5 minute read
Regulatory technology – exploring
The appliance of science
Paul Golden looks at the opportunities for regulatory technology growth in the securities lending space and the aspects of compliance where technology can have the greatest impact in terms of speeding up processes, reducing errors, and keeping pace with regulatory change.
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Regulatory technology or regtech (a subset of fintech that leverages new technologies such as cloud computing, big data, machine learning and natural language processing to address regulatory challenges within the financial industry) is one of the fastest growing segments of the technology market.
A report published earlier this year predicted that the global regtech market would expand from $7.6 billion in 2021 to $19.5 billion by 2026 across multiple areas including risk and compliance management, identity management, regulatory reporting, fraud management, and regulatory intelligence.
When asked which areas of regulatory technology offer opportunities for growth in the securities lending space and the areas of compliance where technology could have the greatest impact in terms of speeding up processes, reducing error and keeping pace
with regulatory change, Bob Zekraus, chief operating officer and head of the Americas at Pirum notes that regulation often is a driver to implement changes, automate processes, drive efficiencies, and enable firms to prioritise their IT budgets.
Regulatory drivers “We have seen this with other regulations - most recently CSDR, which is driving improved post-trade processes not just for the European markets impacted by CSDR, but in all markets for our clients,” he says. “Additionally (although not a direct requirement of the regulation itself) with the advent of SFTR in the EU as well as the reporting services we offered, we saw a lot of firms review and ultimately improve their daily processing of securities financing transactions via our existing automation of marks, returns, and other processing functionalities.”
This was necessary to improve the quality of the reports being submitted to regulators. With proposed SEC rule 10c-1 - Reporting of Securities Loans looming on the horizon for US participants, Pirum expects firms to be looking at how they will deal with the challenge of reporting as well as how they ensure the quality of what they are reporting.
Tracking of regulatory requirements by jurisdiction is one of the areas to watch because these are always subject to
Bob Zekraus, Pirum
Aman Thind, State Street
change and present a risk to global financial institutions operating simultaneously in and across many locations.
At the same time, collateral management is increasingly complex and support for multiple asset types as collateral and especially automated collateral management will likely see strong growth. Automisation opportunity That is the view of Aman Thind, global chief architect at State Street, who notes that because securities lending has historically been a heavily manual process there is significant opportunity for systemisation to improve efficiency and mitigate risks.
“Straight-through processing or STP, for example, can best be achieved with no or low code automation that is accessible to end users who are less technical-minded,” he says. “Beyond that, machine learning pattern recognition can help predict next required actions, although it must be aligned with regulatory model documentation requirements on explainability.”
In addition to STP, consolidated data processing of both internal and external sources - and the ability to identify all forms of a given entity and linked entities - will result in reduction of errors and enhance quality controls overall.
“To ensure regulatory adherence, data security and segregation best practices must also be in place,” adds Thind. “Finally, any application should have a high degree of configurability to adjust flexibly to changes in regulatory and market requirements, and ideally be able to integrate seamlessly with other in-house and vendor tools.”
Rising reporting Regulatory reporting requirements have increased significantly, and there is no sign of this trend easing. Although it is still early in the process, the SEC 10c-1 proposal will dramatically impact market participants and is expected to bring a much greater level of transparency to the securities lending marketplace.
As EquiLend has two entities registered with and regulated by the SEC and which are members of FINRA, it is well placed to act as a reporting agent should the proposed rule come into effect observes Nancy Allen, head of
Nancy Allen, EquiLend: “We have the technology in place to support intra-day, end of day or T+1 reporting, which is already utilised by many participants in the securities lending market” Dexter Gall, RBC Investor & Treasury Services: “Some of the investments made by the International Securities Lending Association, International Capital Market Association and International Swaps and Derivatives Association in terms of standardising via the common domain model should make markets more attractive for innovation”
data & analytics.
“We have the technology in place to support intra-day, end of day or T+1 reporting, which is already utilised by many participants in the securities lending market,” she says.
Distributed ledger technology (DLT) and smart contracts could – if properly adopted - create a near perfect environment to sustain growth while maintaining operational risk and generating efficiencies suggests Dexter Gall, associate director securities finance at RBC Investor & Treasury Services.
“Some of the investments made by the International Securities Lending Association, International Capital Market Association and International Swaps and Derivatives Association in terms of standardising via the common domain model should make markets more attractive for innovation,” he concludes. “Evidence of that can be seen already with electrification of the negotiation and retention of master agreement terms.”
