2024 Regulatory Reporting Trends and Predictions

# 1 – Crunch year for digital regulatory reporting

   Tara Kruse, Global Head of Infrastructure, Data and Non-cleared Margin, ISDA (International Swaps and Derivatives Association)

In 2024, the upgrade of the global derivatives regulatory reporting framework will gather pace as Japan and the EU make changes to their reporting rules in April, followed by the UK, Australia and Singapore later in the year.

This critical batch of rule changes follows the implementation of the first phase of revisions to the US Commodity Futures Trading Commission’s (CFTC) swap data reporting rules in December 2022. The rule updates incorporate globally harmonized critical data elements developed by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions. If widely adopted, these global data standards will pave the way towards a more harmonized and effective reporting framework that will enable regulators to build a clearer, more consistent picture of derivatives market activity.

However, the data standards and rule updates don’t complete the job. Once rules are amended, market participants need to implement them in a consistent, unified way. If every entity makes its own independent assessment of the rules and develops its own reporting logic, further inconsistencies will emerge in the way data is reported. That’s why ISDA developed the Digital Regulatory Reporting (DRR) initiative, which leverages the Common Domain Model to transform a mutualized, industry-agreed interpretation of the rules into human-readable, machine-executable code. The DRR was launched last year ahead of the CFTC rule changes and, throughout 2023, we’ve worked with our members to adapt the code to support implementation of other forthcoming rule changes.

The DRR represents a step change in the way regulation is implemented, giving market participants a powerful way to reduce inconsistencies and inefficiencies in their reporting to trade repositories. As derivatives reporting takes center stage in 2024, ISDA will continue to work with market participants to maximize the benefits of the DRR.

#2 – SEC 10c-1

  Tom Veneziano, Product Director, Head of North America Product, Pirum

As the industry heads towards a new year, tradition dictates that we look forward to the changes which lay ahead in 2024. With the ever-changing regulatory landscape, there are a couple of developments that are likely to dominate people’s agendas. The first will be the standard settlement cycle for most securities’ transaction across North America markets being shortened from two business days (T+2) to one business day (T+1). The accelerated settlement cycle will take effect on May 28, 2024, and includes the U.S., Canada, and Mexico. Although the industry has been preparing for this for the better part of 2023, there are many challenges yet to be resolved. In the securities lending space, recalls are at the forefront of discussions. What will be the agreed cut-off times for issuance of a recall? Best practice states 11:59 P.M. on trade date, however, this is not supported by Master Securities Lending Agreements. Will the market come to an agreement on timing? One more thing to look out for in 2024 will be the outcome of consultations concluding in the EU and UK as well as India on a move to T+0.

As if T+1 was not enough, let us not forget about another new rule coming down from the SEC: rule 10c-1a on the reporting of securities loan transactions. Fortunately, the SEC did listen to the comments from the industry and adopted an end of trade date reporting requirement as opposed to the originally proposed 15-minute window to report. That said, the industry must not get complacent with the January 2026 compliance date as we know from T+1 and from SFTR previously that it will come round quickly. The final rule published on October 13, 2023, still leaves questions on jurisdictional scope and potential overlap with SFTR, and we still do not have the FINRA reporting specifications (which will be proposed in May of 2024 and finalized by the end of 2024).

So, brace yourself – there is a lot to be conscious of in the coming year!

#3 – Harmonization and introduction of a new regulated activity 

Tom Jenkins, Partner, Risk Consulting, Head of Financial Services Governance, Risk and Compliance Services, KPMG Advisory (Hong Kong) Limited

2024 is expected to bring harmonization of Hong Kong OTC derivative reporting requirements with international standards including cross-regulation fields (global UTI logic, LEO, UPI and CDE) as well as ISO 20022 XMP format for submission. Additionally, we expect to see a continued focus by Hong Kong regulators in their supervisory activities on policies, procedures, systems and internal controls adopted by HKMA licensed banks and SFC licensed corporations for ensuring completeness and accuracy of information reported to HKTR including new reportable trades, subsequent trade events and valuation information. The role of the second line of defense in ensuring compliance with the reporting requirements is likely to continue to be an area of focus.

One significant change to the Hong Kong OTC derivative reporting landscape which may take place in 2024 is the long-expected introduction of the new Type 11 regulated activity (“Dealing in and advising on OTC derivatives”). Alongside existing code of conduct requirements which prohibit licensed persons from booking OTC derivatives activity into an entity which is not a bank or licensed OTC derivative dealer, the new Type 11 regulated activity will require OTC derivatives activity which is currently booked by market participants in unregulated entities not subject to the Hong Kong mandatory OTC derivative reporting requirements to move into licensed entities. As a result trades which have hitherto been unreported to HKTR are expected to come into scope. This means that market participants are likely to spend 2024 preparing for the new licensing requirements and the resulting impact on the scope and volume of their OTC derivative reporting.

#4 – Managed services and transaction reporting

   Gordon Wong, Managing Director, Head of Advisory Services, Botsford Associates

Ever-changing regulatory pressures, coupled with market volatility, and complexities around new products and reporting processes, pose a significant challenge for many firms in transaction reporting.  Staying on top of regulatory compliance is paramount; firms need to be at the forefront of revisions and developments to safeguard the integrity of their legal, financial and reputational risks. With an ever-increasing amount of data to process and report, lack of automation, along with legacy systems translate to substantial burdens on a firms’ resources and operations.  Compliance reporting obligations can be manually intensive and complex, prone to data inconsistencies and errors which not only strain resources, but also reduce transparency for management decisions.  Additional concerns include talent shortages and critical reliance on key resources. Firms are finding it increasingly difficult to source resources who are able to keep pace with constant regulatory changes and who have the expertise to provide the necessary guidance that increased regulatory scrutiny demands.

The need for cost-effective and sustainable solutions is critical. Managed services, the outsourcing of targeted business functions for operational efficiency, can address the growing challenges firms experience with transaction reporting. By leveraging innovative technologies for automation, managed services can migrate highly manual processes to third-party providers, enhancing data quality for accuracy and completeness, while also addressing complex regulatory requirements and providing valuable real-time insights for executive decisions. Moving to a shared service approach brings the benefits of extensive industry expertise, reducing the need for additional resources, while providing subject matter experts who can skillfully navigate the regulatory landscape. External service providers also forge strategic alliances with leading tech providers, enabling cost savings through technology-enabled solutions that not only reduce end-to-end reporting costs but also help mitigate the compliance risks associated with transaction reporting. The scalability of managed services provides a predictable cost structure that firms can adjust based on their shifting needs and changes in market conditions.

As demand for greater transparency in the financial markets grows, regulatory scrutiny will continue to escalate, and heightened requirements will necessitate that firms have robust transaction reporting infrastructures in place. Firms will need reliable, sustainable and economical solutions to meet these constantly changing reporting obligations, and managed services are becoming a key asset in addressing these ever-increasing challenges.

#5 – A tidal wave of regulatory reporting obligations

  Ben Smith,  Head of product, Sharegain

#6 – EMIR

Chad Giussani, Independent Transaction Reporting Specialist.

As 2023 closes the thoughts of many turn to the festive period. Those of us working with the upcoming EU EMIR REFIT are still hard at work. Trade repositories, the Big One included, have now opened up their UAT testing and our email inboxes are filling with encouraging reminders to begin submissions. Instead of Christmas Party invitations.

The EMIR REFIT addressed identified issues by providing a simplified and more proportionate approach to the original requirements, particularly for smaller firms. For the Article 9 reporting obligation the opposite has happened. New fields, changed fields, removed fields. Trade Repository communication using ISO20022 messaging formats, rigorous pairing and matching requirements, increasingly detailed lifecycle event management and the new Unique Product Identifier. Simpler, no. Proportionate, maybe if your reading reports and not writing them.

EMIR reporting is, under the right conditions, a dual sided reporting obligation. As a gesture to the NFC- firms the mandatory delegation of reporting responsibility for OTC derivative contracts concluded with a FC is introduced. That still leaves the NFC- with an obligation to report their remaining ETDs. Many smaller FCs are similarly struggling with the increased complexity of reporting valuation and collateral data. Transaction and instrument data points increase.

What is a firm to do? There has always been the regulatory option for one party to delegate the reporting activity, if not the legal responsibility, to another party. Voluntary delegation.

We now see firms reconsidering their approach on voluntary delegation, weighing up the pros and cons of outsourcing reporting to another party. Some are bringing it back in-house for greater control, other firms are using the REFIT as a critical juncture to move to voluntary delegated reporting ahead of the REFIT deadline. Going ahead of REFIT is important allowing both parties to implement the reporting, operational control framework and tease out errors without colliding into the REFIT changes. Firms are pivoting self-reporting build programs into delegation and control framework initiatives.

Not outsourcing a problem is conventional wisdom and this remains as pertinent as always. Q1 and early Q2 will remain challenging for those firms that have recently decided to delegate.

#7 – Canadian reporting

Paul Childerhose, Board Member / Member Relations Lead, Capital Markets, Canadian Regulatory Technology Association

In 2023, individuals and all organizations that operate within or support the financial services sector were provided with the opportunity to participate in multiple Canadian federal government public consultations – the results of which will have significant implications for 2024.

Canadian law requires that the Department of Finance conduct consultations on Canada’s Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) Regime every 5 years. During this summer a public consultation examined ways to strengthen the PCMLTFA.

Consultation on Strengthening Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime. In 2024, the report from the consultation with recommendations will be released, resulting in significant enhancements to the regulatory framework – which will most certainly result in bigger budgets for technology investments.

At the same time, in 2022 the Finance Department published the 3 year strategy [2023-2026] for Canada’s AML/ATF Regime Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime Strategy 2023-2026 which was intended to complement the 2023 Parliamentary review/ public consultation. FINTRAC is making significant investments in modernizing their tools and technologies to keep up with the digitization of the financial sector accelerated during COVID times, as are the financial institutions. In 2024, we should witness major advances from within Canada’s digital identification and authentication ecosystem.

Underpinning these 2 items, on April 1st 2024 FINTRAC will implement a new funding model that will shift the source of funds for its compliance program from taxpayers to the reporting entities. Charging reporting entities for FINTRAC’s compliance program (canada.ca)

Also expected in 2024 will be public disclosure of significant (for Canada) punitive fines for lax AML controls being issued to large financial institutions here.

The 2nd major public consultation concluding in December 2023, required by Canadian law every 5 years, is a review of the Bank Act. The review has focused on how emerging trends in the financial sector will impact consumers, national security, fair competition, and the safety and integrity of the financial system. Consultation on Upholding the Integrity of Canada’s Financial Sector – Canada.ca

After 5 years of on-going consultations with industry, in late November, Canada’s Minister of Finance surprised the public and industry in announcing a long-awaited framework and timeline for Canada to implement Consumer-Driven Banking by introducing legislation and fully implementing the necessary governance framework by 2025.

2023 Fall Economic Statement: Policy Statement on Consumer-Driven Banking – Canada.ca

As a Board member with the Canadian Regulatory Technology Association (CRTA) | RegTech (canadianregtech.ca) our mission is to foster a neutral setting for key participants in the financial services ecosystem to learn, collaborate, raise standards and promote growth and innovation.

As we enter our 6th year of operations in 2024, the need for meaningful collaboration amongst the RegTechs, FinTechs, Regulatory Supervisors, Financial Institutions and Professional Services providers has never been greater.

# 8 – The Crypto crystal ball

Mark Kelly, Founder and Director, Regulatory Advice Limited

#9 – Substantial change coming to transaction reporting

Natarajan K Venkatasubramaniam, Managing Director, Compliance Advisory Services , RegEdge LLC

The trade and transaction reporting landscape is set to undergo substantial changes in 2024, marked by a series of comprehensive Refits and Rewrites globally. These modifications will herald the introduction of several pivotal changes. Key among these are the adoption of harmonized data fields (Common Data Elements – CDE), the implementation of standardized message formats through ISO 20022 XML, and the inclusion of essential reference data, notably the Unique Product Identifier (UPI). The implementation schedule is staggered throughout the year, commencing in January with the CFTC UPI changes, followed by JFSA and EMIR ESMA in April, EMIR FCA in September, and subsequently MAS and ASIC in October, among others.

Three critical trends are anticipated to influence the regulatory landscape in 2024 and beyond significantly:

• Intensified Regulatory Enforcement: Following the advisory issued by the CFTC’s Division of Enforcement on October 17, 2023, which underscored the gravity of recidivism in regulatory violations, it is expected that there will be a surge in enforcement actions. This advisory advocated for escalated penalties for repeat offenders to ensure effective deterrence, aiming to adequately recalibrate penalties to deter future misconduct. This approach is not only intended to prevent repeat offenses but also to maintain market integrity. Other regulatory bodies are expected to adopt similar stances in line with CFTC’s guidance.
• Resource Allocation Towards Historical Data Correction and Modification: The transition to reporting in the ISO 20022 XML format necessitates that firms ensure accuracy and compliance in reporting for active historical trades, including those that have undergone modifications or terminations. This will likely lead to a significant allocation of resources towards managing and correcting historical data, representing a notable challenge for many firms.
• Further Rule Finalization by the SEC: In the wake of finalizing eight sets of rules in 2023 and with another eight-pending finalization, it is projected that the SEC will continue this momentum into 2024. The expectation is to finalize several more rules, along with the proposal of new ones.

In response to these evolving regulatory demands, firms are advised to focus on strengthening their regulatory governance frameworks. This includes enhancing supervisory controls and clearly defining roles and responsibilities. Additionally, there is a growing imperative for firms to increase their reliance on automation and assurance testing to navigate this complex and dynamic regulatory environment efficiently.

# 10 – KRX transaction reporting rules

Prateebha Narayan, Executive Director, Head of Operations Control and Transaction Reporting, Asia Ex-Japan, Nomura 

Bonus Trend – Data quality challenge set to increase

Struan Lloyd, Head of Cappitech at S&P Global Market Intelligence, Cappitech 

___________________________________________________

Disclaimer: This blog is for informational purposes only. Any views expressed are those of the authors and should not be taken as a substitute for legal advice, nor advice on specific regulations.

About the author: Trudy Namer

As Executive Director, Marketing at S&P Global Market Intelligence Cappitech, Trudy leads the global marketing strategy for Cappitech. Capitalizing on over 15 years of B2B and financial services marketing experience, Trudy specializes in all aspects of marketing including branding, lead generation, digital marketing, public relations, thought leadership positioning and content creation. Trudy holds a Business of Commerce degree (Cum Laude) from the University of South Africa and a Master of Business Administration (MBA) from Bar Ilan University, Israel.