The year 2017 will be marked with uncertainty, as there are various regulatory amendments expected to take place. Globally, ~$80 billion is spent on governance, risk and compliance, and the market is only expected to grow, reaching $120 billion in the next five years. If compliance seems expensive, non-compliance will just knock out the common sense. Financial institutions in the US alone have paid more than $160 billion in fines for non-compliance.
Although the changes in regulation are likely to help banks and financial institutions get some breathing space, they need to be well prepared for new or updated requirements that are likely to be implemented. The potential impact of each regulatory agency's policy can affect the compliance strategy of financial institutions.
Regulatory Challenges of Financial Institutions
Regulatory reporting as a process is here to stay. While the impact of new regulations and changes is yet to be seen, some of the key challenges faced by banks are as follows:
- Multiple sources of data: Banks do not have a single source of information. Depending on the depth of information required, banks need to collate data from different sources to comprehensively meet reporting requirements. At times, this requires the development of IT applications which have an impact on the time and cost aspects of the reporting exercise.
- Multiple & dynamic report formats: Depending on the nature of business, banking systems need to file reports in different formats as specified by the governing regulator. Organizational systems and processes in most cases are not flexible enough to create new or modify existing data models to meet changing requirements.
- Lack of skilled resources: Changing reporting requirements mean that banks not only need finance experts, but also require professionals skilled in mapping business requirements to existing IT systems, developing new applications if and where needed, and so on.
- Inaccuracy of data: Banks exchange information through financial statements, risk reports, submissions for capital adequacy, and regulatory reports. All these reports are generated from different systems, and banks need effective reconciliation processes to cross-check the accuracy of data across systems.
- Stringency of timelines: Regulators expect financial institutions to quickly alter their internal processes to meet the modified reporting requirements within scheduled time frames. Though prior information on these implementation dates is shared with banks, more often than not, the time is not sufficient to action the required changes.
Garbage In, Garbage Out
For the last few years, banks have been aware of the increasing regulatory expectations for data quality and reporting, as they face heightened standards from regulators to submit accurate reports across a large number of financial, capital and liquidity reports. With the introduction of BCBS 239 principles for effective data aggregation and reporting, financial institutions are required to meet high expectations around report preparation, monitoring and use. This includes end-to-end process and data documentation to explain controls around report preparation—from transaction capture through filing—including data transformation and aggregation, reconciliations and manual adjustments.
To meet these requirements, institutions need robust data management capabilities, including:
- Data Governance: Clear ownership and accountability
- Data Sourcing and Integration: The process of sourcing data from its origin to integrating it into the software/system to generate reports using it.
- Data Quality Management: Ability to monitor and identify errors and reconcile data elements across business lines.
- Reference Data Management: Storage of control framework that covers access, retention, distribution and quality for data.
- Data Lineage: Ability to trace end-to-end data flow and controls from reports to their point of origin.
- Automation: A strong control framework that can streamline manual processes to achieve a higher level of data quality and deliver accurate reports with sustained repetition and increased efficiency.
Reporting Starts With Data Management
A data management software (DMS) takes data and converts various types of data into a single storage container, or aggregates diverse data into a consistent resource, such as a database. In many cases, the specific term is used interchangeably with the broader term data management software, in which case, many data management resources may direct the incoming data to a database or series of databases.
Data management software includes ETL (extract transform, load) and reconciliation tools that enable banks and financial institutions to streamline their data and get it ready for creating regulatory reports. Below are a few tools that focus on simplifying the data management and transformation processes:
Data Focus: Sample Categories & Tools:
SmartStream: SmartStream provides Transaction Lifecycle Management (TLM®) solutions and Managed Services to dramatically transform the middle and back-office operations of financial institutions. SmartStream delivers greater efficiency, automation and control to critical post-trade operations including reference data operations, trade process management, confirmations and reconciliation management, corporate actions processing, fees and invoice management, collateral management, cash & liquidity management and compliance solutions.
Visualization and Reporting
Tableau Software: Tableau Software helps people see and understand data. Offering a revolutionary new approach to business intelligence, Tableau allows you to quickly connect, visualize, and share data with a seamless experience from the PC to the iPad. Create and publish dashboards and share them with colleagues, partners, or customers—no programming skills required.
TIBCO Spotfire: TIBCO Software provides integration, analytics and events processing software for companies to use on-premises or as part of cloud computing environments. The software manages information, decisions, processes and applications. TIBCO Spotfire is an analytics and business intelligence platform for analysis of data by predictive and complex statistics.
Ab Initio: Ab Initio Software is a company specializing in high-volume data processing applications and enterprise application integration. Ab Initio products are provided on a user-friendly homogeneous and heterogeneous platform for parallel data processing applications
Informatica: Informatica delivers enterprise data integration and management software powering analytics for big data and cloud. Informatica's product is a portfolio focused on data integration: ETL, information lifecycle management, B2B data exchange, cloud data integration, complex event processing, data masking, data quality, data replication, data virtualization, and master data management.
Adaptive: Adaptive provides clients with software solutions and value-adding partnerships that deliver a business discipline of data governance, control and innovation to the enterprise. Industries currently served include financial services, government agencies, healthcare, energy and many other regulated industries, where compliance and data governance are critical to operational and strategic success.
What Does a Traditional Reporting Software do?
Banks and financial institutions need to report financial information to regulators of respective jurisdictions. This is not an easy task for banks as they need to generate not only internal reports, but also collate data for Financial Reporting (FINREP), Foreign Account Tax Compliance Act (FATCA), Common Reporting Standards (CRS), and BASEL reports, among others.
Existing IT systems at most banking and financial institutions are not equipped to handle the ever-changing reporting requirements with ease. To meet the reporting requirements of an ever-changing regulatory setup, banks and financial institutions are looking to upgrade their legacy systems, or implement tools that will help identify, collate, and convert data into required formats to generate reports.
Regulatory reporting tools help banks avoid inherent problems like legacy system issues, lack of granular data, excessive system feed and complexity in data mapping, compatibility for data feeds, and so on. Modernizing and automating regulatory reporting processes can deliver several functional benefits to banks.
Regulatory Focused Reporting Tools:
AxiomSL: AxiomSL provides enterprise-wide infrastructure and analytical applications in the areas of data integration and warehousing, financial and energy risk management, regulatory reporting, compliance and financial control.
Jack Henry: Jack Henry and Associates provides technology solutions and payment processing services primarily to financial services organizations in the US to process financial transactions and automate their businesses.
Wolters Kluwer: Wolters Kluwer provides information services to professionals in the areas of legal, business, tax, accounting, finance, audit, risk, compliance and healthcare. The company provides its customers information-enabled tools and software solutions to manage their business efficiently.
Vertiv: Vertiv provides software products and services. The company offers liquidity risk management, regulatory reporting, compliance, Basel II/III, and portfolio management software products and solutions. Vertiv primarily serves customers in the banking and financial sectors.
Lombard Risk: Lombard Risk is a provider of integrated collateral management and liquidity, regulatory, transaction and MIS reporting solutions to enable firms in the financial services industry to significantly improve their approach to managing the risk in their businesses.
There are several tools and service providers available in the market that can help banks and financial institutions cope with increasing regulatory demand. However, they lack the ability to transform raw data into the right format to generate reports. This reliance on data reconciliation or ETL tools to fetch and clean the data means financial institutions are unable to get 100% data lineage.
Banks require a solution that can work with their current legacy infrastructure while at the same time ensure that they are well prepared for the dynamic and complex regulatory reporting requirements. Additionally, they need infrastructure that is agile and provides data reconciliation features in order to provide optimal data quality so as to stay compliant with BCBS 239 principles.
The reporting process starts not just from getting data to create reports but also spans the use of data from its source to the use in a report. This process requires the frequent use of manual processes to do repetitive tasks, thereby compromising speed and adding to the complexity of the reporting process. The complexity means present solutions are limited in their ability to make configurable inputs to the existing report template.
Most tools are focused on doing one particular function, i.e., either the data focus or reporting focus, meaning they have to rely on each other for various inputs. Therefore, they are limited in their ability to provide data lineage and auditability features that are vital to regulators who need information regarding where the data is sourced from.
Currently, there is only one FinTech big data software company in the market – HEXANIKA which has a software with the following functionalities:
- Ability to showcase end-to-end data lineage from source to report in a single software and hence provide complete data governance (BCBS 239 compliance). The software performs both the functions of data integration and regulatory reporting thereby ensuring 100% data lineage and traceability
- Built on Big Data (Hadoop) platform and leverages secure bank-ready cloud that provides data security and efficiency in the process
- Owns a Multi-Tenancy Cascading & Centralized Rules Engine which allows users to create and suggest rules to automate the reporting process and can scale the same rules across varied reports, regulators and geographies
- Possesses heuristic and semantic algorithms which automate data sourcing
- The solution sits on existing architecture and works from the time data is sourced to the time it is transformed into a report.
Hence, HEXANIKA's end-to-end solution addresses data sourcing and reporting challenges for regulatory compliance; improves data quality, keeps regulatory reporting in harmony with the dynamic regulatory requirements and keeps pace with new regulatory updates. HEXANIKA also provides 40% cost and time savings, and 35% improvement in data quality.