Transcript of "Technology Facilitating the Regulatory Reporting"
NIIT Technologies White Paper
Key Regulations and Trends
Dodd Frank Act
Markets in Financial Instruments Directive (MiFID)
Emergency Economic Stabilization ACT (EESA)
Challenges & Implications of Regulations on the Capital Markets
Technology and Regulatory Reporting Compliance
Key Regulations and Trends
Regulators face extreme challenges of collecting, processing
After the financial catastrophe in 2007-08, there was a need to
bring changes in the regulatory system. Some of the key
Ever-expanding regulatory initiatives such as Dodd Frank Wall
regulations that brought sweeping changes in the regulatory
Street Reform and Consumer Protection Act, BASEL III, AML
etc. and increased demands to report more at a time
exacerbate these challenges. These regulatory initiatives, thus,
makes it imperative for the firms to improve the value of
Foreign Account Tax Compliance Act (FATCA) is not just a
information collected and reported and manage change
regulation or a compliance requirement; rather it is a compliance
effectively with the changing economic environment.
that covers the entire banking value chain. It was enacted in
March 2010 and is intended to prevent tax evasion by U.S.
taxpayers, through the use of offshore accounts. This compliance
from the U.S. requires U.S. clients to report their financial
Analytics and Review
accounts held overseas and foreign financial institutions to the
Internal Revenue Service (IRS) about their American clients.
FATCA taxes U.S. citizens and residents on the worldwide
income. However, if a person is working in a foreign country then
FATCA gives a flexibility to exclude a limited amount of foreign
Figure 1: Data based on Federal Reserve Suggestion
income from the total income.
Over the past several years, external reporting requirements
All non-financial intermediaries and agents owning or holding U.S.
continue to evolve with numerous new laws, regulations and
investments will have to fulfill information reporting and disclosure
regulatory expectations. In order to provide transparency within
requirements of FATCA from January 2014. This U.S. legislation
the financial system banks and financial institutions must
will impact tax functions, technology systems, operations, and
automate regulatory reporting process to deliver data quality and
business strategy of an organization.
accuracy. According to a survey in 2012, 25% banks have
automated regulatory reporting process while 75% still have
manual or partially automated regulatory environment.
• Harmonize with inter-governmental agreements
• Relax documentation and due diligence requirements
This paper elucidates key regulations and trends and how
technology can help financial institutions in complying with
• Liberalization of requirements for retirement funds and savings
• Limited relief for FFIs.
Technology and Compliance
Financial institutions must make significant changes in technology
to consolidate and automate processes and procedures before
implementing and complying with FATCA. They must reassess the
As of July 1 2013
current state of the systems and operations, conduct gap
analysis, develop action plans and evaluate the legal entities to
determine whether they have been covered by FATCA or not.
Data mining data help minimize the number of time information
is needed from the client for data analysis. Many technology
companies use business intelligence tools to customize
different types of data analysis. An important type of data
analysis for FATCA is link analysis. Link analysis enables clients
to bring together disparate data. Technology can be used to
find out common elements from the disparate data available;
Figure 2: DFA Rulemaking progress as on July 1, 2013
allowing financial institutions to connect and group data to a
centralized place. Technology also helps in data sharing and
automating data masking.
Dodd Frank Act
The Dodd–Frank Wall Street Reform and Consumer Protection Act
brought significant changes to financial regulation in the United
States. In order to protect unsuspecting borrowers against
abusive lending and mortgage practices, Dodd Frank Act
established federal financial regulatory agencies and financial
services industry to monitor banking practices and troubled
financial institutions. It contains roughly 1,500 provisions, including
about 398 rule-making requirements.
• Protect U.S. citizens from abusive financial service practices
• Finish the “too-big-too-fail” concept to ensure that the
taxpayers don’t have to bear the consequences of the failure of
• Ensure advanced warning systems are created in order to deal
with future economic crisis
• Bring transparency in derivatives and instruments market and
don’t create havoc in the future
• Increase accountability of credit rating agencies for debt
• Ensure top executives decisions are aligned with interest of the
Regulatory activity on Dodd Frank in 2013 will include:
• Financial Stability Reform
• Resolution Planning
• Securitization Reforms
• Derivates Regulation
• Investor Protection Reform
• Credit Rating Agency Reform
• Volcker Rule
• Compensation, Corporate Governance and Disclosure
• Capital Requirements
• Foreign Bank Regulation
• Consumer Protection Reform
Technology and Compliance
Dodd Frank Act impacts different lines of business in the financial
services industry. To comply with Dodd Frank’s rules efficiently and
effectively, technology firms must assess the new rules and
regulations, tools and processes it currently has and build new IT
systems integrating old processes within the existing platforms.
New IT systems will contain measurable, transparent and
predictable processes that reduce costs across the different
• Origin of Mortgage and its Servicing
• Specialized Corporate Disclosures.
Technology firms must
• implement pre-trade compliance checks enforcing system
• rationalize and consolidate to achieve true copy of the data and
support regulatory reporting.
Financial institutions must place special emphasis on data
management, business intelligence, risk analytics and knowledge
Figure 3: Basel III Phase in Arrangements
Basel III builds on Basel I and Basel II documents by the Basel
• Improve the financial institutions ability to deal with issues
Committee on Banking Supervision. Basel III enhanced the
banking regulatory framework and dealt with financial and
economic stress, risk management, liquidity in the market and
arising from financial and economic stress
• Improve risk management and governance
• Strengthen banks transparency and disclosures
banks transparency. The two liquidity ratios – the short-term
Liquidity Coverage Ratio (LCR) and the longer-term Net Stable
Funding Ratio (NSFR) increases the high-quality liquid assets of
banks and obtains stable sources of funding. These liquidity
ratios ensures adherence to sound principles of liquidity risk
Technology and Compliance
All technology firms must focus on improving data management
practices which requires financial institutions to aggregate,
standardize and analyze data to derive high quality information.
When the data management levels as required by Basel III are
LCR will incorporate amendments in expansion of the assets
considered as High Quality Liquid Assets (HQLA) and net cash
achieved, technology firms need to deploy advanced analytics
to achieve process efficiency.
outflows to reflect experience in times of stress. The new LCR will
be implemented in a phased manner starting January, 2015.
Implementing LCR on an ongoing basis help monitor and manage
liquidity risk. An LCR of 60% should be maintained in the first year
of its implementation; gradually climbing by 10% each year until it
is implemented at 100% in January, 2019.
In the past, data was managed in silos. To comply with Basel III,
financial institutions need to manage the quality of the data
extracted from the aging infrastructures. There is a need for IT
systems to be developed that produce and manage consistent,
accurate and true copy of the data from disparate systems. The IT
infrastructure should be flexible and robust enough to quickly
integrate data from disparate systems and build quick interfaces.
AML came into effect after the formation of Financial Action Task
The Financial Industry Regulatory Authority (FINRA) is a self
Force (FATF) - an intergovernmental body, and anti-money
regulatory organization that oversees financial regulations of
laundering standards. Due to new government regulations and
member brokerage firms and exchange markets. It offers
ever evolving laundering techniques AML compliance departments
regulatory services to all security firms that publicly do business,
always struggle to stay ahead of the constant change.
and organizations that offer professional training, testing, and
licensing of registered persons, arbitration and mediation, market
New Anti-Money Laundering and Countering of Financing of
regulation by contract for the NYSE, the NASDAQ Stock Market,
Terrorism (AML/CFT) will undergo a makeover effective from the
Inc., the American Stock Exchange LLC, and the International
end of June. The following amendments will be made to the AML
Securities Exchange, LLC; and industry utilities, such as Trade
Reporting Facilities and other over-the-counter operations.
1) Amendments to the ordinary course of business exemption that
currently applies to accountants and others will now include
FINRA uses internet, media and public forums to help investors
director, employee, agent or other person.
build financial knowledge. It also provides essential tools to better
understand the market and principles of investing. In 2013, FINRA
2) New Regulation 5A will require enhanced customer due
will consider the following products and investments for heightened
diligence to be undertaken for transactions requiring suspicious
scrutiny: Business Development Corporations, Leveraged Loan
Products, Commercial Mortgaged-Backed Securities, High Yield
Debt, Structured Products, Exchange Trade Notes, Non-Traded
REITs and Closed Funds.
3) Changes will be made to the customer due diligence exemption
and will be extended to client funds account.
Technology and Compliance
• Regulates trading in equities, corporate bonds, security futures
Financial institutions are reacting to regulatory demands and
• Licenses individuals and admits firms to the industry, writes rules
to govern their behavior and examines them for regulatory
• Sells regulatory products and services to stock markets and
• Provides educational and qualification examinations.
investing in automated systems that can monitor every single
financial transaction, discover unusual behavior and discover
transactions that seem to be a money laundering transaction.
Automated systems leverage data from disparate systems and
can help verify new customer identities and perform link analysis
in order to understand the background of the customer. These
systems must learn and adapt to the situations while analyzing
client profile and their transactions improving cost and
Technology and Compliance
With FINRA clearly stating its social media guidelines, financial
institutions must look out for firms that can help them establish a
Financial institutions look for technology firms that can provide
strong social media policy that evolves as industry regulations and
technology platforms based on the product and risk specific
technology changes. The organization before building a social
requirements. There is no need to replace existing systems. The
media policy must find out the social media platforms aligned with
new platforms must integrate tightly with the existing applications
the business goals.
maximizing previous technology investments. The platform
designed must be agile enough to change as risks and rules
changes. Changes may include product changes, mergers and
Anti Money Laundering Laws (AML) is a set of procedures, laws or
acquisitions, and financial organization working in a new
regulations used in the financial and legal industries to prevent,
geography. Maintaining these new systems help in achieving cost
detect and report illegal money laundering actions. According to a
efficiencies, and customer satisfaction.
survey in 2012, 41% organizations have integrated AML in the
business strategy of new products/services.
financial transparency and protect consumers in the field of
KYC regulation is important for both financial institutions and
investment services. MiFID covers investment banks, portfolio
regulatory companies to ascertain relevant information about the
managers, corporate finance firms and some derivatives and
customer while doing business with them. These policies help
commodities related firms.
prevent identity theft, financial fraud, money laundering and
terrorist financing. Seven out of 10 Indian financial services firms do
not regularly update the know-your-customer (KYC) details of their
customers, says a survey on anti-money laundering.
The following four key elements are incorporated by financial
institutions while framing their KYC policies:
• Customer Acceptance Policy
• Customer Identification Procedure
• Transaction Monitoring
• Risk management.
Basic identity information helps financial institutions understand the
capacity of the individual in committing money laundering or
identity theft. In order to understand the capacity daily transactions
of the individual are monitored against their expected behavior and
Figure 4: MiFID related regulations
Technology and Compliance
The global footprints of financial institutions necessitate the need
• Authorized firms regulated in their home states can provide
for global KYC hubs with data to cater to various regulations. The
data in these hubs must be reusable in order to enable better
flexibility and scalability. Reusable data reduces the overall cost of
the financial institution. Global KYC hubs will help in automating
firm’s processes improving efficiency, enabling rapid turnaround
and at the same time reducing operational risk. Automated
processes ensure all data is captured; reducing the risk of
complying with the regulations due to incomplete data.
services to customers in other EU member states
• Clear procedures are adapted to categorize customers as
"eligible counterparties", professional clients or retail clients
• While taking client orders detailed information needs to be
• New post-trade transparency requirements and capital
requirements to transactions is extended in financial instruments
• Firms need to publish price, volume and time of all trades in
Markets in Financial Instruments Directive
MiFID is a European Union Law that aims to increase the cross
border investment orders. Its main objective is to increase
competition, create harmonization across jurisdictions, enhance
• Firms must obtain best possible results in the client order
• MiFID treats Systematic Internalisers as mini-exchanges for preand post-trade transparency requirements.
Technology and Compliance
To comply with MiFID, technology firms had to alter marketing
practices, rewrite customer contracts and deeply assess client
needs. This poses a challenge for the firms to retain and integrate
information to plan for and implement technology requirements.
Firms must manage information lifecycle to easily access
information and include indexing for fast and accurate searching.
In order to implement MiFID regulation in a financial institution,
technology firms need to upgrade the network infrastructure and
communication lines to enable acceptance of data from multiple
sources. The upgradation should be flexible enough to handle the
new business rules and data elements that may emerge with time.
Along with the infrastructure technology firms must also upgrade
their storage systems. Storage infrastructure has to ramp up
significantly to handle increase in data flow and manage data
Challenges & Implications of
Regulations on the Capital Markets
Managing regulatory reforms is the biggest driver of strategic and
operational change in the capital market industry. Financial
institutions have to change their working every time a new rule global, national and regional – is reinforced.
Few are the challenges that financial institutions face:
• Multiple bank regulations at various stages of development and
• Diminished returns and rising costs
• Aligning business and strategic choices to the new regulatory
• Ineffective use of big data
• Banks have to change their culture and behavior; take difficult
decisions, implement them effectively and restore customer
Emergency Economic Stabilization ACT (EESA)
confidence and trust.
The Emergency Economic Stabilization Act of 2008 is a U.S.
financial system law enacted for international credit and
Leading financial institutions evaluate their current regulatory
subprime mortgage crisis. The regulation authorizes United
infrastructure and think of refining tools and capabilities to
States Secretary of the Treasury to spend more than $700
adjust to the current regulatory landscape. Institutions are
billion for the purchase of distress assets and for supplying cash
progressing from regulation to transformation in order to
directly to banks. It also allows companies to insure their
position themselves and achieve success. Control functions
troubled assets using EESA regulation.
must be used to ensure compliance and support transformation
change in key business processes. To support transformational
Treasury secretary was authorized to establish Troubled Asset
change, it is mandatory to identify and assess interrelationships
Relief Program (TARP) by the EESA to protect consumers and
between regulatory initiatives, develop business and structural
businesses for securing credit. The purchases of illiquid assets by
models in compliance with new regulations and change
the Treasury secretary under the TARP increase confidence of the
customer needs through innovation and investment.
banks in the credit market.
The pressure on financial institutions is to ensure that they meet
regulatory requirements at an appropriate time. In order to meet
• Provide authority and facilities to restore liquidity and stability to
these requirements they need to do careful planning to improve
the financial system
• Allow TARP to purchase troubled assets from any financial
• Imposes limits on executive compensation of participating
• Monitors the Secretary’s activities
• Protect homeowners.
economic conditions to generate balance sheet growth and reduce
provision of liquidity. Financial institutions also need to invest in
technology as a result of regulatory requirements. The existing IT
infrastructure reflects what was required to support regulatory
requirements in the past. Therefore, there is an urgent need to
bring significant architectural changes to adapt radically to the
changing regulatory landscape and create control of key individual
Technology and Regulatory
Banks and financial institutions that use technology are real winners in
burdens on financial institutions. Financial institutions need to
the capital markets as technology helps build tighter relationships with
• Automate regulatory reporting processes to minimize the
the client. Continued investment in technology, user friendly channels
such as mobile and internet, and social media help these institutions
in providing excellent customer service.
Regulatory compliance programs generate considerable data into
disparate silos. In order to properly manage and generate
intelligent data, there is a need to have a unified data management
system to reduce risk and maintain regulatory compliance, and use
appropriate technology and tools for fast access to granular
information. Without appropriate technology and tools it is difficult
to understand the background of data, measure and monitor
compliance programs and generate right kind of reports for the
higher management. Technology, thus, implemented appropriately
to monitor and manage compliance programs not only drives
down cost but also drives up revenues.
Three steps that a financial institution must consider in order to
overcome the challenges in areas of risk management and
1. Unified Data Management Platform
Unified Data Management Platform delivers data integrity and quality to
support regulatory compliance. With an integrated and unified platform,
financial institutions can perform data mining, and data profiling and
Rapidly changing regulatory requirements have placed huge
manual work involved in the process
• Build a team that can handle changing requirements and help
train the personnel
• Optimize governance structure and control environment
within the regulatory function
• Enhance and evolve business processes with changing
regulatory environment in order to enhance flexibility and
effectiveness to keep pace with the regulatory demands.
Banks and financial institutions need to invest in the
infrastructure and leverage technology to ensure effective,
investment should be timely, aligned with the current regulatory
environment and periodically monitored so that the financial
institutions are able to keep pace with the changing needs.
NIIT Technologies service areas address business processes,
data quality and technology architecture to support the
regulatory reporting processes. We manage the regulatory
reporting requirements and accuracy of numbers quickly and
easily. It simplifies the processes required to produce clients
financial views and facilitates the production of fully reconciled
financial reports at all levels of granularity.
monitoring. It also helps in transforming data silos maintained in
disparate systems into reliable, accurate and trusted data.
1. Dodd-Frank Progress Report, July 2013
Optimizing regulatory structures enables financial institutions to
2. Bank for International Settlements
implement changes in the regulatory landscape within a specified
time frame and aligned with short and long term objectives. This
can be achieved through incremental and innovative improvement
to the supporting technology.
Regulators everywhere face the challenge of collecting, processing
and reporting information accurately and effectively. In order to
overcome this challenge, e-filling is a standard tool that regulators
must choose to improve the entire end-to-end regulatory reporting
process. The financial institutions achieve greater transparency and
efficiency while collecting relevant information. This standardized
reporting tool can easily support the changing needs of the regulators.
About NIIT Technologies
NIIT Technologies is a leading IT solutions organization, servicing customers in North America,
Europe, Asia and Australia. It offers services in Application Development and Maintenance,
Enterprise Solutions including Managed Services and Business Process Outsourcing to
organisations in the Financial Services, Travel & Transportation, Manufacturing/Distribution, and
Government sectors. With employees over 8,000 professionals, NIIT Technologies follows global
standards of software development processes.
Over the years the Company has forged extremely rewarding relationships with global majors, a
testimony to mutual commitment and its ability to retain marquee clients, drawing repeat
business from them. NIIT Technologies has been able to scale its interactions with marquee
clients in the BFSI sector, the Travel Transport & Logistics and Manufacturing & Distribution, into
extremely meaningful, multi-year "collaborations.
NIIT Technologies follows global standards of development, which include ISO 9001:2000
Certification, assessment at Level 5 for SEI-CMMi version 1.2 and ISO 27001 information
security management certification. Its data centre operations are assessed at the international
ISO 20000 IT management standards.
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