Industry players are convinced of risk, compliance and bottom-line benefits, but for regulators it's more complicated
Friday, May 17, 2019
By Katherine Heires
Data standardization and open data architecture - which supports interoperability among information systems of the government and the private sector - hold tremendous promise for the financial industry. Firms can streamline their regulatory compliance, better manage risk, improve efficiency and, over time, reduce operating costs.
On that there was no argument among some 190 regulators, financial industry executives, academics and technology providers who attended the second annual RegTech Data Summit in New York in April. This was a crowd that disdains outmoded recordkeeping systems.
“People who believe that PDFs are sufficient for the future are the same people who believe the earth is flat,” said Dean Ritz, senior director of digital reporting strategy at Workiva, which offers a cloud-based data, reporting and compliance platform.
“Global reporting and compliance have remained document-bound for too long,” asserts Preparing for a RegTech, SupTech and AI Future, a white paper from Donnelley Financial Solutions (DFIN). It argues that standardization is key to realizing the “incredible promise” of innovative regulation-and-compliance technology, supervisory technology and artificial intelligence.
(The RegTech Data Summit was “presented by” DFIN and hosted by the Data Coalition, a trade group favoring open and standardized government data.)
Modern data standards such as XBRL (eXtensible Business Reporting Language) and inline XBRL (iXBRL, a machine‐ and human‐readable format that is now a Securities and Exchange Commission reporting specification) are seen as catalysts for bringing artificial intelligence and machine learning into trend analysis and risk mitigation.
Data standardization is also regarded as a corrective.
“Data standardization is needed to build and sustain a vibrant financial system,” said Ben Harris, chief economist and senior adviser of Results for America, a nonprofit that states as its mission “helping decision‐makers at all levels of government harness the power of evidence and data to solve our world's greatest challenges.”
“If we had had it” - enabling timely and accurate access to critical information - “we would have had far less government intervention” to stabilize the economy during and after the financial crisis, Harris stated, citing recent academic research on the topic: The Data Standardization Challenge by Richard Berner, former director of the U.S. Treasury's Office of Financial Research (OFR), now with New York University's Stern School of Business; and Kathryn Judge of Columbia Law School.
Harris and other standardization advocates support the Financial Transparency Act, a bill first introduced in Congress in 2017, calling for “standards with respect to format, searchability, and transparency” in regulatory agencies' collection of data under securities, commodities and banking laws. Nick Hart, CEO of the Data Coalition, said the act would be “a game changer. We are hoping that Congress takes action soon.”
Despite the consensus among data experts and technologists, a point of contention emerged when a panel of regulators was asked about the lack of standardization in their data collection processes.
Speaking for himself and not for the Securities and Exchange Commission, Walter Hamscher, senior IT program manager at the SEC's Office of Structured Disclosure, said, “Collaboration between agencies is hard. Congress would have to do this. You need to rally Congress.”
Implementing modern technology “is the easy part,” he said, while understanding or reinventing the future roles of the SEC and other regulatory agencies is a major challenge.
Call for Comments
Hamscher encouraged those with strong feelings about how these issues play out to respond to agency requests for comment.
“The SEC is full of folks who are fundamentally risk-averse and want to avoid litigation or controversy,” he said. But, he added, when members of the financial community make the effort to comment on rule proposals and call for changes or improvements, the regulator will respond, investigate, and potentially endorse improvements.
“If all [regulators] ever hear from the financial community is, 'We may be put out of business because of the cost of a new data standard,'“ then that is all that they will seriously consider before rule‐making, he said.
When asked if machine‐readable regulations will be a reality anytime soon, Hamscher said, “It's an old idea. The closest we would come to that is to provide validation rules and open-source programs,” but not regulations. “There are limits on what we can do with data.”
John Bottega, a veteran bank chief data officer who is executive director of the Enterprise Data Management Council, moderated a panel discussion on the benefits and outlook for the adoption of a single, open data standard for entity identification among U.S. regulatory bodies.
Robin Doyle, managing director, Office of Regulatory Affairs, JPMorgan Chase & Co., recalled how in the past, she would spend a great deal of time explaining why the bank had one set of internal risk numbers for Ireland, and different numbers for regulators.
“The absence of a standard is a big waste of time and prevents you from doing in-depth analysis,” she said.
Karla McKenna, head of standards at the Global Legal Entity Identifier Foundation (GLEIF) emphasized that adopting standards ultimately reduces costs and risks and improves transaction efficiency.
“We should be using the same data we use in business in reports to regulators,” McKenna said, which in turn would allow regulators to analyze trends on an industry‐wide basis.
Ken Lamar, a consultant and former Federal Reserve Bank of New York senior vice president, said that open data standards or legal entity identifiers (LEIs) present two real use cases: Greater transparency in single counterparty credit exposures, and in syndicated lending. “These are two practical examples in play right now,” where the wider use of standards would dramatically help to reduce risk, he said.
JPMorgan's Doyle encourages more banks to come forward and support the Financial Transparency Act. “We have a few supporting the act, but we need more to participate,” she said, adding that the data standardization goals can help reduce money laundering and Know-Your-Customer (KYC) risks.
She said there cannot be a complete picture of criminal activity without data standardization that allows for a look across the financial system - a prospect that should drive positive change.
Australians Save Billions
During a climactic “fireside chat” at the conference between NYU adjunct professor Berner and Troy Paredes, founder of Paredes Strategies, an audience member pointed out that data standardization has saved the Australian government and business community billions of dollars.
Berner, a strong LEI supporter during and after his tenure at the OFR, called Australia a “North Star” example, representing a worthy U.S. goal. But the two countries' industry and regulatory structures are very different. He and Paredes, who is a former SEC commissioner, both endorsed launching multiple pilot projects to help move the U.S. government and more U.S.-based financial firms in the direction of standardized data.
Said Berner: “An easier way to achieve change [in data practices] is to have pilot projects and the idea of innovation sandboxes, endorsed and assisted by regulators. It is something that we should do more of in the U.S.”
Katherine Heires is a freelance business journalist and founder of MediaKat llc.