The words chaos and regulation appear to be a juxtaposition; however, in the current world of financial services, it could be argued that the two go hand in hand. We are currently navigating a complex regulatory landscape, shaped by global economic shifts, the convergence of international markets, and rapid technological advancements.
Strategic planning is also further complicated by new regulatory policies such as the European Market Infrastructure Regulation (EMIR) Refit and the Markets in Crypto-Assets Regulation (MiCA). Firms are not only dealing with a complex commercial landscape but are also having to adapt to shifting regulatory expectations that require a more integrated and proactive approach from organisations.
According to our research, 96% of compliance professionals are planning to invest in technology to address compliance issues. The advent of artificial intelligence, cited by 57% of compliance professionals, and global economic instability, identified by 56%, are key drivers behind firms’ increased reliance on digital tools. It highlights a growing recognition that technological investment is not just a ‘nice to have’, but an essential piece of armoury in addressing the complexities of modern compliance.
The need for businesses to adapt is clear. However, adaptation extends beyond merely meeting regulatory obligations. The challenge for businesses is to view compliance not as a hurdle but as an integral part of their business model that can be enhanced and streamlined. As the sector continues to evolve, this will be crucial in ensuring future commercial success.
A new realm…
In the wake of global shocks, including the COVID-19 pandemic, supply chain disruptions, geopolitical conflicts, inflationary pressures, and market upheaval, the financial landscape is undergoing a significant transformation.
These events have reshaped the dynamics of market abuse, intensifying economic and price volatility while widening the tools available to bad actors. Regulators face the delicate balance of avoiding underreaction, which could foster opportunism and criminality, and overreaction, potentially causing further instability.
The heightened volatility complicates how market abuse is detected. Rapid, unpredictable price movements can obscure manipulative activities as perpetrators exploit increased market noise, diminished liquidity, and general uncertainty. The commodities market is particularly susceptible due to its price sensitivity and lower liquidity. This is further compounded by its delayed adoption of technology which exacerbates these risks.
With the increasing digitisation of financial markets, new challenges arise in combating market misconduct. The emergence of trading platforms, FinTech innovations, cryptocurrency, and social media has created an intricate web of interactions that demand a reevaluation of how we engage with the market, and how we prevent misconduct. From new market players to increasingly interconnected regulatory domains, surveillance efforts have never been more complex than they currently are in this evolving ecosystem.
… means new rules
With so many market changes, regulations also need to follow suit. For example, the EMIR Refit is increasing the volume of data fields required for regulatory reporting significantly, with firms now facing the task of reporting on an extra 89 fields. This change necessitates substantial operational and reporting adjustments to maintain compliance. The addition of fields like the ‘Event Type’ is intended to enhance trade lifecycle transparency, but it also complicates the reporting process with numerous event and action type combinations.
The format for reporting data is also evolving. The shift towards the ISO 20022 XML format, an international standard, aims to create a more structured and unified approach to data reporting. This change is intended to facilitate global harmonisation of derivative reporting and enhance market abuse detection capabilities. Businesses must therefore adapt their reporting processes to comply with these standards, which may be challenging for those accustomed to simpler or manually collated formats like CSV and Excel.
And this is just one example of regulatory change and the subsequent work it brings with it. It’s not the only one, and it certainly won’t be the last. These developments act as a perfect example of why being regulation-ready is less about responding to regulatory changes and more about the effectiveness of internal processes. But why is this the case?
Why legacy systems won’t work
Traditional regulatory processes, particularly those relying on manual data entry, are becoming increasingly inadequate. These methods, which may well have been fairly effective in the recent past, now struggle to keep pace with the complex nature of modern financial transactions. One of the key issues with legacy systems is they often rely on manual intervention or offer limited connectivity with the latest technology. As a result, they are prone to human error and sometimes lack the flexibility to scale or adapt quickly to new regulatory requirements.
It is unrealistic for firms to aim to create an entirely bulletproof system or predict every potential market shift. Instead, the focus should be on developing processes that are both efficient and agile. It’s about having a framework in place that can adapt readily to whatever changes may arise, whether they are regulatory updates or shifts in market conditions. By prioritising adaptability and efficiency in design, businesses can ensure they remain compliant, and ready to respond effectively to the ever-changing financial landscape.
The bottom line
The state of the financial markets present a new guiding principle for businesses: being regulation-ready lies not in the regulations themselves but in the processes we establish to navigate them.
While legacy systems were once the backbone of financial institutions, they now falter under the weight of modern market demands. They are too slow, too error-prone, and too rigid to keep pace with the rapid evolution of the financial landscape.
The shift towards technology-driven solutions is not just a trend; it is a necessity. This is not just about enhancing existing processes; it is a fundamental restructuring of how businesses approach compliance and market dynamics. It’s a critical step in ensuring that businesses remain agile, efficient, and above all, compliant.
By Ben Parker, CEO, eflow Global