Can Automation Prevent Regulation Consternation?

Digitization and automation are key to meeting the demands of the financial industry's future regulatory burden.

The need for firms to automate internal processes is becoming a higher priority, especially when it comes to complying with constant changes in regulation—both domestically and worldwide. Wei-Shen Wong reports on the challenges facing firms attempting to address this issue in Singapore, where new proposals will see a massive increase in data reported to regulators.

Financial institutions are increasingly being bombarded by a barrage of new regulations, as well as updates to existing regulations. Moreover, they must also comply with regulations not only within their own country, but with regulations from different jurisdictions around the world that demand compliance in return for participation—such as the second iteration of the Markets in Financial Instruments Directive (MiFID II)

Singapore-based firms are facing one such double-whammy: Not only must they scramble to implement and start testing for MiFID II; they also have to deal with pressing updates to regulations from Singapore’s central bank, the Monetary Authority of Singapore (MAS), which—though not entirely new—have been the source of a drawn-out back-and-forth between MAS and the industry over feedback on implementation challenges.  

This process dates back to Dec. 31, 2014, when MAS proposed revisions to two of its notices—MAS 610 and MAS 1003—that regulate the submission of statistics and returns by banks and merchant banks. The first consultation, which closed on Feb. 5, 2015, contained proposals by MAS concerning the format and content of the reporting forms, reporting deadlines and items to be covered in the forms. 

MAS proposed to increase the amount of data points and detail it collects from banks. According to Abraham Teo, head of regulatory policy for Asia Pacific at AxiomSL, the number of data points that banks must submit would increase from about 4,000 to about 340,000 when the notices take effect. “It’s about an 8,000 percent increase, or 80 times more data points to submit,” he says. 

Data required includes where trades are booked, the industries in which clients operate, and grouping of assets by countries, among other fields—many of which have not been previously captured under MAS’ existing reporting requirements. 

For example, under the current MAS 610, accrued interest is recorded and classified separately under “other assets” and “other liabilities” in the Statement of Financial Position. Under the proposed MAS 610, accrued interest will be included in the outstanding amounts of the underlying assets or liabilities. MAS’ reasoning for this specific proposal is that the approach would result in the uniform treatment of accrued interest across all interest-bearing assets and liabilities. 

MAS had initially proposed a six- to nine-month implementation timeline for banks and merchant banks to comply with the new submission requirements, but later proposed an 18-month period after respondents indicated constraints in meeting that timeline. 

After even more consideration, it has given banks 24 months from the issuance of the notices to implement the revisions, as well as a six-month testing period for banks to ensure that data is correctly collected and submitted, therefore giving banks at least 30 months to make sure their data is ship-shape and ready for reporting.

Elevating Automation

The sheer increase in the amount of data fields required for reporting to MAS is being seen as prompting banks to prioritize automating their processes. This is because it is unlikely that banks can afford a corresponding increase in regulatory headcount, Teo says.

“The focus should be on the automatic generation of the returns, as well as specifying any control reports to assist in analyzing the data—for example, creating a month-on-month or yearly trend analysis to see what items have significant movements, and focusing on analyzing the movements,” he adds.  

One of the central bank’s expectations is for every bank and merchant bank to keep track of all trades booked and executed in Singapore, and for auditors to validate these transactions. 

A MAS spokesperson says the proposed revisions to Notice 610 and Notice 1003 is part of the central bank’s ongoing review of notices to financial institutions. “The first consultation focused on reporting of new data items and clarified data definitions. The second consultation focused on implementation details, including the setup of an industry working group with the Association of Banks in Singapore (ABS) to monitor the implementation of the revised notices,” the spokesperson says, adding that a key challenge raised by financial institutions is the need to build systems to track and compile data at the required level of granularity to implement the proposed revisions. “MAS will work closely with ABS and the industry to ensure smooth implementation of the revised notices.”

MAS is currently reviewing the industry’s feedback to its second public consultation, and will provide its responses in due course, officials say. 

Early Efforts Pay Off

Although MAS has not finalized an effective date, firms will benefit from preparing early rather than leaving it to the last minute—in part because of the complications introduced by addressing regulations from other jurisdictions alongside this. In a report published in 2015 following MAS’ first consultation paper, Deloitte said inconsistent regulatory guidelines across countries makes regulatory reporting a complex task for global and regional banks, especially since regulators are becoming more specific and granular about the calculations behind each dataset. 

AxiomSL’s Teo recommends that clients who have not automated their reporting systems should address the current MAS 610 and MAS 1003 first before attempting to automate the new proposals. Though MAS has yet to announce the effective date for compliance with the revisions, automating the current return would enable banks to free up resources to focus on the new MAS 610 and to cross-validate and check the current and revised results, enabling them to identify any issues early on, rather than closer to the compliance date.

To create a model adaptive to the changing regulatory reporting environment that includes a greater integration between risk, finance and operational data, and increases the ability to drill down into the underlying source data and transactions easily, banks would need to source and implement systems that can accommodate changes to calculations and reports going forward, and which can also cater to the requirements of multiple jurisdictions—some of which can include significant changes. 

For example, one significant change included in the proposed MAS 610 notice is the introduction of a risk component, Teo says. “For example, deals with Client A’s Vietnam branch may be considered to have a  different risk profile to the same deals with Client A’s Singapore branch,” he says. 

That said—although the revisions require additional fields and more granular data—the majority of data required by MAS generally remains the same, so banks with existing systems that support reporting under the current MAS 610 would have a lot of reusability under the proposed update. In addition, the MAS 610 and 1003 notices are taken as the root for all other returns required by the central bank. Therefore, Teo says, it is likely that other returns will be reviewed and regression-tested against the revised MAS 610 and MAS 1003 to ensure consistency. 

“The other main issue we have heard mentioned by our clients is one of sourcing new data—for example, loan purpose, ultimate counterparty, and execution method are some of the new pieces of data which the banks are required to source. If not available in current systems, enhancements to upstream systems might be needed to capture this information,” Teo adds 

Prepared or Scared?

Banks contacted for comment for this article were generally unwilling to comment on the progress of their implementation preparations, citing the fact that MAS has not confirmed an effective date for the revisions. 

However, a regulatory risk manager at a global financial services firm says the feedback for the second consultation paper published by MAS shows the level of concern among banks. 

“By the extensive 99 pages of industry responses for the second consultation paper for MAS 610, it is just unbelievable. It shows how much concern and challenges banks have in executing it. Given the quantum of feedback, I think it is reasonable to take a little bit more time to understand the industry’s concerns. The devil is really in the execution,” the regulatory risk manager says.

Bank of China, BNP Paribas, CIMB Bank, DBS Bank, Deutsche Bank, Nomura Singapore, and United Overseas Bank were among 35 respondents that provided feedback to the second consultation paper. 

Some of the comments from respondents include questions about whether the MAS could provide a spreadsheet template for banks’ internal testing and trial runs, and whether the central bank would provide specific instructions on how the data should be created and represented. In response, MAS has promised to revamp the existing data collection infrastructure, and to engage the industry on IT implementation. 

Also in response to feedback from the first consultation paper, MAS decided to remove the distinction between the Domestic Business Unit (DBU) and Asian Currency Unit (ACU) in its banking regulations, and the requirement to report them separately—though this may create more problems for firms, notes AxiomSL’s Teo. 

“Because the MAS has decided to do away with the ACU and DBU banking units at the same time, banks would have to re-look at how their general ledger systems and books are set up, which might be a more fundamental change to the way data is processed in the general ledger,” he says.

Though there will most definitely need to be some system enhancement requirements, much of the additional data already exists within banks, so the key challenge for banks is how to create a customized feed to report it. The regulatory risk manager commends MAS for acknowledging the investments that banks need to make to be able to comply with the revisions. 

“This two-year turnaround time is quite welcome. MAS understands the practical difficulties for banks. Particularly for banks that are big in scale, it requires a sizeable amount of time and effort to map the data into the right format, granularity and structure. It’s something that is easier said than done,” the regulatory risk manager says. 

Teo also praises MAS’ efforts to be sympathetic to the other regulatory challenges facing firms. In the current regulatory landscape, uncertainty and changes are aplenty—not only domestically, but also on a global scale, with new regulations such as MIFID II and the International Financial Reporting Standards 9 (IFRS 9) coming into effect in 2018. 

“The MAS has been very good in this regard, trying to provide some certainty to banks by spelling out their medium- to longer-term changes for regulatory reporting. This gives banks a clear roadmap of what needs to be done, and a decent amount of time to get the change implemented, which is actually pretty rare in today’s regulatory world,” Teo adds.

One Bank’s View

Although the Notices are only applicable to financial institutions that hold a banking license in Singapore and currently report under the MAS 610 and MAS 1003 requirements, sell-side firms that are part of a banking entity in Singapore would also be affected, though firms regulated only under the Securities and Futures Act would not subject to the new rules. 

The regulatory risk manager says the risk and finance team at her bank has already conducted internal assessments considering different options for pulling the data together to meet the proposed reporting requirements. “We are still in the initial feasibility stage. At this stage, we will try to identify any showstoppers or issues we really cannot deliver on. But at the end of the day, some of these matters might require manual effort—for example, defaulted assets. It depends on the items; some might require automation, others can potentially be done on a spreadsheet,” she says.

The bank does not plan to employ an external solution to assist with collecting, managing and mapping the additional data required by the MAS for reporting, she says, adding that this decision comes down to cost–benefit analysis: Unless there are economies of scale for implementing such a solution, banks will tend not to use external solutions, but rather develop or upgrade their systems in-house.

“Particular to MAS 610 requirements, the key challenge is really in tidying up the data at the right level of granularity to suit the reporting requirements based on the raw data that’s already being kept somewhere,” so there is little value that an external solution can add in this instance, the regulatory risk manager says. 

MAS plans to publish the additional data it will collect via a series of reports, though it remains to be seen whether or not the data will be comparable across banks. “It’ll be interesting to see the consistency and storyline told by these reports. Whether they all come together and make sense is the big question mark: When we try to compare the same statistics across different banks, will the numbers really tell the story that Bank A has a problem while Bank B is fine?” the regulatory risk manager adds. 

The additional and more stringent reporting requirements will only increase the capability for regulators—not just MAS, but also other regulators in the region that might seek to increase reporting requirements within their own jurisdictions—to enhance their supervision of financial institutions and therefore be able to identify any early warning signals of potential systemic risks. 

With the certainty of constant change and increasing demands from regulators in the future, one thing is clear: Financial institutions need to be more flexible to changes to existing regulatory data requirements and ensure their internal systems are able to cope with change across multiple regulatory jurisdictions. 

With little appetite to increase headcount to handle these processes and the volumes of data involved, automating collection and reporting might be seen in the short term as a drain on resources competing with compliance demands, but may prove to be the best long-term solution for dealing with future requirements. 

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