Michael Shashoua: E.T.—The Extra-Territorial

A new buzzword surfacing in the data operations space is extraterritoriality, a concept that affects not just standardization of data standards and compliance with regulation, but also the way both reference and market data are managed, and data services clients are onboarded.

Rules and standards such as the legal entity identifier (LEI), the Foreign Account Tax Compliance Act (Fatca) and firms’ own business conduct rules, all hinge on differences from nation to nation. LEI administration hinges on how local operating units will work together under a central one. Fatca, a US-based rule, requires all other countries to set up their own regimes for compliance.

Peter Serenita, chief data officer at HSBC in New York who spoke at our North American Financial Information Summit in May, says phasing in these rules “requires the ability to have good reference data and know which components of the reporting you need to phase in over time.” With identifiers, Serenita says, a firm’s trading process should be tracked, and “you need clear reference data for how that relationship between that fund manager and clients exists.”

Causing Fragmentation
Overall, extra-territoriality is when national regulators take different stances on the same areas of rulemaking, says Robert Pickel, CEO of the International Swaps and Derivatives Association, who spoke at last month’s Markit customer conference. Extra-territoriality can also include exemptions from local law. Either way, regulatory fragmentation can result, he adds. An international regulatory or standards body may attempt to impose rules that supersede national rules, or national regulators may have the authority to interpret international guidance.

The danger, says David Schraa, regulatory counsel for the Institute of International Finance, who spoke at the Markit event, is that a potentially “well-regulated and reasonably stable global financial system” will “Balkanize” into territorial national markets—not just in the derivatives business. “It will be much more costly for a bank to monitor 10 major markets if they must have capital and liquidity for each one,” he says.

There may be some possible integration of provisions of the US Dodd–Frank Act and Europe’s Basel III capital adequacy rules, according to Jacklyn Osborne, global head of client data policy and quality assurance at UBS in Stamford, Conn., who also spoke at our event. However, to achieve a single identifier that integrates counterparty and issuer data, the industry will have to look at “not just one regulation, but all the regulations together, because they have so much overlap.”

Client Onboarding Issues
Just as different sets of rules makes it difficult to reconcile all the rules into a consistent whole, the need for different systems to handle compliance with all the different sets of rules makes it hard to get one cohesive system for data management and data-related compliance. “If you try to look across different boutique solutions, you never really can because they don’t quite add up,” says Serenita. “If you’re trying to look at the same thing, but reporting it differently, you’re suddenly creating a series of requirements that are very specific to a market or location.”

As a result, a task such as onboarding clients can become conditional, says Serenita. A firm may only need certain pieces of data from those clients because they offer a certain product in a country where that client has business, he says. But this also poses a danger of data providers giving different answers to the same client.

Data managers must be proactive by anticipating occurrences like that, along with the potential outcome of extraterritoriality in regulation, rather than a successfully globalized and coordinated effort—and be prepared for both possibilities. That preparation will extend into multiple territories within firms, as well—such as overall data management, assigning and cataloging identifiers, and onboarding clients.