Over the course of 2017, risk management systems were guided primarily by regulatory updates – but in 2018, the provision of solutions has been utterly defined by those changes. According to researchers at the Boston Consulting Group, financial institutions are now forced to cope with an average 200 regulatory revisions per day. As several key pieces of legislation come into effect throughout 2018, risk professionals are facing more pressure than ever to leverage trusted sources of financial technology to meet these fresh obligations and avoid the financial and reputational risks associated with non-compliance.
On 3 January 2018, firms were forced to adapt to the sweeping changes introduced by Mifid II and it’s new rulebook – which stretched to 1.7 million paragraphs. From new guidance on investment research and dark pools, to transaction reporting and a refreshed regime designed to create a new culture of post-trade transparency, the reliance on fintech vendors for pre and post-trade data management has skyrocketed. A 2017 survey conducted by Thomson Reuters found firms were anticipating spending up to 30% of an average annual $119m regulatory compliance budget adjusting to the directive during 2018.
Yet demand for data intelligence throughout the year extends far beyond Mifid II. Its January implementation coincided with the EU’s new Benchmarks Regulation, which has been rolled out to improve the quality of input data and methodologies to create more accurate benchmarks. The EU’s Packaged Retail and Insurance-based Investment Products (PRIIPS) legislation also came into effect at the beginning of the year with a view to strengthen rules about the information included in key information documents (KIDs) that retail investment and insurance providers extend to clients. Many fintech applications have subsequently been tweaked and upgraded to allow for the new environment.
Compound those changes on top of the May 25 implementation of the General Data Protection Regulation (GDPR), the Fundamental Review of the Trading Book (FRTB) and its strict rules for the treatment of market risk in 2019, the revised Payments Services Directive (PSD2), Financial Transactions Tax and the Securities Financing Transaction Regulation (SFTR), and it’s fair to say firms have needed to heavily invest in the deployment of holistic onboarding risk management solutions now to ensure compliance in the months and years to come. This means, in terms of a chief risk officer’s wish list, effective software solutions in 2018 must come equipped with infrastructure that’s rationalised at the data level and can streamline multiple reporting requirements while offering improved insights on business exposures.
Many of these solutions are still in development or are in the process of being rolled out via a range of government-backed regulatory sandboxes in key jurisdictions. Yet other systems are already widely available from existing industry players. Of note, collaborations have sprung up to help deal with the regulations. One such arrangement provides a detailed systematic internaliser (SI) registry that ensures Mifid II compliance by allowing SIs to register their products. The registry is designed to ensure the correct counterparty is recording all trades and allows buy-side firms to identify which brokers must report a trade upfront. The service also integrates all required sources for reference data into a single schema so that institutions can incorporate it into their enterprise data management systems, trading platforms or regulatory reporting. Elsewhere, risk management technology providers are offering the increasingly holistic approach by providing integrated platforms that ensure compliance with regulatory adjustments like Mifid II and new know your customer (KYC) rules across jurisdictions.
With the full implementation of Basel III regulations looming on the horizon for January 2019, credit risk and transparency will also continue to be a key theme over the next six months. Basel III is set to introduce tighter capital requirements, new leverage and liquidity rules and fresh countercyclical measurements. The rules will place an extra burden on institutions to utilise an expanded range of risk models that factor in information like the demographics of borrowers and quality of collateral to manage the risks that go hand-in-hand with lending.
There are a number of solutions already on the market fully equipped to compensate for that demand, and some notable providers have pushed real-time credit reporting and transparency to the next level by embracing blockchain applications. These sophisticated systems enable firms to act as agents to publish data on loans and deal positions to the ledger, in order to streamline the communication process, maximise transparency and minimise operational risk.
Of a similar vein, risk managers need to place additional focus on trade-based money laundering and fraud from 2018, particularly in the UK. Experian’s 2018 Global Fraud and Identity Report found that only 54% of more than 500 firms surveyed were “somewhat confident” in their ability to detect fraudulent activity. Yet with a host of new regulatory measures introduced over since the beginning of 2017 – including 5AMLD, the Criminal Finances Act 2017 and new cybersecurity standards at SWIFT – financial institutions need to be able to display robust assessments around fraud. Compliance in many jurisdictions now requires firms have the ability to identify illicit money and fraudulent activity in real time. Fortunately, an emerging crop of software solutions are able to provide that identification through tracking inappropriate invoices, as well as the introduction of digital due diligence and trade finance compliance.
A number of systems fulfil these requirements – enabling firms to fully monitor fraudulent activity and calculate the financial risk and exposure related to fraud. In a number of instances, clients can not only monitor market activity around trades, but also simultaneously utilise real-time communication data to highlight and containerise communication activity for regulators without breaching global jurisdiction requirements.
These technological collaborations between service providers will undoubtedly become more commonplace as time passes and CROs work to centralise internal risk intelligence while linking data from existing legacy platforms in order to drive better decision-making. Firms need complete solutions that connect and manage compliance mandates, mitigate enterprise risk and strengthen internal auditing capability. In 2018, that all-in-one shop is starting to take shape through compatible add-ons that work alongside existing systems to optimise risk management. By deploying collaborative solutions, financial institutions will be able to improve their time-to-market, minimise the risk of regulatory non-compliance and gain a competitive edge over other industry players.