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Reimagining trade compliance

Carl Carrie
Carl Carrie
Head of Analytics Customer Proposition, Refinitiv

Today’s trading teams are faced with more regulatory change than ever before, and many of these new requirements demand data and analytics outputs. Firms are recognizing that it’s challenging to source and normalize the data needed, as well as to support the analytics processes that generate their own trade compliance demands. How are trading teams turning to data-as-a-service and analytics-as-a-service as new ways to meet trade compliance requirements cost effectively and with agility?

  1. The data and analytics demands in today’s regulations are proving very challenging for firms — poor trade data quality is being flagged by bank supervisors.
  2. Firms will continue to struggle to deliver trade compliance with regulations such as FRTB and MiFID II unless they take a more strategic approach.
  3. By pivoting to trusted data and analytics in the cloud, firms can comply more efficiently and manage future regulatory change with more agility.

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Today, regulatory change is intensive in pace, and the new rules require financial services firms to provide increasingly large amounts of data and analytics outputs to financial industry supervisors. Recent examples include:

These rules require firms to bring together both internal and external data sources, perform analytics on that data, and supply regulators with either the data (as with MiFID II trade reporting) or with analytic outputs (such as with FRTB).

Firms are continuing to struggle with both MiFID II and market surveillance. The issues are so significant that, pre-COVID-19, many EU regulators said they were planning to crack down on poor quality MiFID II trade reporting.

How trusted data will power digital transformation in your trading business

Meanwhile, the UK Financial Conduct Authority (FCA) continues to call out firms for market surveillance monitoring failures in their Market Watch newsletters. While FRTB doesn’t come into force until January 2023, many firms are already concerned about their ability to meet this deadline, because of FRTB’s data and analytics demands.

A new whitepaper from Refinitiv discusses how trading teams are engaging in digital transformation to address challenges in building and back-testing trading strategies, best execution analytics, and innovation.

This blog will explore a fourth topic in the white paper — trade compliance and regulatory change. Trusted data and analytics are essential for meeting today’s regulatory challenges. Having a strong strategy enables firms to become more agile in the face of regulatory change, and to embrace innovative technology solutions that can improve efficiency and underpin growth.

Considering the data challenges

A good case study for the data issues firms face is FRTB, which contains three key data and analytics challenges:

  • Calculating market risk — Firms need access to historical market data that goes back to 2007, at a minimum. This data set must include a wide range of instruments and needs to be normalized with other data sets, such as corporate actions.
  • Performing the new liquidity test — Firms need to identify executed trades and committed quotes within their own data to perform the Risk Factor Eligibility Test. This is very challenging for trading teams, which will have to sift through the data they have and decide how to label individual trade data points. Firms then need to perform the liquidity test analytics.
  • Undertaking the standardized approach — Firms have to classify their portfolio based on the attributes of the instruments they have in it. These attributes are often contained in the terms and conditions of the instruments, which a trading team may not have access to. Misclassifying instruments could have a direct impact on the capital the firm holds, which they have to calculate.

Clearly, getting the data right is essential to obtain the correct result from the analytics.

Jacob Rank-Broadley, Director of Regulatory and Market Structure Propositions, said: “Best practice for meeting all of these FRTB compliance requirements is to have as complete, and correct, a data set as possible.

“Firms shouldn’t just be using their own data — it is likely that their data set will be incomplete. Although the deadline isn’t until January 2023, firms shouldn’t underestimate the amount of work needed to get data up to the right level of quality.”

Many firms are already choosing to outsource their data needs, using tick data in the cloud, to meet these requirements more quickly and easily.

Learn more about Refinitiv FRTB solutions

Reconsidering analytics

Once firms have the right data in place to begin to fulfill their regulatory obligations, they often then need to perform analytics on that data, and report those outputs to the regulator.

These analytics can be simple or complex, and the analytics process itself is subject to reviews by auditors and regulators.

Many firms are recognizing that while it’s essential to perform trade compliance analytics correctly, the analytics themselves are not proprietary in nature. Most firms are taking the same approach.

A good example is MiFID II’s best execution requirements.

Firms need to bring together large volumes of data — intraday quotes across hundreds of venues — to prove best execution for a particular instrument, or to provide regulatory reporting, such as RTS 27 or RTS 28, for example.

For RTS 27, execution venues, market makers and systematic internalizers (SI) must create quarterly reports on the quality of their execution on behalf of clients. For RTS 28, investment firms have to report their top five venues for all trading on behalf of clients.

So, trading teams need large quantities of data, and the trade compliance analytics are well-established and do not provide any sort of competitive advantage to firms.

Refinitiv is already gathering and normalizing this historical tick data — this is fundamental to Refinitiv’s data offering — and so it makes sense to provide data and required compliance analytics in the cloud, and enable trading teams to build their own customized analytics on top, as well. Clients can then access all of this via APIs.

This approach — analytics-as-a-service — can increase efficiencies for firms, and reduce the operational burden on compliance teams, so they can spend more time on value-enhancing activities. In addition, this strategic approach has regulatory change baked right in, enabling the firm to respond with agility to new rules.

How are firms tackling trade compliance?

In summary, the way firms meet trade compliance challenges is changing.

Trading teams are seeking to outsource data gathering and normalization, as well as certain compliance analytics, to the cloud. By taking this more strategic approach, trading teams are able to enhance efficiency and be nimbler in the face of regulatory change — directly supporting their organization’s digital transformation program.

Discover more about Refinitiv market data services