Hosted by the SWIFT Institute, SWIFT’s Standards Forum and the London School of Economics (LSE), the day mixed academic presentations with lively panel debate to pinpoint problems and identify solutions around the role and implementation of financial standards.
Keynote speaker commissioner Scott O’Malia of the US Commodity Futures Trading Commission (CFTC) called for greater emphasis on technological innovation to meet regulatory challenges: “Our supervisory mindset is focused on the filing of forms and compliance checks. This is not an acceptable regulatory paradigm in the post-financial crisis world,” he said.
He highlighted as a priority for the CFTC the use of big data and technology and the importance of a coordinated regulatory approach to swaps reporting. Specific challenges, related to the need to improve swaps data quality, develop a system capable of processing and analysing this data, and developing automated risk analytics.
A View across Stakeholders
Columbia Business School’s director of research, Suzanne Morsfield, showed why it was important to get a view across all the different stakeholders when developing financial data collection processes and standards.
Focusing on business implementation, her team surveys regulators, designers, filers and end users, to understand different stakeholders’ experience of how the standards are designed, maintained, updated, and the extent to which there is an effective feedback loop.
Morsfield examined eXtensible business reporting language (XBRL), used for some US Securities and Exchange Commission (SEC) submissions, in more depth to illustrate perception gaps between stakeholder groups. One example was the technology used – asked: ‘Do you consider the standard/format and delivery mechanism to be state of the art?’ the overwhelming majority of regulator respondents agreed, while majority of the filers and users disagreed. She noted: “There’s no right or wrong answer here, it’s about getting the context from all the different stakeholders – they all need to be around the table the entire time.”
A Common Financial Language
High-level issues around the feasibility of introducing a common financial language (CFL) and the shape it would take, to aid efficiency, risk and data management were highlighted by Alistair Milne, professor of financial economics at Loughborough University. He said that creating a single common language is not a realistic proposition, although “movement towards a single common language will be more useful for specific communities of interest and very clearly defined applications.”
One reason for this situation is that transaction-relation standards have not been seen as an industry priority. “It is the deal that matters, as this is where the profits are made. The resources all surround deal execution and, to a certain extent, post-trade processing, and the back-book becomes a secondary issue,” said Milne. “There are huge challenges – none of us are under any illusion that standardisation will be a work of years.”
EU and US Regulation Differences
Stuart Weinstein, head of Coventry Law School, characterised US and European Union (EU) regulatory regimes as being ‘separated by a common language’. “While the two regimes deliver broadly the same outcomes in respect of the key regulatory goals, the devil is in the detail and there may be technical differences,” he said. He noted that there had been an effective use of standards to address ‘knotty’ problems such as shadow banking and a lack of interoperability. “Those standards can make a big difference in terms of showing the regulator the right way of doing it.”
He described different reporting requirements relating to clearing and swap processing, mandatory trade execution and daily trade records. “There are significant differences. However, the problem that we have is that we’re supposed to be aiming towards the same outcome and I have the feeling that’s not going to happen with these differences.”
Andrei Kirilenko, professor of the practice of finance at the MIT Sloan School of Management, examined the intersection of finance, regulation and data, outlining what gets ‘lost in translation’ between business processes created to comply with regulation and their technical implementation.
He suggested that regulators could adopt a ‘safe harbour’ approach to designing operational processes and procedures to deal with operational risk. “They could say: ‘Here is a particular way of doing it and if you implement this, it will give you safe harbour from a regulatory perspective. You don’t have to do it in this specific way but at least it will give you a better understanding of the template underneath it’.”
Standardisation: Problems and Solutions
The panel discussions, chaired by SWIFT’s head of public affairs, Natasha de Terán, examined problems and solutions relating to standards implementation.
One key issue explored was the differing expectations between regulators and banks, with Lindsay Thomas, who was a director at the UK’s former regulator the Financial Standards Authority (FSA), calling for banks to hand control of data structures to suppliers in a bid to become more cost-effective. As he recalled:
“When the European Market Infrastructure Regulation (EMIR) came out, I said ‘go to the back office suppliers, let’s talk data structures’ but they wouldn’t do it. They saw it as giving commercial advantage to a relatively small group of suppliers.”
Barclays’ global head of client and market execution, Brendan Reilly, suggested in response that regulator communication had a role to play in banks providing useful data. “When we implement a client we describe to them in detail what the standard is and how we’re going to interact with them. If they ask us a question about it, we answer them precisely. We also offer the ability for the client to test what we have described. Those things rarely happen on the regulatory reporting side.”
He added: “For me, what’s missing from the regulator is information on what we need to do to meet the requirement. It’s a boon for lawyers at the moment, not because bankers can’t interpret things, but because they feel we need the rubber stamp of a lawyer to say ‘you’ve done your best to interpret it’.”
Collaboration of Standards Bodies
Citing SWIFT’s collaborative standards management platform Mystandards as a good example, Kevin Houstoun, who helped establish the Financial Information eXchange (FIX) protocol in Europe, said that increasing collaboration between standards bodies was key. “We have shown that we can align underlying data models. That means we can now start looking at the harder-to-solve problem of how we address governance and get those two standards bodies to play well together.”
He added that at the same time as fixing technical and governance problems, standardisers also need to consider how they engage with the stakeholders. “Standards can be ‘one size fits all’ but what goes into the standard will vary – exactly as you can use standardised shipping containers for Ferraris, computers or beans – it really doesn’t matter. A very important role for standards is as a technological enabler to enable regulators to do a better job.”
Defining Data Needs for Stability
Euroclear UK and Ireland’s chief executive (CEO), John Trundle, called for regulators to first define what data is to be collected before storing it, especially with the volume of data submitted by firms complying with the Markets in Financial Instruments Directive (MiFID II). “There is a huge number of data items and fields that need to be stored. First they will be dumped in a data warehouse and only then will people consider what is to be done with it.”
Citing the example of JP Morgan rogue trader Bruno Iksil, dubbed the ‘London Whale’, he argued: “We didn’t ask the right questions of the data. It is a really difficult thing to identify because you don’t know the ways in which risk can arise. You need to do that hard thinking at the beginning of the IT project before you design it.”
Houstoun made the point that the academic community has almost no access to financial data, making it difficult to explore measures to prevent future financial crises. “Even regulators have little access across Europe. A consolidated picture is very hard unless you have the smoking gun. [We need to have] a trusted system in place to have bona fide academic researchers to look at these data sets for us. They know what field elements are in the data but can’t see the data.”
Summing up the main takeaways from the day, TowerGroup’s research director, Gert Raeves, noted that the challenges discussed were not to do specifically with the regulatory angle. “They are more to do with the way we as an industry are structured – I think it is more a supply chain problem than a regulatory problem.” He added that the corporates and the vendors represented a missing voice in the debate. The LSE’s associate professor, Dr Susan Scott, said that the evidence-based points introduced by the academics presenting were ‘refreshing’ to hear, adding that standards had a particularly important – and underestimated – role to play in bridging governance gaps between jurisdictions.
Aite Group’s senior analyst, Virginie O’Shea said that the industry needed to move past cultural and political issues, to be able to work effectively together regardless of regulation. Finally, Scott reminded the audience of the collective focus applied by the industry for SWIFT adoption: “We need something of that spirit if we’re to overcome this gap,” she said.
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