'The balance between regulatory oversight and free enterprise has tipped towards regulation'

Massive regulatory frameworks such as MiFID II in the EU and the Dodd-Frank Act in the US have forced investment firms to integrate compliance into their high-level strategic thinking.

More recently, new sustainability disclosure regimes being phased-in around the world, in conjunction with ongoing financial reporting, have pushed this trend further.

This presents a particular challenge for investment firms, many of which find opportunities – and thus reporting obligations – in a diverse array of jurisdictions. What strategy should they implement to handle this?

Regulatory expertise – do these rules apply to my firm?

It starts with regulatory understanding, the first threshold question being: is my firm subject to this regulation? 

Drawing an analogy from home construction, we are at the initial stage of trying to figure out what ordinances and permits apply to our project.

This analysis can be complex. An American fund manager, doing cursory research into MiFID II requirements, might conclude that the law’s focus – sell-side entities operating in EU markets – leaves her buy-side firm in the clear. 

While she would be correct for the most part, her firm would nevertheless be subject to MiFID II’s commodity derivative position reporting and position limit rules, which do not exempt buy-side entities.  

In practice, a regulation’s applicability to any particular firm may depend on a complex combination of factors, including its place of business, investment activities, fund marketing, number of employees and/or annual turnover. 

A prudent strategy calls for experienced regulatory attorneys at this stage, whether in-house or as external counsel.

Data management – what should be sourced for reporting?

The next step is to assess what a relevant disclosure rule requires. 

In today’s world of financial regulation, that largely means understanding what data is being demanded. 

In the house-building analogy, this is where you decide on the materials for your foundation.

Financial data is the foundation of an investment firm’s reporting workflow. The firm already collects much of this information, for compliance or investment or other purposes. 

But the data may be dispersed among multiple sources, incomplete, and/or incompatible with the regulator’s reporting systems. 

This produces the need for two critical components at this stage, either internally or through an external vendor:

1. Dedicated regulatory data management specialists.
2. A flexible data hub used for compliance across multiple jurisdictions.

The latter, which can be seen as a “regulatory book of record” akin to an investment book of record, should pay dividends, as regulators worldwide continue to require analysis of large data sets, aggregation and enrichment, and suitable file types. 

This data “foundation” is an important part of a firm’s regulatory reporting function, propping up everything that follows.

Calculations and content – what must be reported?

It is time to build your frame and run the plumbing and electrical lines, to make the home functional.

For the investment firm this means the content of the disclosures, fulfilling the purpose of the reporting requirement. 

Ideally, most of the information required, across various reporting obligations, can be extracted by the reporting firm from its centralised data source in an automated fashion. 

As part of this, the more complex quantitative disclosures may demand a “calcs team”: analysts steeped in the formulas and calculation methodologies imposed by the relevant regulators. (An area of possibly increasing demand for this function is sustainability reporting, as more environmental, social and governance-focused regimes are coming into effect, and calculations such as GHG Scope 3 emissions introducing themselves.)

Document production – how to present the information?

The reportable information is now ready, but what will it look like? Time for drywall, trim, exterior siding and landscaping. 

Financial regulators require disclosures in any number of formats, including standard templates, file attachments, interactive forms, text within existing reports and/or website content. 

A firm’s strategy for reporting, that can be repeated at scale, should integrate a document production team that can do the following: 

• Understand the reportable information being sought.
• Build the templates needed to satisfy disclosure formats.
• Map the relevant data points to the appropriate fields within templates.
• Monitor for regulatory changes, updated requirements and reporting deadlines.

Lastly, the final walkthrough: regular testing of disclosure outputs, for accuracy and completeness.  

Unavoidably, substantial planning and budgeting are needed to implement a successful fund reporting strategy. 

But in the long term, such an investment can save significant effort and resources – particularly for firms active in markets worldwide – when compared with a more ad-hoc approach to reporting that may not be able to keep up with the pace of global regulatory demands.

Greg Hotaling is regulatory compliance manager at Confluence