Regulatory Transparency—Cutting through the Fog

I enjoy coming home to my kids after a day in the office and having the same conversation each day:

Me: “How was school?”

Kids: “Good” or “Fun”

Me: “What did you learn today?”

Kids: “I learned a lot, but I really enjoyed seeing my friends.”

A circular conversation until I finally ask for more details, which they grudgingly provide. No one wants to hear about my four meetings today when Transformers is on or in the middle of an intense “Where’s Waldo?” search.

Something similar can be said of our ever-changing financial marketplace. Regulations and regulators asked managers the same standard set of questions for quite a while. With the financial crisis of 2008, many new regulations have passed, requiring more details and transparency, but with the same timeframe to report on the information. But with the new regulatory changes approved (DOL Fiduciary Rule, GDPR, Cross Border Derivatives)—some enacted and others soon to be enacted—gone are the days of the standard responses from managers.

Transparency has become the holy grail for regulators. More timely and accurate data reported by the managers with more frequency filings to the regulators is the bedrock principles of these new regulations being passed. Our world has seen many changes over the past 30 years (electronic data delivery, high frequency trading, big data). All of this has revolutionized the investment manager, but regulators have not caught up with the speed of information until now.

Regulators across the landscape (SEC, FSA, ESMA) are introducing new regulations aimed at increased transparency for investor protection and a streamlined, more frequent filing requirement. No one wants a repeat of extreme market conditions (Black Monday 1987, the Dot Com Crash of 2001, the Housing Crash of 2008 and the Flash Crash of 2011), but how can managers manage these regulatory changes? 

Regulators are now asking for more clarity and access to trading activities, holdings, performance, deltas from prior filings and a strong risk management program. In the US, SEC Modernization (SEC Mod) is aptly named for the requirements it has set forth; standardizing and expanding the data sets required for reporting while introducing a format to electronically receive the new filed form (Form N-PORT).  Meanwhile in Europe, Markets in Financial Instruments Directive II (MiFID II) and Packaged Retail and Insurance-based Investment Products (PRIIPs) are two European rulings made with the same intent as SEC Mod. ESMA, the governing body, is requiring new, detailed monthly reports from the managers to be published to the regulators as well as the public for consumption. In addition, PRIIPs will require all funds or products to have a Key Information Document (KID) published. This three-page document provides current and prospective clients details around the strategy as well as a risk profile defined in the ruling.  This is all aimed at giving the client the data and tools necessary to make an informed decision.

As an asset manager, what do you need to do to keep pace?

1. Improve your data architecture. The data required for these new regulations are sourced from multiple sources and potentially disparate systems within the asset manager’s systems and operations footprint (trading activity, positions, holdings, cash and cash transactions, referential data, performance measurement, risk, analytics, etc.). The need for a central data storage or warehouse becomes essential. A central truss and data framework designed to house data stored for reporting and historical purposes will help to streamline the filing process. Proper data mappings and traceability will enable you to “follow the data trail” and meet the increasingly aggressive filing timelines.
2. Implement strong reporting capabilities. More the 50% of the data required in the new filings are already used for operational and client reports. The new data points specific to each new regulation may also become a requirement from clients (e.g., liquidity reporting). A robust reporting engine will enable managers to adapt to the increased data points requested.
3. Stay close to regulatory changes. Regulations are never set in stone, even for those rules that are currently in place. The marketplace is constantly changing and the regulators are continuously enacting new rules or modifying existing rules. Conversations with peers and third parties to monitor the development of the industry’s response to new rulings or proposed ruling changes is the key to compliance. Identifying dedicated resource(s) or appointing a task force to moderate discussions provides many firms with the focus they need to stay abreast of changes.

Addressing the above areas will allow you to be prepared to adapt quickly and efficiently to these changes. Getting more details out of my children may take more work, but stay tuned!