Bradley Foster and Murat Bozdemir discuss the need to have a strategic data framework in place to ensure regulatory compliance and set out operational best practices for the road ahead.
Asia’s financial institutions face a shifting regulatory landscape as jurisdictions across the region refine domestic policy and adopt global standards in response to changing market dynamics or newly observed risks. Further compounding this is the aftermath of the COVID-19 pandemic and disruption of business processes. The International Organization of Securities Commissions (IOSCO) work program outlines that pandemic-heightened market turmoil continues to make implementing new regulatory and reporting norms difficult, and mitigating risks exacerbated by COVID-19, such as misconduct and fraud, have been added to the official priorities list of IOSCO.
Additionally, environmental, social and governance (ESG) issues along with climate-related risk management and reporting, have become a business imperative. With a large share of global emissions coming from the region, climate change is set to become a main focus for investors as Asian regulators are stepping up to address climate-related risk management, greenwashing, and transparency requirements.
In order for financial institutions to keep up with an ever-changing and growing list of requirements, a strategic data framework that can manage new regulations and additional risk categories with more detailed data is necessary.
Forward-Looking Risk Management, Compliance, and Reporting
Building a firmwide data-driven infrastructure which flags market events and supports proactive real-time risk management, compliance, and reporting is not a simple undertaking. When faced with time and cost pressures, financial firms may be tempted to forgo a larger, strategic data infrastructure investment and instead reactively invest in one-off solutions. This can result in long-term, expensive inefficiencies since these solutions rarely align with existing data frameworks. Conversely, when a firm does invest in a strategic data infrastructure, their multiple systems, fueled and connected by data, are able to ‘talk to each other’ and therefore able to operate in a seamless, regulation-agnostic manner.
A strategic data infrastructure is especially relevant today as market and regulatory developments over the past 18 months have underscored the need for interconnected, aligned, and consistent data across an organization. The COVID-19 pandemic disrupted “business as usual” working environments and processes, exacerbated weaknesses in regulatory reporting, and made data completeness, reliability, quality, and consistency issues painfully visible.
The pandemic also had knock-on effects in terms of regulatory schedule resets, such as timing adjustments to Basel III and FRTB. Europe extended the implementation of Basel III to 2025, and most Asian jurisdictions also made postponements with Hong Kong setting an implementation date of June 2023 and Australia targeting 2025. The ‘long tail’ of Basel III’s shifting schedule continues to generate uncertainty in many Asian markets, which makes it very difficult for an institution to respond effectively across the region, especially if they’re relying on disjointed data sources or manual data processes.
While these delays give financial institutions much needed room to manage the impacts of the pandemic, the delays are also intended to provide more time for resource gathering and planning so firms are better prepared when the rules do come into force. The Australian Prudential Regulation Authority (APRA), in deferring capital allocation reform implementation to 2025, reminded constituents that ‘unquestionably strong’ capital adequacy levels were already in place, and its deferral decision refers only to reallocation of those levels across portfolios. Additionally, the Hong Kong Monetary Authority (HKMA) signaled that it expects financial institutions to use the intervening time to 2023 to rigorously assess and prepare for compliance highlighting the need for reporting institutions to get their data management house in order.
Data Strategy and ESG
A comprehensive data strategy is also critical for financial institutions to address growing ESG regulatory reporting requirements such as the EU Taxonomy and Sustainable Finance Disclosure Regulation, and new local requirements. Financial institutions in Asia are under pressure to manage climate-related risks and ESG more generally both for regulators and the overall market. Thus, data which verifies their low-carbon footprint, responsible investment, and capital allocation and aligns with green economic policies, will be increasingly valuable when reporting to investors, regulators, and other stakeholders.
However, ESG reporting requirements in Asia are still evolving which creates additional risk and complexities. For example, evaluating ESG risk for sell side participants involves integrating a lot of new, unstructured data supporting the measurement of transition and physical risk into traditional structured security and financial data sets. This is further complicated by numerous different industry standards for ESG compliance with limited supervisory guidance. All of this data needs to be standardized and harmonized with traditional data before proper climate risk measurement and assessment can begin.
Operational Best Practices for the Road Ahead
When taking into account the future impact of changes in regulators’ priorities and compliance capabilities, there are several operational best practices reporting institutions should consider.
Firstly, workflows around managing and reporting transaction and performance data must be optimized. This chiefly refers to the automation of these functions, something that grows increasingly important as business processes are still far from normal.
Secondly, risk management practices must leverage holistic data analytics to account for portfolio allocations, liquidity levels, and other operational requirements as well as assist in proactively assessing potential market shocks and regulatory changes. Effective implementation of Basel III compliance practices, for example, will continue to be challenging for multi-jurisdictional market participants for some time to come.
Finally, automated risk management and reporting tools will be instrumental in helping firms quickly design and implement new compliance and reporting processes that can readily take into account new rules or digitally-enabled products and processes that shift the market landscape. Proactive risk assessment tools will be particularly important for ESG compliance, as the implications of the Paris Accord agreements come into effect, and Asia’s financial regulators increasingly incorporate sustainability measures into compliance practices.
Complex business environments and interdependent risk factors create constant operating challenges for Asia’s financial institutions. However, having an interconnected data strategy spanning risk management and regulatory reporting criteria will allow firms to effectively and confidently respond to these challenges and any future developments.
How Bloomberg Can Help
As financial regulations increase in number and complexity and are sometimes interconnected, firms can no longer prepare for each in isolation. Instead, they need to take a strategic approach to how they acquire and manage their data to benefit from available efficiencies, reduce operational risks, and gain insights that benefit their business beyond regulation. This starts with a firm’s foundational data including areas like terms and conditions, pricing data, corporate actions, and extends to more bespoke and targeted datasets that address specific regulations across the globe covering sell-side and buy-side clients.
Bloomberg’s end-to-end regulatory and risk data solutions offer full interoperability with our foundational data and enables decision-makers to quickly screen and optimize their portfolio and automate risk and regulatory reporting across multiple areas and jurisdictions. To learn more about Bloomberg’s regulation-ready data, click here.
This article was produced by Regulation Asia in conjunction with Bloomberg. The authors of the piece were Bradley Foster, Murat Bozdemir, Vicky Cheng, Kate Lee, and Dennis To.