Making the first move on technology for regulatory reporting quality assessments
15 July 2019
A speech by Mark Carney, the Governor of the Bank of England, in June 2019 stated that the Bank of England is launching a review to explore the transformation of the hosting and use of regulatory data over the next decade. This includes proofs of concepts to test how the Bank can automatically extract regulatory firm data.
The speech clearly highlighted the Bank’s increased focus on exploring how Artificial Intelligence (AI) and Machine Learning (ML) technologies can be used to collect and interpret supervisory data from firms to minimise manual processes. The Bank aims to pull the data on demand from firms, making the regulatory reporting process more efficient and less expensive.
While the above remains more of a medium to long-term project, there is a new wave of imminent changes to regulatory reporting requirements that means firms could benefit from the use of these technologies much sooner. This becomes even more important with the finalisation of the new prudential regime for investment firms (Investment Firm Regime or IFR) and the publication of the EU Banking Package (revised Capital Requirements Regulation or CRR 2). Those new rules will require banks and investment firms to juggle an array of new reporting and disclosure templates. AI and ML technologies will support firms to meet these requirements as well as regulatory expectations in relation to the quality of data submitted. Firms that do not adopt technology in their approach may struggle to meet regulators’ high expectations on completeness, accuracy and timeliness of data submissions.
CRR 2 requires firms to disclose their key prudential metrics such as own funds and own funds requirements in a tabular format. Uniform regulatory reporting formats and templates, as well as the instructions and methodology on how to use those templates and frequency and dates of reporting will be determined by secondary legislation. It also introduces the revised market risk framework (‘Fundamental Review of the Trading Book – FRTB’) as a reporting requirement for certain firms with large trading books. These firms will have to start reporting the calculation derived from the revised standardised approach within a year of the adoption of the Commission Delegated Act, so this requirement could be live as soon as December 2020.
IFR, on the other hand, will introduce new reporting and disclosure requirements for firms with changing frequencies depending on their size, and level of sophistication and connectedness. While ‘Class 2’ firms will be required to report all key metrics including their level of capital, ‘K-factors’ and the firm categorisation parameters quarterly, ‘Class 3’ firms will be allowed to report annually. Details with respect to the reporting and disclosure requirements and the relevant reporting templates will be determined via the EBA’s draft technical standards within a year of the regime entering into force.
Other concurrent regulations will also introduce new reporting requirements. For instance, the EBA ITS on resolution plans introduces new reporting templates. In addition, securities financing transaction reporting will require firms to report data regarding their securities financing transactions.
While AI and ML technologies may one day streamline data collection and assessment for the regulators, the technology today is available for firms to invest in and develop. Our firm, for instance, has developed tools that allow us to assess data quality across large data sets, assess whether the firm's risk calculations are in line with regulatory expectations and conduct cross reporting template validation checks to ensure consistency and accuracy.
Firms that act fast will benefit from remarkable gain in efficiency and support on their completeness, accuracy and timeliness journey. This will allow them to start identifying issues themselves before this is imposed upon them as a regulatory compliance requirement.
Our experience supporting firms recently in using technology tools to streamline their regulatory reporting shows that firms that don’t embark on that journey might be lagging behind their peers in the near future - and possibly the regulator not too long after.
