the report needs data and that means we have to fill any data gaps.”

Commenting on the process of developing regulation, he added: “Consultations on regulation are publicly available. We need to agree on consistent data content for reporting and go back to the regulators to ensure this meets their objectives. There are industry working groups helping to form a unified response to deliver regulatory reporting such as the Investment Management.”

While the need for earlier and better understanding of regulation was clear, European Union policy adviser David Doyle warned: “The industry meets authors of regulations, but it is often too late. They need to meet when the paper is still blank.”

Arguing the case for regulatory standardisation, Skinner said: “I would like to see more consistent regulation across the world. The G20 could drive this. Without standardisation it is not easy to build solutions and avoid taking a custom approach to each regulation.” Exemplifying his argument, Skinner pointed to Dodd-Frank Title 7 regulation on swaps and similar European Market Infrastructure Regulation requirements, asking why these regulations have not been standardised.

Discussion moved on from the macro to micro level to consider the implications of the legal entity identifier (LEI), which will be part of the Financial Stability Board’s global LEI system, and the CFTC’s Interim Compliant Identifier, or CICI, that has been introduced as a temporary measure ahead of the LEI introduction in March 2013. Huw Bishop, valuations director at BlackRock, said: “Having two codes is frustrating.”

Johnson added: “You need to have nimble technology to meet this kind of demand. If you are not nimble and you do not have the right people, infrastructure and vendors, you will find it very hard to report.”

Raising a ripple of laughter from conference delegates, Skinner said: “We all know that interim codes last a very long time in our industry. Unwinding them is a real problem. The FSB’s Private Sector Preparatory Group is working on this to make sure any interim identifiers adhere to the annex agreed by the FSB.”

Building on Skinner’s sentiment, Johnson ventured: “Let’s make a reality check. We need industry data standards. Most firms do their heroic best to provide data consistency, but delivery of complete, accurate and consistent reference data, as required by regulators will not be easy. This is a very complex area.”

Responding to a final question from panel chair Victoria Winningham of Metalethia on the biggest risk in the market from a data management perspective, both Skinner and Johnson pointed to central counterparty clearing (CCP), particularly for those working with derivatives. Again, lack of time to comply with regulation was noted and Skinner concluded: “The reporting side of CCP is a challenge for many firms. They must clean data, match it to the LEI and make the data correct. The LEI has put the problems of inaccurate entity relationships under the microscope.”

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