By Marion Leslie, Managing Director, Pricing & Reference Services, Thomson Reuters
The current barrage of regulatory reforms sweeping the global financial services industry poses an enormous challenge for all sectors. These changes are impacting banks, broker/dealers, insurance companies, institutional asset managers, hedge funds and their asset servicers such as fund administrators, custodians and prime brokers at differing levels but on a similar time frame.
Yet for all the breadth of scope and complexity of the rules being introduced, there are striking commonalities between many of them. Overall there is an inherent desire from legislatures to limit systemic risk, to make the markets more transparent and to fundamentally protect the investor (consumer) from unfair market practices. In particular, the key to compliance lies in leveraging timely, accurate and transparent pricing and reference data.
The financial crisis has focused many regulators’ attention on protecting customers and markets, enhancing corporate governance standards and levels of transparency, and making supervision more effective. In particular, reforms are targeting:
- Transparency and Disclosure: Various regulations – including Dodd-Frank and EMIR, IFRS, UCITS, PRIPS, AIFMD and Form PF – aim to increase transparency and disclosure of exposures to financial markets. FATCA targets transparency and disclosure of underlying investors. Meanwhile, new accounting standards being rolled out by the International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB) focus on measuring and reporting the ‘fair value’ of assets and liabilities.
- Capital Adequacy and Liquidity: Basel III and Solvency II tackle systemic risk by introducing more effective capital adequacy ratios and modelling, leverage and liquidity requirements to ensure banks and insurance companies have sufficient reserves to cope with financial stresses.
- OTC Derivatives Trading: The G20-led initiative seeks to improve trade transparency, reduce systemic default risk and promote market integrity in OTC derivative markets. The changes are being implemented in the United States through the Dodd-Frank Act, and in the European Union through EMIR and MiFID II.
Compliance Through PRD
The central theme running through this welter of regulations is the introduction of onerous new valuation, risk assessment and reporting requirements. To meet these obligations, affected institutions must address a number of common challenges. These include:
- Providing transparency into the methodologies used to make complex calculations
- Ability to map their risk exposures and build their own risk models
- Understanding asset and liability positions at all times so as to maintain adequate capital and liquidity levels to offset risk exposures
- Obtaining and managing pricing and reference data from multiple vendors
- Maintaining a master set of data, and updating it continuously.
To achieve compliance, it is essential organisations fully understand and identify what pricing and reference data they use, how they should use it and the provenance of that content.
Non-compliance for many is simply not an option, as it presents huge reputational, legal and potentially financial risks for organisations and their associated boards. Now more than ever before firms need a reliable and trusted partner to help them meet their regulatory requirements and to deliver the pricing and reference data they need in a format tailored to their business.
One of the most crucial capabilities firms need from their data provider is content transparency, to demonstrate where the data comes from and how it is derived.
In this environment, institutions are also seeking more than one source of price content. And for each of those sources it is important they have transparency into where the prices come from and their relevance. This is why at Thomson Reuters we provide clients with line of sight into the pricing of illiquid securities, details of the benchmarks used, as well as access to market experts who can explain how an instrument has been priced.
If you would like to learn more and to download a whitepaper on IFRS, Form PF, or Entity Risk simply click here: http://www.prdcommunity.com/index.php/special-reports