A new survey by Aite Group and the DTCC finds firms are not ready to meet the strict data reporting requirements that are causing friction at firms with outdated data management systems.
Post-crisis regulatory reforms are putting immense pressure on financial services firms to overhaul their ability to manage client and legal entity data, an area most firms had been content to ignore until recently, according to a new white paper.
Conducted by market research firm Aite Group and commissioned by the DTCC, the paper outlines the problems firms face as obsolete data management systems run up against a regulatory regime that places a premium on the quick delivery of high quality data.
“Legal entity reference data has long been the poor cousin to financial instrument data in terms of active management and governance,” the paper notes. “But regulatory and risk management transparency requirements, market structure change, and changing business dynamics have compelled firms to re-evaluate their treatment of client and counterparty data.”
The paper’s findings are based on surveys conducted by Aite with 16 financial institutions, including Tier-1 and Tier-2 buy- and sell-side firms split roughly evenly between North America and Europe.
The paper finds that the vast majority of respondents are unprepared for the client and legal entity data demands of current and soon-to-be regulations, with only one firm reporting that its client data lifecycle is “well supported.” All respondents report that their off-boarding is “poorly supported.”
As a result, “most firms anticipate investment in data management to be one of the highest technology investments they will have to make in the coming years,” according to a DTCC statement.
“It is worrying that 70 percent of firms are still using legacy, manual processes to onboard clients, exposing themselves to increased costs and operational risks,” says Virginie O’Shea, the senior analyst at Aite who authored the study, in a statement. “The tide is however changing with regulatory requirements and fear of penalties among the main drivers.”
OTC, FATCA Pressures
Global over-the-counter (OTC) derivatives regulations and the Foreign Account Tax Compliance Act (FATCA) pressures pose the greatest operational challenges for entity data management processes, according to 80 percent of respondents.
Another 80 percent of respondents said regulatory compliance concerns will be the main driver behind any planned overhaul of legal entity data management processes at their firms, and 62 percent of firms said risk management obligations ranked second.
The study notes that several recent regulations have all increased the pressure at firms to upgrade their legal data management capabilities.
Systemic risk measures like the European and U.S. recovery and resolution regimes, regulations stemming from the Basel III reform measures targeting the supervision of the banking sector are holding firms to heightened standards of risk management and market infrastructure changes. Each initiative features aspects that ask more of firms’ legal data management systems than ever before.
Furthermore, after several recent high-profile cases involving large fines at major firms, the costs of non-compliance have become clear. In late 2012, HSBC was fined $1.9 billion by the U.S. Treasury for anti-money laundering (AML) violations, and this summer BNP Paribas was forced to pay a record-breaking $8.9 billion and to admit guilt for contravening U.S. sanctions.
The know your customer (KYC) function is “therefore a key area for investment in 2014 and beyond,” the report notes.
But the focus on overhauling legal entity data management processes isn’t caused solely by regulatory pressures.
Ron Jordan, the DTCC’s chief data officer, says it’s a mix of “factors related to risk management, regulatory compliance and an increasingly competitive capital markets sector.” Jordan responded to FTF News questions via an email message.
“Executives understand they need to have their operations in order to meet regulatory compliance mandates, and client onboarding is a part of that,” Jordan says. “The competitive differentiator in this case comes from having operations in place to handle client onboarding efficiently and effectively.”
“Concurrently, there is increased industry focus on fostering client stickiness, which has resulted in a desire to better understand clients’ risk appetites and product preferences,” Jordan adds. “Creating a single view of a client is therefore a business imperative for new client acquisition and existing client retention, and this process needs to be initiated during onboarding (which can itself prove a sticking point due to slow and duplicative processes).”
Time for a Utility Model?
To accomplish those goals, 88 percent of respondents say they’re considering adopting a utility model to simplify and standardize the client onboarding and lifecycle management process.
The utility would essentially aggregate “data and documentation for business, regulatory, and KYC purposes from both end clients and third-party data providers,” according to the report. The utility would then double-check and validate the information, before storing it in a single, centralized location.
“Data consumers – essentially any financial institutions that service the end clients – could collect the relevant data from the utility once they have received permission from a client rather than chase end clients directly,” the report notes.
In addition, many firms are also looking into establishing a single legal entity identifier (LEI) master file, with 56 percent of respondents saying they plan to go that route.
“Most of the firms we speak to are working on establishing a comprehensive LEI master file and beginning to employ data governance best practices as a piece of their response,” Jordan says. “This reflects the desire of these firms to take a much more strategic approach to data ahead of the next wave of regulatory requirements.”
Firms have “a desire to move away from firefighting and develop a single record for a client from which regulatory reports can be more easily generated,” Jordan adds. “In order to do this, many firms recognize that legal entity identifier and other proprietary identifiers are necessary for firms to better internally aggregate legal entity data and deliver a single view of clients and counterparties for business, risk and compliance purposes.”
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