Banking: Tower of regulation

New fintech providers are inveigling their way into every corner of finance these days, torn between disrupting the banks and touting themselves to them as the must-have investment that can save their businesses.

Finally one has addressed the biggest single challenge banks face: regulation.

JWG is a think tank originally set up for the great and good of European banking to brainstorm the best insights on how MiFID I rules would affect their businesses.

It has now launched RegDelta, a golden-source library that has ingested some 750,000 paragraphs of legal documentation, much of it relating to MiFID II, and which aims to give banks ways to ensure that each new regulatory document has been registered, assigned for attention to businesses it most affects, prioritized and tagged for specific individuals to deal with.

It sounds prosaic, but it’s the Sisyphean task occupying thousands of people inside each bank across IT, operations, compliance, risk control, the middle office as well as those running businesses.

“We have reached a point where regulators in Europe, Asia and the US are producing a huge volume of new rules which are being changed every week, so the challenge for the banks is only getting bigger,” says Blythe Barber, managing director at JWG.

“There is no universal language between regulators and neither is there a standardized taxonomy tying it together, so often varying terms are used to describe the same things.”

A small example: while some regulators in many countries write rules around high-frequency trading (HFT), their counterparts in certain other jurisdictions might still describe these same activities as computer-based trading, while still others regulate for automated trading.

Barber, who before joining JWG held a number of senior positions in capital markets including director at Expand Research – a subsidiary of the Boston Consulting Group – managing principal at Capco and senior trader at Schneider Trading Associates, says: “RegDelta uses a semantic ontology to relate the myriad of new documentation to the businesses most affected. It crowd-sources the bank’s house view for the smartest thinking on interpretation of those rules from across the industry.

“The platform has powerful search tools which can integrate change-the-bank implementation workflow into the ongoing running of the bank to provide traceability from the release of a new rule, to the firm’s interpretation of it, the impact assessment and who in the bank has taken what actions to be compliant. No one else is doing this end to end.”

An insight into the sheer complexity banks face in analyzing draft rules was provided by Christian Voigt, senior regulatory adviser at Fidessa, at the end of September when European Securities and Markets Authority (ESMA) produced its long-awaited report on the technical standards for MiFID II/MiFIR.

Voigt noted: “As well as reviewing every single word of this impressive tome – 1,532 pages spread across three documents – we should consider the wider scope and take note of what the report does not cover too.”

He pointed out that ESMA still needed to publish details on some parts of investor protection, commodity position reporting and indirect clearing.

“We’re also still waiting for the delegated acts from the European Commission (EC), covering areas such as the unbundling of research, record-keeping requirements for non-HFT investment firms and the definitions for both systematic internaliser and HFT. It is suggested that the EC will follow up with a final text to be released sometime in November 2015.”

PJ Di Giammarino, JWG

He added: “As all the level 2 texts become available, the focus will shift to further level 3 clarifications. With the content and timing of any type of level 3 document still very uncertain, this is probably a topic for 2016 and beyond. So whilst we’re all relieved to have got this far, there’s still a way to travel on the road to MiFID II.”

Focus

RegDelta has launched with 10 clients among tier-one and tier-two global banks.

Barber says: “It can be a very modular platform, so from the hundreds of thousands of pages of rules coming into force it can be used to focus just on areas such as the MiFID II programme, trade and transaction reporting, or know your customer.”

Just how much regulatory documentation sits inside this golden store, Euromoney wonders? PJ Di Giammarino, chief executive of JWG, has no doubt that Barber will stay busy.

“As the industry tightens the nuts and bolts of G20’s regulatory framework, he will help our clients face a pile of paperwork more than three Eiffel Towers tall.”