False data marks major risk in achieving compliance with the reporting obligations of EMIR & Dodd-Frank

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Over the last 9 months we experienced a great spike in activities in regards to fulfilling reporting requirements as demanded by EMIR, Dodd Frank Act and country-specific regulation in Asia. DTCC, REGIS-TR and various central counterparties, such as CME conquer the new regulatory reporting world in a global race to win members for their transaction repository services. A huge new business opportunity with a sustainable business model as it provides access to very powerful data and intelligence, which can be repackaged and sold via data licenses, similar like exchanges around the world commercialized the distribution of market data for equities in example.

While there is still quite some work and clarification outstanding in regards to global unique identifiers for entities, transactions and clients, several financial institutions launched the complex integration of their data world with the data architecture utilized by DTCC, REGIS-TR and others as deadlines are showing up on the radar for 2013.

Depending on which regulation applies to a financial institution, different requirements need to be fulfilled, as again, local authorities in the different regions were not able to agree on a single global standard – a situation that seems to be the norm, when it comes to global financial regulation in general. For example the Dodd Frank Act focuses more on real time price transparency for OTC derivatives and on the other side EMIR focuses on full transparency on transaction level data across all derivatives on a T+1 basis.

Besides the different challenges financial institution might need to tackle, based on under which regulation they fall, there is one common show stopper for achieving compliance on time: lack of timely access to accurate and complete data.

The requirement for high-quality and complete data has been around for many years, but still many institutions do not have a central transaction repository for the whole firm. In example a lot of transactions have been confirmed based on paper, or modeled as plain vanilla deals even though they were not. Others are captured as unstructured, not machine readable free text terms & conditions. In addition to that, transaction data is distributed across highly fragmented system landscapes, which prevents a consolidated and complete view on the inventory of the institution.

This all breaks down into four distinct challenges financial institutions around the world are currently facing in this area:

Challenge 1: Consolidated access to transaction level data

Even though initiatives have been launched to establish central data warehouses, most financial firms have transaction data distributed across different silos. In many instances, multiple legal position keeping systems are utilized for different asset classes or business units. However, data will need to be reported as 1 single consolidated data set to transaction repositories.

Financial institutions need to first identify, where relevant data for derivative transactions is located and establish a standardized representation of a consolidated view on each transaction, regardless of the source.

Challenge 2: Complete data

Mainly due to the lack of system capabilities to capture all terms & conditions of a transaction, most data records only reflect a portion of the actual contract. In order to understand the full terms & conditions of an OTC transaction, the actual paper confirmation / contract will need to be studied and interpreted. In many cases, also free text fields have been utilized as a so-called work around to capture terms & conditions in an unstructured way in systems. This is also a circumstance that prevents correct reporting of transaction level data to transaction repositories.

Financial institutions will need to establish a data repository by revisiting all OTC contracts and enter missing terms & conditions either into existing systems or find a technical approach to extend data prior to the submission to the transaction repository.

Challenge 3: Correct data

Due to the lack of proper controls (enforced by systems) and trade capture guidelines (enforced by processes), terms & conditions are captured in many different ways, and often with inaccurate terms & conditions data. We have seen many different scenarios, where deals are modeled as something similar, not considering essential terms & conditions that impact processes, risk measurement and valuation.

Financial institutions will need to review existing data, eliminate any false representations in systems and databases and correct transaction level data with the real terms documented in the confirmation statements.

Challenge 4: Sustainable data quality

While the challenges 1 to 3 deal with data for existing deals, financial institutions will need to implement technology, processes and controls to ensure that transaction level data remains in top quality, complete as well as available and accessible for reporting purposes across the entire firm.

At this point we have integrated several financial institutions with transaction repositories, which is a challenge in itself. Since we have turned this effort into a repeatable exercise through our dedicated methodology, the so-called regulatory reporting factory, we feel very comfortable in guiding financial institutions through the process of selecting and onboarding transaction repositories.

However, the key success factor will be the availability of complete and accurate data when needed. False, inaccurate and delayed data will in our opinion be the single biggest risk in achieving compliance with reporting requirements from Dodd Frank Act and EMIR. Only when financial institutions treat this matter as important and launch the initiative now, set deadlines can be met as demanded by global regulators.