May 09, 2020 – Whether the European Securities and Markets Authority ESMA will implement its plans for the further development of the MiFid II/MiFIR financial markets directive this year as planned is anything but certain in view of the corona pandemic. In principle, however, the current situation does not change anything about ESMA’s general objective – namely to continuously improve investor protection through the continued differentiation of transparency and reporting requirements. Even if the corona crisis were to lead to a temporary relaxation of supervisory requirements, the regulatory complexity will undoubtedly continue to increase in the long term.
Limitations of reporting tools
Financial service providers and their administrators are faced with massive challenges due to the constantly growing variety of ever new detailed reporting requirements, especially since an asset manager often has to meet the hardly less demanding Solvency II or CRR requirements in addition to PRIIPS and MiFid II/MiFIR.
With an in-house reporting software such as MS Excel running on classically operated on-premise IT systems, it is neither possible to map the dynamically changing compliance requirements in real time nor to meet the increasing security and home office requirements. At least not at reasonable costs, if you only take into account the effort for the acquisition of regulatory special know-how. Take, for example, the inconsistent methodology for calculating transaction costs: fund managers have to provide data for packaged investment products (PRIIPs) in which client money is not invested directly but indirectly in the capital market or in which repayment claims are linked to reference values such as the performance of certain securities.
Although standardised template formats such as EMT and EPT are available for MiFid and PRIIPs, there are major differences across Europe in the way the calculation and filling of these templates is designed: With regard to compliance costs, the correct choice of a legally compliant calculation mechanism for transaction costs is crucial. There are currently still various regulations available for this purpose in accordance with UCITS, PRIIPS or MiFid II. Even within PRIIPS or MiFid II, transaction costs can be calculated differently – which can lead to more or less favourable results. In addition to the New PRIIPs method (also known as the basis point estimation method), the Arrival Price and Full PRIIPs methods, among others, are used to determine the implied transaction costs.
The ability to independently enter such data into their own reporting and reporting system is also beyond the capabilities of many asset managers because regulatory reporting is not usually one of the core competencies of an investment specialist. An alternative is the use of an external cloud platform, where all regulatory changes are automatically updated in the background. This completely eliminates the need for on-site adaptation of compliance-related software solutions and the maintenance costs for the corresponding server and storage systems. In addition, there is the standardization effect for processes and workflows relating to the collection of reporting data and periodic forwarding to the responsible regulatory authority.
However, it is important to ensure that an external cloud offering does not introduce new regulatory complexity through the back door. For this reason, reporting services should be modularly retrievable in as fine-grained a form as possible: This is the only way to put together a tailor-made reporting and reporting system in the cloud in accordance with your own portfolio.
For example, a financial services provider whose funds have no contact whatsoever with insurance-like financial products does not need service modules for Solvency II. And with regard to the transaction cost calculation mentioned above, different calculation alternatives should be available as separately bookable cloud services. This creates additional scope for selecting the optimum calculation method in each case – whereby fund managers often also benefit from empirical values derived from benchmarks of many users within the cloud community.
But be careful: data sovereignty must not be given away through cloud use. Maximum control can be achieved by using a suitable dashboard that provides access to all data and calculations at all times. Under this premise, the regulatory reporting database can develop into a central component of an asset manager’s digitization strategy. Because modular compliance services from the cloud can not only facilitate regulatory compliance, but can also improve internal reporting processes and data quality.