In Part 1 of this Data Management series, I talked with Advent’s data expert, Michael Lobosco, about data trends and the importance of data automation in the financial industry. This next Q&A with Michael on regulatory requirements and data management seemed like a logical next step towards tackling the data beast. Because realistically, compliance is a spinoff of data management—without fast and easy access to accurate datasets, firms will simply not stand up to the increasing regulatory environment.
So let’s take a look at some of the leading regulatory requirements and how firms can get out in front of them. While we realize that regulations pertaining to data stretch globally, many have regional focuses as well.
Kendall: What are the latest regulatory requirements investment management firms should be particularly cognizant of?
- AIFMD-An EU directive put into place to oversee regulation of alternative investment fund managers. This was put into place to fill a perceived regulatory gap as many believed that hedge funds, private equity firms, and their managers, were not receiving an equal amount of oversight as asset and mutual fund managers under UCITS. For hedge funds and private equity firms, AIFMD affects the areas of depositary, risk management, remuneration, and transparency and reporting.
- FATCA- When FATCA came into effect in the US in 2013, it changed tax withholding obligations and introduced additional reporting requirements, which far surpassed the capabilities of widely used Client Identification Program and Know Your Customer processes. Since identifying systemic risk as well as measuring the impact of the financial system on the economy are two core pillars of FATCA, firms have been tasked with finding more effective tools to source data.
- CRM2- Specifically in Canada, this regulation is a move toward stronger client communications. CRM2 outlines obligations of firms to deal with clients honestly and fairly, and recognize and appropriately handle any conflicts of interest. Speaking about data, CRM2 requires firms to maintain books that accurately reflect their business activities, financial affairs, and client transactions. Amongst other requirements laid out, firms must produce reports on excess working capital and audited annual financial statements within 90 days of the end of their financial year.
Kendall: What types of challenges, if any, can they anticipate due to these regulations?
Michael: You know, a lot of firms take the first step of developing a data management strategy to ensure compliance long-term. This is great, but many firms don’t take the next step of fully implementing and institutionalizing that strategy. And it’s quite a large chunk of firms that do this—close to 65% have a defined, but not mature strategy. It’s just sitting on the shelf. Once a firm defines a strategy, they really need to commit to it to realize all the benefits.
And so they can run into obstacles when they go to implement it. At times, firms can feel like regulations are the antithesis of efficiency, but it’s important to remember that they are ultimately there for protection and long-term success, a step toward more transparency for public investors. It’s just a reality that firms may have to go back to the drawing board to re-allocate budget, resources, and ownership of various projects. While it can mean creating new teams, the need to train more employees, implementing additional process controls, the idea is to create more room for opportunity, flexibility, and innovation down the road.
I’ve found that finding a good balance between efficiency and cost containment can also be tough for firms. Some firms often do not want to expend the energy, time, and manpower to strategize for meeting regulatory requirements so they leave the legacy systems in place, and stick with risky manual or custom processes for data gathering. They tend to just throw a lot of money at implementing various controls and don’t check on their ROI over time. That’s an extreme example, though. Some firms avoid implementing a lot of process controls to save money and try and be efficient, but things fall through the cracks this way as well. Without a good balance, one or the other or both will be compromised.
Specifically, FATCA requirements have forced firms to not only collect and maintain client data, but also report client-related data in the event of inconsistent financial transactions. For firms that are gathering information for multiple sources, they’re required to find new ways to manage and maintain data gathered from multiple sources—integrated and nonintegrated systems, desktops, contextual content, and from embodied knowledge. This can be costly and time-consuming for firms.
Kendall: With these challenges in mind, can you offer any best practices for data management compliance?
Michael: I had the opportunity to attend CEB TowerGroup’s annual tech summit. I attended a session about data management and analytics, and it really captured my thoughts on this question. They called the imperatives (or best practices) to data management. While it was an aspirational model, albeit a bit ideal in ways, I’ll share a few I found to be most valuable, many of which can be accomplished with a defined AND mature strategy.
- Standardize reference and internal data- firms need to rationalize their data supply, looking at the requirements for fixed income, derivatives, exchange data, etc.
- Define capital and liquidity data- firms should review their asset classification process, implement all-venue capital and collateral monitoring, develop or adopt an infrastructure for dissemination of information and materials across venues.
- Aggregate risk data, share internal operational data, and align enterprise data—firms need to implement risk and data governance by adopting a whole enterprise risk model, integrate with IT for extracting and transforming data, and develop or adopt a shared architecture so that PMs, traders, IT, finance, compliance , and sales and marketing teams are not using all different tools.
- Unify, mine, and analyze client data—draw on unstructured data (contextual content and embodied knowledge) when keeping track of data sources and usage, and integrate regulatory and client reporting.
Using these and other industry best practices, firms can accomplish what CEB termed a “one data” approach. They can unlock much more visibility into the data they’re gathering, and the ways in which it is being used to meet regulatory requirements as well as investors’ demands for transparency and accountability.
I would be keen on hearing how your firm has navigated the regulatory requirements regarding data and data management. What best practices have you used?
Check back in two weeks for a discussion on data management and security in the cloud.
Kendall has leveraged her passion for writing along with her background working with enterprise cloud technologies to strengthen Advent’s external communications.