Best Execution recently spoke to Chris Childs, Managing Director, Head of Repository and Derivatives Services at DTCC and Chief Executive Officer and President of DTCC Deriv/SERV LLC, about the importance of creating effective control frameworks as part of a healthy reporting infrastructure.
In the age of rapid change in the trade reporting landscape, firms need to keep a keen eye on the effectiveness of their overall reporting control frameworks to ensure effective regulatory compliance. Compromised control frameworks can lead to reporting errors, especially as firms embark on the process of updating their systems in preparation for updated regulatory rules including the Commodity Futures Trading Commission’s (CFTC) rewrite, the European Securities and Markets Authority’s (ESMA) regulatory fitness and performance programme (Refit) for the European Market Infrastructure Regulation (EMIR), as well as other regulations across the globe. Now is the time to look under the hood and ensure your firm’s control framework is operating at an optimal level to ensure the completeness, accuracy, and timeliness of your reporting.
Firms are grappling with an unprecedented degree of financial and operational challenges in 2022 and beyond. Why are effective control frameworks so important?
In general, a robust control framework is critical to ensure reporting of accurate data in a controlled, repeatable, and efficient manner, and helps mitigate the risks of undetected reporting issues. By taking extra measures to establish a construct that focuses on early identification and prevention of reporting concerns, firms may avoid the compounding costs of remediation and potential regulatory fines.
Since 2017, the Financial Conduct Authority (FCA) has fined firms nearly £100 million for failure to comply with Markets in Financial Instruments Directive (MiFID) and EMIR rules. Since 2019, the CFTC has fined firms nearly $20 million for similar breaches in CFTC reporting*. Many of these breaches were exacerbated by a lack of a clear control framework and governance around remediation items. As a result, we encourage firms to consider investment in an enhanced reporting infrastructure to better protect against the expense of non-compliance.
What is DTCC doing to support clients that may be concerned that their reporting infrastructure isn’t up to par?
We are here to help our clients address their trade reporting challenges and get them ready for the swathe of regulatory changes taking effect over the next few years. DTCC’s post-trade experts have developed a propriety Reporting Control Framework Model, offered through DTCC Consulting Services. Leveraging this model, we assist clients in performing their diagnostic assessments and reporting control framework enhancement and implementation. Our experts pay very close attention to current and future legislation to build in updates to the model and reflect current regulatory changes.
How do your consultants go about identifying areas of improvement within firms’ existing infrastructure and recommending the appropriate remediation?
We begin with a deep-dive analysis of the current state of a firm’s processes, including process maturity across jurisdictions. From there areas of improvement are identified against the Reporting Control Framework Model.
Once relevant gaps and inefficiencies are identified, our post-trade experts can help clients discover how more mature processes will result in reduced operational risk and higher levels of automation, independence, ongoing repeatability, and future scalability across a comprehensive set of use-cases. We can then help to implement a control framework that is fit for purpose based on the organisation’s risk profile, trade volumes and other key factors identified to our consultants.
Our Reporting Control Framework Model also empowers clients with access to best-in-class examples of reporting control framework functionality, including access to a library of over 50 control assessments and best practices which can be applied to various reporting jurisdictions for G20, Securities Financing Transactions Regulation (SFTR) and MiFID reporting. Each observation has been categorised for thematic analysis and includes criteria developed by a broad panel of experts within DTCC.
Are there any key themes that have emerged from DTCC’s analysis of firms’ existing infrastructure and reporting controls?
The ongoing evolution of the regulatory landscape has required financial firms, large and small, to dedicate tremendous human and financial resources to compliance. When it comes to our assessments of clients’ reporting infrastructure, controls, and processes, we have seen a considerable need for assistance with pre and post trade reporting functions. One of the most common findings is the dependence on manual processes and institutional knowledge of exceptions. In this case, we urge firms to consider finding a service that alleviates this dependency and readies them for the regulatory changes taking effect in the coming years.
Does DTCC offer any other tools to help firms meet their trade reporting obligations?
We created the DTCC Report Hub® service to provide firms with a robust reporting solution. The service’s functionality enables firms to: manage the complexities of reporting across 14 jurisdictions covering global derivatives regulation, SFTR and MiFID II with a robust control framework; minimise the burden of updating their reporting processes to stay current with changing mandates; and benefit from a resilient, scalable, and intuitive technology to help with their pre- and post-reporting assurance tasks. The service also allows firms to manage their holistic global derivatives and SFTR reporting needs when they use both DTCC Report Hub and our Global Trade Repository services.
*Data derived from the FCA and CFTC websites.
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