Data Management Blog
Financial firms remain at a familiar crossroads when it comes to the technology they implement: build something proprietary in-house or buy in a solution from sector specialists.
However, highlighted no more so than on this very blog, one of the things that differentiates the current position of financial services industry is the sheer amount of regulatory change taking place. On what sometimes feels like a daily basis, regulators change rules, adapt them, tweak them and, in some cases, create entirely new rules by which the entire industry must react and adapt to – or face the consequences.
For in-house technologists at these firms this presents a problem. Just like the Dodo, proprietary solutions must evolve to the changing landscape around them or face extinction. A Darwinist evaluation of in-house teams will reveal a graveyard of solutions which simply couldn’t stand the pace of the industry in which we work. Too often, the frequency of market, regulatory and client driven change adapt too quickly for such solutions to keep pace.
This situation, combined with the current and sweeping pace of change within capital markets is prompting many firms to now look more closely at the viability of their current operations at an application level.
The keyword here is future proofing. A great deal of IT and resource investment is spent on overly complex and expensive systems to address this issue. All too often such systems have been built in house are no longer fit for purpose and usually uneconomical and time consuming to maintain and expand as new instruments come on board, as trading volumes increase and as factors change with the acquisition of new business lines.
So what’s the alternative? A vendor supported and maintained commercial product. But before diving into the vendor space, ask yourself what such a product must look like.
Obviously anything you implement must cover what today’s requirements – but your proprietary solutions are built with these requirements in mind. The question is, what might the future look like? For example, what asset classes might you be trading or what regulatory changes are coming into view on the horizon.
Stare into your crystal ball for a moment, you’ll need something that can integrate seamlessly and easily with a broad array of applications across your firm, scalable enough to meet current business needs and future performance requirements – which will differ according to the various consuming business units.
The industry is constantly evolving – if you’re technology isn’t prepared to do the same then you face a Dodo-esque future.
With Form PF, the SEC’s 42-page compliance directive that requires hedge funds, liquidity funds and private equity funds to report detailed trading positions and risk profiles within their portfolios, required to be implemented this year, the alternative investment industry now finds itself firmly in the regulatory spotlight it would no doubt rather have avoided.
As a consequence, it’s now fundamental that the shadow banking sector publically address the extent to which portfolios are exposed to risk. But transforming the formerly opaque into the transparent will require not just a technical shift in how to manage the new reporting processes mandated under Form PF, but also huge cultural change. Firms will need to get more comfortable with compliance, whatever form it comes in, and the tools that enable them to achieve it. This is especially true given that the current systems employed across the alternative investment industry were not designed to collate, capture and aggregate detailed data on VaR and liquidity from multiple sources.
Certainly the technical and cultural overhaul brought about by Form PF demands immediate investment. A quick and dirty solution to this is not the quick and easy option; it’s just sticking plaster. Preparing for the longer-term calls for the right systems, the right attitudes, and most importantly, the right data in place from the outset. Above all, efforts must be focused on ensuring a robust validation process, ongoing controls and transparent audit trails around the data required for Form PF – these are processes that can no longer be avoided or hidden from view.
Although much effort was expended attempting to dilute the ambitions of the regulators, at Asset Control, we see this directive as a step in the right direction as it aims to create a better understanding of systemic risk – something that has been managed ineffectively in recent years and seen even the mighty fall. But what the regulators don’t explain what they are going to do with this information, this data didn’t exist before and now it will be landing in the laps of regulators without an explanation as to the benefits of such reporting. At least with a tax return, you know where you are…Indeed, the success of any long-term strategy will hinge on having complete confidence in data that is truly accurate given that Form PF is not the first, and certainly not the last, regulatory development to present fresh challenges for financial institutions operating in the alternative investment industry.
Are you sitting comfortably? Are you ready to be served another regulatory delight?
In the spotlight this week, we’ve brought some tax regulation to the forefront. The Foreign Account Tax Compliance Act, or as it’s more commonly known, FATCA, requires foreign financial institutions (FFIs) to gather sensitive data, including balances, receipts and withdrawals, on US account holders and identify accounts for the purpose of reporting to the Internal Revenue Service (IRS). As is commonplace with regulatory changes of all flavours, data requirements go far beyond the current mandatory tax requirements on financial institutions.
However it’s not just more data that binds together the plethora of new regulations facing the financial markets, but also the increasing focus on the quality of data held and analysed by financial institutions. Indeed, as regulators strive for transparency, quality data is the fundamental ingredient to ensuring that new regulations, from FATCA to Form PF, effectively measure and manage what they propose to.
At Asset Control the importance of quality data – what we call Triple A rated data (that has no chance of being downgraded) – has never been underestimated.
Although investment is required to achieve Triple A rated data, the cost of not having it is even bigger; for example, under FATCA, a withholding tax of 30% will be applied to payments made to FFIs if they fail to report or inaccurately classify clients, and that’s without even mentioning the reputational damage that can far outweigh any fines or other financial penalties.
So, if your systems are feeling the stress with FATCA compliance then the indigestion will only persist when it comes to stomaching the full menu of regulatory initiatives being served to the global financial markets. Firms must ensure they have the key compliance ingredient in stock if they are to confidently manage the onslaught of regulatory changes they face in 2012 and beyond.
We all know that data volumes have gone intergalactic in the past few years. Businesses have to get more data, do more with it, more often, and in a shorter timeframe. There is much greater demand for real-time understanding of valuations, exposures and risk. Both investors and regulators want more transparency and proof that management has put adequate operational procedures, controls and risk checks in place. Regulatory arbitrage is out of the question: demonstrating that a consistent approach is unavoidable.
That’s a huge increase in operational complexity – and it is no longer something that can be avoided, ignored, or delegated down the chain of command. This is more than data management – this is data governance. And just like corporate governance, it goes all the way to the top of the organization. It might be operationally complex, but that doesn’t mean that ownership should remain in operational departments.