Looking at the ever-growing list of market regulations, risk frameworks and guiding principles, it is not surprising that in November 2016 UK regulator the Financial Conduct Authority (FCA) called for action to develop and onboard technologically advanced tools to assist financial institutions with regulatory compliance.
Through machine learning, the industry will automate reporting and compliance processes, thus creating large cost-saving opportunities.
According to Bloomberg’s survey of 10 top tier sell-side firms in London, roughly 2.5 million documents need to be reviewed between sell- and buy- side firms to be MiFID II compliant. This, combined with other financial regulations, creates a challenge for financial institutions to process such huge volumes of paperwork without increasing administrational and legal costs for more resources.
Onboarding new reference data parsing systems and tools to automate existing manual processing operations (i.e. exchange of contracts by email or post) will result in a number of benefits. These include minimizing handling time to speed up licensing, reduction of regulatory costs, and lowering of the workload burden of both legal and operations departments.
The concept of a smart license inventory system is simple. Primarily, the inventory system will not only store and encrypt all licenses between vendors, exchanges and end users, but will also tackle the very issues that bring large “dollar liabilities” for end users. This typically includes a lack of uniformity, the reluctance to agree definitions, the tendency for some sources to interpret permitted usage policies in a way that benefits a segment of the industry but not the whole. In other words, the licensing landscape should be reshaped by creating uniform clauses in agreements and contracts. As a result, it will be possible to automate renewal of licenses as well as make amending and revising licenses more efficient. This process avoids the exchange of physical papers, speeds up licensing processes, and reinforces compliance by licensees.
The proposed inventory system will assist in achieving and maintaining licensing compliance—albeit without the corresponding uniform licensing policies—and, crucially, interpretation of those permitted usage clauses.
Data sources, exchanges, industry bodies, end users and redistributors will need to publicly agree changes: market data licensing is currently in the hands of the few who sometimes apply a varied interpretation that may be construed as being revenue driven (and licensing is, typically about a year behind the curve), and whose top priority is to get the most from the intellectual property held within market data. For instance, some of the changes might be agreeing universal definitions, structure of licensing contracts and their logic and interpretation.
The market data industry has reached a stage where institutions are being forced to adopt policies for which their technology and practices cannot be changed within the standard 90 days prior notice period given by exchanges—for example, for algorithmic development, risk management and reporting, transaction reporting, among others. Technology has driven efficiency, allowing for previous thinking and boundaries to be re-written: the oft-templated and static license inventory system must now face its future: as not merely an “inventory,” but as a solution in itself by resolving licensing compliance issues.
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