Meeting the Wave of Regulation: Q&A with Arun Aggarwal, SWIFT

gtnews: Fragmentation in financial services regulation is increasing. What do you see as the main issues resulting from this?

Arun Aggarwal:
We are seeing a tsunami of regulation, which is coming from all directions. Every country realises that there is a requirement to aim for transparent and fair markets, greater capital backing and better liquidity management. In general, we have consistency around core principles. However, just in the European Union (EU), let alone globally, there is already a discrepancy between passing a directive and it being passed into local legislation. In a sense, therefore, we’ve always had regulatory fragmentation – some deliberate, some accidental.

The danger now is that, while principles are agreed, there is an additional layer of complexity brought about by the financial crisis. There is difficulty in tracing where the liquidity really sits and where the control weaknesses are. National exchequers are also focusing on how they can recover some of the losses that they felt they made as a result of the financial crisis.

Another word for describing the fragmentation is ‘Balkanisation’; each country is starting to impose its own controls within its territory to protect against losses, free flight of money and so on. This sort of national or regional control is somewhat militating against the fact that there is relative consensus around the overall regulatory infrastructure.

In this context, which regulations are causing particular challenges for organisations?

The US Foreign Account Tax Compliance Act (FATCA) is going to cause ongoing challenges – it already has to some extent. Secondly, if the proposed financial transaction tax (FTT) takes off, whereby the EU would tax financial transactions if there is an EU participant, how is that going to work? All of this fragmentation, Balkanisation and regulatory arbitrage is playing into a very complex environment, whereby the devil is in the detail. And international organisations have to plot their way through this.

How can organisations respond to this type of challenge?

Trade reporting offers one example. It is an agreed, consistent requirement more or less worldwide to get more transparency and monitor the markets. However, there is fragmentation of trade repositories. For example, a foreign exchange (FX) transaction which involves an EU entity and a US entity, in dollars (USD) or renminbi (RMB), could be reporting into three or four jurisdictions.

What is critical in that space is that organisations don’t have to find a bespoke solution for each of their trade reporting requirements. If they try to do that, the imposition of cost and complexity on the business is going to be huge. They have to find a single solution. To facilitate reporting anywhere, any place, any time, a lot of organisations are working on putting in place internal trade repositories.

Organisations need to embed these compliance and reporting requirements in their business as usual. They cannot include it as an afterthought. That is a recipe for disaster both costwise and in terms of reconciliation. We have seen bigger banks consider putting in place a centralised trade reporting utility to make it simpler.

How can smaller organisations such as corporate treasuries fulfil their reporting obligations?

The introduction of the European Market Infrastructure Regulation (EMIR), which requires dual-sided reporting – as opposed to Dodd-Frank, which is single-sided – means that corporate treasuries and asset managers in the EU have to report, as well as banks. They are not necessarily geared up for that. For smaller organisations it is of course a lot more difficult, costwise.

SWIFT has solutions in that space – one is a version of our core messaging that is tailored to the trade reporting world. You can apply it to an FX confirmation and route it to whichever trade repository you want. The only two bits that we’ve added have been firstly to adapt FX confirmation messages so that they carry all the data that’s needed for trade repositories and, secondly, to create a FileAct service to allow you to file transactions to trade repositories. I’m not saying that it caters for everything, but for a segment of the market it’s definitely a very useful product.

Compliance within financial crime regulation is a key focus for SWIFT at the moment. What are the priority areas in that space?

We’re doing a lot. So far we have concentrated on sanctions screening and sanctions testing. We’re now moving towards know your customer (KYC) and we’re supplementing that with compliance analytics. It’s all around financial crime being the area that needs a lot of attention, to help the industry be much more efficient. More broadly, we’re also supporting some of the more structural changes in the marketplace. For example, trades have to go through central counterparty clearing houses (CCPs) and therefore have to be collateralised. One of the things we’re focusing on is a regulatory drive in central clearing and collateralisation. We’re supporting both through our traditional messaging structures.

Basel III’s liquidity requirements are proving to be an ongoing issue for banks. Is there anything they can learn from corporate treasurers’ liquidity management practices?

Yes, despite the fact that the intraday liquidity is not a requirement for non-financial institutions. For many years, getting end of day cash positions for the whole group reported into the central corporate treasury has been standard practice. The scale and complexity of their operations are not as great as a big bank but actually, in terms of best practice, the big corporate treasuries are already there.

This is because corporate treasuries are part of big international organisations. These big international organisations were facing wafer-thin profit margins. If they could squeeze a little extra from cash pooling across the group, they would do that. Corporates have had to have end of day cash pooling arrangements, cash management and cash reporting, across the group, for many years. I find it ironic that the big corporates have already had to go through all the liquidity management issues the banks are facing now.

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