A Baker’s Dozen: 2021 Predicted Compliance Trends
# 1: Emir Reporting in 2021 – Continued Regulatory Focus on Data Quality
Timothy Hartley, Vice President, Regulatory Consulting, Duff & Phelps Ltd.
As the UK leaves Europe, so the regulatory oversight for EMIR Reporting changes, and will pertain to the FCA for UK firms, and ESMA for EU27 based firms.
The improvement of data quality will be at the top of regulatory oversight agendas. The FCA (and other NCAs), keen to avoid further public criticism of their own EMIR reporting supervision, have been increasing efforts and personnel numbers behind closed doors to improve their productivity in this space. Raising the matching and pairing success rates of the Inter-TR Reconciliation will also be high on the regulatory agenda.
During 2020, EEA based firms saw relatively few changes to EMIR reporting, and whilst this gave some much needed respite for technology and regulatory change teams, a period of relative regulatory calm gives NCAs a level playing field of reasonably ‘clean’ data, from which to assess how firms are performing, specifically, how high is the quality of data that is being reported. NCAs will focus on the accuracy, consistency, timeliness and completeness of valid reporting submissions.
2020 also saw the latest round of changes from EMIR Refit go live, and so NCAs will be keen to check that ‘mandatory’ delegated reporting is being met, and that firms adhere to the same reporting standards as they do for their own reporting. Firms will be expected to keep up to date with the next round of EMIR Refit changes, which will be published by ESMA in Q4 2020 or more likely Q1 2021.
Overall, prudent firms will need to review their own EMIR reporting data, but also the accompanying process controls, governance arrangements and crucially data reconciliations, to ensure they are well prepared for regulatory scrutiny, and to see that their data quality remains high.
#2: Best Execution Obligations for RTS 27/28
Evdokia Pitsillidou, Risk & Compliance Director, SALVUS
By the time the COVID-19 pandemic had become to cripple Italy and other EU nations, on the 31st of March 2020 the European Securities and Markets Authority (‘ESMA’) announced an extension to the Best Execution obligations for the RTS 27 and RTS 28 reports. This decision was taken by ESMA as an acknowledgment of the fact that the affected firms, had to deal with the unprecedented crisis and had to prioritise their resources and efforts. This decision was also taken amid concerns for their cost, revelations that investors rarely read these reports and a market-wide perception that no meaningful comparisons were derived from the data.
Within 2021, on the 3rd annual anniversary of the introduction of the Markets In Financial Instruments Directive (MiFID II), the European Commission will review its implementation. In its review, the Commission will assess whether the requirement for firms to produce and publish these reports should be permanently removed or whether these reports shall be re-introduced with a revised format.
Market participants must be expecting changes in these regulatory obligations during the year 2021, given the above. Stakeholders are well aware that any decision by the European Commission and ESMA, to remove or revise these reports, must not be seen as lessening investors’ protection. Thus we expect the Commission to ensure that investors will receive the necessary information concerning their Best Execution right through one report or another.
#3 – Trade Reporting in APAC – The Difference a Year Can Make
Oliver Williams, Regional Head of DTCC Repository & Derivative Services, Asia
In April 2020, the Monetary Authority of Singapore (MAS) announced a raft of adjustments to their regulatory programs in response to the growing Covid-19 pandemic. One of these adjustments was the postponement of the MAS’s final phase of OTC derivative trade reporting requirements by one year to 1 October 2021. Now, it is time to consider what this postponement means for the coming year.
First, it is important to note that the vendor landscape has changed significantly over the past 12 months. The last compliance date for MAS reporting was October 2019 and the majority of new firms required to report at the time did so leveraging a trade repository directly. While there were vendors offering reporting solutions, they were not as active in Singapore and their presence in the APAC region was limited. Fast forward a year and the story is very different. A number of vendors are now firmly established in region, having picked up a number of clients as firms moved their reporting from the CME to DTCC in Australia.
Second, we are seeing reporting entities increase their focus on technology stacks. Increased regulatory scrutiny and lower tolerances from compliance and risk functions, combined with a need to drive down costs, are all contributing to greater recognition that a way to solve for these challenges is through investment in re-architecture programs, best-of-breed solutions and innovative technologies.
As a licensed trade repository in Singapore, we expect to see additional trade reporting flows coming to us through our vendor partners as firms get ready for the next MAS trade reporting deadline and we are well placed to support these mutual clients. We also expect that, as compliance pressures grow, the demand for services to help with the complexities of pre- and post-reporting activities will continue to increase. We will be watching how these trends in vendor adoption progress as we move through 2021 and beyond and the raft of reporting rule re-writes that are widely expected to come into force are introduced. Will we see these trends continue and the reg-tech industry grow both in terms of size and capability? It certainly looks to like it.
#4 – Mifid II – Tools to Master the Profession
Ron Finberg, Regulatory Specialist at Cappitech
2020 taught us the lesson that having analytic tools are a key product for monitoring transaction reporting. With most compliance and operations personnel working from home this year, dashboards provided a visual tool to better monitor submissions.
For MIFID II, analytic tools helped spot reporting NACKs due to product ISINs and client identifiers failing to be updated. In addition, visual dashboards assist in spotting reconciliation breaks between front and back office solutions.
In 2021, many firms have updated their BCP procedures and fall backs to better handle remote and work from home environments. I believe that part of this change means putting in place additional monitoring tools for managers to review that daily tasks are being completed. Also, analytic tools will help companies adapt to regulatory continuity questions regulators will be asking about how firms are complying with transaction reporting and MIFID II obligations when working from home.
#5 – SFTR – The Journey Continues
Pierre Khemdoudi, Managing Director at IHS Markit
In the second half of 2020 we saw the first three phases of SFTR and Brexit being implemented, keeping us and our clients extremely busy. Looking ahead to 2021, we are expecting to see the market participants focusing further on the quality and the monitoring of the reporting.
We are also expecting our clients to leverage the new workflow features we have provided them, to not only improve the monitoring of the reporting but as well enhance their post trade processes.
#6: Regulators Doubling Down on Remote Work
Oliver Bradford, EMEA Sales Director at Shield
Home working will continue to be vital in 2021, to protect health but also for convenience and cost savings. For Financial Services this creates some huge challenges coming in to 2021, regulators such as the US Securities and Exchange Commission (SEC) and UK FCA have confirmed they are doubling their efforts to crack down on breaches, such as Insider Trading and employee conduct, despite the extraordinary circumstances.
Home working adds new temptations for rule-breaking when employees are outside the physical surveillance of financial firms, so powerful automated surveillance systems (which understand nuances of language, sentiment and behaviour) are essential, and will continue to be so even when strict social distancing restrictions begin to be lifted and remote working becomes an integrated part of the financial industry landscape moving forwards.
#7 – CSDR in 2021
Pardeep Cassells, Head of Financial Products, Access Fintech
With feedback expected from ESMA to resolve outstanding queries and confirm the regulation’s requirements, clarity on the CSDR Settlement Disciple Regime requirements will be a key milestone as we head into 2021.
As we progress through the year, firms will simultaneously work to ensure settlement efficiency and build to meet the needs of CSDR.
Data driven collaboration to permanently manage down mismatch and fail volumes will see increases in matching accuracy and timely settlement. More organisations will benefit from vendor services, such as through AccessFintech’s Pre-Matching and Settlements offering, using these to aid collaboration with peers and service providers to minimise inter and intra-firm queries and to reinforce processing. The key objective will be to remediate thematic issues that would otherwise lead to penalties and buy-ins from February 2022.
Best practice standards for operational adherence to CSDR will be published by the AFT CSDR Implementation Working Group for validation and distribution by market bodies to benefit the broader market in Q1 2021. The organisations in this group (and any firms who are in implementation phase) will spend most of 2021 actively testing their solution.
The rest of the market will spend this time selecting their CSDR solution and moving into implementation phase. This will mean less time for testing but they will benefit from tried and tested solutions without investing the effort required by early adopters.
One thing is for sure, all businesses impacted by CSDR have a lot of work ahead of them.
#8 – Regulatory Change in 2021
Rob Fulcher, Head of Sales, Americas, Cube
Regulatory change in 2021 looks set to be a demanding and potentially challenging area for financial institutions (FIs). Over the course of 2020, as a result of the pandemic, we’ve seen countless regulatory and policy changes, as well as guidance and consultations
put on hold. Regulatory bodies have acted with leniency and generosity – allowing FIs space to grapple with the looming challenges presented by the pandemic. In 2021, however, the regulators look set to jump back into action – potentially buoyed by the promise of a vaccine on the horizon.
Messaging from global regulators seems to suggest that 2021 will be a busy year; not only will the on-hold changes for 2020 be put back in action, but regulators will no doubt be looking to implement guidance and policies around the new post-Covid world.
What does this mean for financial institutions, especially those working within regulatory change management? It means an increased workload with potentially reduced resources and budget. With that in mind, 2021 will likely see an influx in automation as FIs look to minimize output on administrative tasks and make the most of their highly skilled compliance team. AI has come a long way in the compliance space over the last few years, and FIs are opening their eyes to the value it adds within the sphere of regulatory change – 2021 will likely see a digital evolution in this space, with regulatory intelligence set to become mainstream.
#9 – 2021 EMIR Developments – What’s Next?
Silvia Morales Ivorra, Head of Product Management, REGIS-TR
The greatest EMIR development of 2021 is just around the corner, with Brexit enforcing redirected reporting for EMIR to be through a UK trade repository. The initial teething issues and adjustments projected after the UK go-live will take some time to iron out until all UK reporting obligations are sufficiently met and successfully reporting. Following this, we can expect that moves are made to fully align UK EMIR with EU EMIR. In this regard, a lot of 2021 will be spent adjusting to this new way of EU/UK EMIR reporting and smoothing out any issues.
Beyond Brexit, we do not expect considerable regulatory changes to be implemented in EMIR. Regulators, TRs and reporting firms alike are preparing for the challenge of adapting data in line with the new rules of REFIT. In addition, the participants must ensure the continued consistency of the transactional data that is reported prior to the REFIT go-live. We can predict that a lot of focus will be concentrated on ensuring market readiness allowing for an effective and successful initiation in 2022 and replicating (or even improving) this with a view towards a UK REFIT.
Beyond Brexit and REFIT, regulation modifications of validation rules or updated Q&As can still be anticipated for both EMIR and its sister regulation across the channel.
#10 – 2021 MiFID – More Changes to Come
Nik Volpe, Managing Director and Founder, Laurellis Associates
2021 is expected to be another busy year for handling MIFID II transaction reporting, both in the UK and EU. This is due in part to ESMA’s final report on the Consultation Paper (“CP”) published in September 2020 which proposed amendments to transaction reporting under MiFIR. While all the proposed changes may not be enacted, they are considerable and cover: 
- The scope of entities subject to the obligations, to include UCITS ManCos and AIFMs
- A clarification of reporting obligations for branches of EEA entities
- The widening of the obligation for NCAs to share transaction reports
- Increasing the scope of reporting to include derivative instruments traded through an SI
- Replacing the reference to “index” in Article 26(2)(c) with “benchmark” as defined under the Benchmarks Regulation
- Extending the concept of TVTIC to transactions executed by an SI
- Linking the client and market sides of transactions executed on a trading venue or by an SI
- Removing the short sale indicator
- Extending the reporting of pre-trade waivers to transactions in non-equity instruments executed by an SI
- Amending the obligations for reporting transmission of orders
The CP also outlined proposals to further align MiFIR with EMIR, with particular reference to data standards.
The proposals outlined by ESMA are not insignificant and coupled with Brexit related changes and the potential divergence of reporting regimes, 2021 is going to be another busy year for transaction reporting!
#11 – Evolving with Compliance: Compliance Management and Digital Regulation
Evgeny Likhoded, CEO and Founder, ClauseMatch
1. Collaborative functionality
Thanks to COVID-19, the need for internal communication and collaboration has gained even more traction. Firms have had to change and implement regulatory and government guidance into their business continuity plans, policies and processes regularly. They have also needed a way to communicate this with employees. These drivers have spurred the adoption of collaborative tools that allow people to work remotely together on documents and content while using centralised repositories to help with employee communication. We expect this demand to increase going into 2021.
2. Digital Regulation
2020 turned out to be a big year for SupTech (supervisory technology) and digital regulation. For firms that have multiple regulators that are supervising them, it’s hard to keep abreast of the rules because they are published in different formats and forms. The regulator also finds it challenging to collaboratively work internally on the changes to the regulation and guidances and then communicate them efficiently. The use of AI and innovative technologies completely transforms all of the outdated practices. We expect further advances in this space and will hopefully see regulators all over the globe collaborating in a better fashion.
3. Sales cycles are going to shorten
We are seeing that RegTech is experiencing a tipping point, and this trend is going to continue. Besides Covid and remote working challenges, an even bigger focus on conduct from the likes of the Department of Justice in the US and the FCA in the UK will speed up buying decisions.
# 12 – Crypto Goes Mainstream
Mark Kelly, Regulatory Advisor to Cappitech
The long-awaited institutional adoption of cryptocurrencies will continue to gather pace. This has already taken the form of corporations investing a portion of their reserves in Bitcoin and asset managers adding crypto exposure to their funds. Supporting this move are the notable improvements in the regulatory framework around custodial solutions and customer verification. One of the main drivers is flight from the inflationary effects of national stimulus packages. Unlimited fiat money printing makes Bitcoin, with its constraints over supply, look like an attractive hedge.
The institutional influx will see individual investors and hobbyists increasingly squeezed out. Prices are rising to the extent that some retail investors may already be unable to own a full Bitcoin in their personal account. They will also be blocked in the UK from accessing leveraged crypto derivatives after the FCA ban comes into effect in January 2021.
Finally, governments are actively considering the use of central bank digital currencies, to gain the benefits of the blockchain while retaining control of the money supply. China is well-advanced in their pilot program for a digital Yuan and the rest of the world doesn’t wish to get left behind.
#13 -Bonus Trend: Regulatory Reporting – Getting a Head Start for 2021
Ronen Kertis, CEO & Founder, Cappitech
As we can see from our esteemed colleagues in this blog, the reporting challenges we are about to face in 2021 are ample. We are vividly reminded that that the regulatory burden will not be slowing down, and no one will be twiddling their thumbs in the months to come. But like in every discipline, there are those with the foresight to invest in reducing the friction and taking control of the process – be it by implementing the right technology for the problem, putting efficient processes in place and/or surrounding themselves with who to rely on to fill any gaps they may have. This should be the mindset for regulatory reporting in 2021 and beyond. No more relying on antiquated systems or processes and putting patch over patch as new regulations come out or changes to old regulations are introduced. No more stumbling around in the dark without the right understanding of regulations and their nuances or knowing how their peers are coping with the exact same issues. This year should be a year focused on increased reporting efficiency and CAT (complete, accurate and timely) reporting as a start. Furthermore, for those looking to get ahead, take the time to find ways to use your compliance data more productively and to make data-driven decisions that drive your compliance success. Finally, no man is an island and selecting a trusted partner to close any knowledge gaps or to give you the right support to help you succeed in your reporting is not only smart but very advisable. Good luck and always here to answer any questions.
