Governance, risk and compliance solution of the year: Kaizen Reporting

Financial firms face the challenge of navigating a complex regulatory landscape with constantly changing reporting obligations. As new regulations are implemented while others face some rewrites, firms need to ensure their reporting meets the regulatory requirements of being accurate, complete and timely.

Dario Crispini, CEO at Kaizen Reporting, says the problem for both firms and regulators is that the quality of the data being reported has been poor since the outset, and has been a recognised industry-wide problem for some time now.

For example, through Kaizen’s quality assurance testing, as much as 78% of reported Australian Securities and Investments Commission (ASIC) transactions have at least one error contained within the data.

“One of the biggest challenges for firms is what we call the ‘valid but wrong problem’, which occurs when firms have sent their reports to a trade repository to be ‘validated’ before they are sent on to the regulator. Many firms mistakenly believe that if their reports have passed the validation rules, it means they are accurate. But unfortunately for firms, validations are mostly syntax rules that require firms to report their data in the right format, but they do not check the accuracy of the actual reported data,” says Crispini.

This is where Kaizen’s ReportShield Accuracy Testing comes in. It checks all data fields within each report, rather than just samples of data that don’t capture the full picture of data quality.

Crispini says the comprehensiveness of testing means all errors in reporting data are detected, so Kaizen clients can evidence where their reporting is correct and identify where it’s wrong. This allows firms to remedy their errors and stay on top of their reporting quality.

Under the European Union’s Markets in Financial Instruments Regulation RTS 22, Article 15, firms are required to test and reconcile on a regular basis. The timely identification of reporting errors is essential to ensure firms meet this requirement. Crispini says, regulatory fines have been issued in the past when firms didn’t have the right controls in place to detect errors.

Errors in transaction reporting are common, and can be caused by several issues, including system releases and static data updates. Accuracy Testing is delivered as an automated managed service, which means that firms receive their test results monthly or quarterly.

Firms can then identify any inaccuracies with their reporting, and quickly remedy them. If errors are discovered, they can quickly start the process to correct and re-report the transactions.

Many firms mistakenly believe that if their reports have passed the validation rules, it means they are accurate

Dario Crispini, Kaizen Reporting

In October 2021, the final phase of the Monetary Authority of Singapore’s reporting of over-the-counter derivatives regulation came into effect, with all firm types in scope required to report trades in all asset classes.

Accuracy Testing was updated to align with the new rules. “However, firms have no time to sit back and relax, as MAS has already announced it is looking to rewrite the rules, which includes mandating updates to old reports, and our service will be updated to reflect these changes, too,” says Crispini.

Kaizen has also increased its team of regulatory subject matter experts, whose expertise is embedded into the Accuracy Testing platform. This allows the firm to expand the jurisdictions that its testing covers and provide more comprehensive testing for clients.

“We have also introduced anonymised benchmark reports, so our clients can see how their reporting fares against firms of a similar size and type, and we have also made improvements and new functionality to our client portal, the Kaizen Hub,” he says.

Kaizen has also established the Kaizen Community, a virtual forum that provides clients with the opportunity to share their views and challenges, and hear the thoughts of the Kaizen subject matter expert team on topics such as upcoming regulation changes, common issues in existing regulations, and deep-dive consultations.

Looking ahead, Crispini says Kaizen will continue enhancing and updating its Accuracy Testing service to align with new regulations and changes to existing ones.

An example of regulations that Kaizen will help firms with is the complete overhaul of the US Commodity Futures Trading Commission’s Part 43 and Part 45 swap data reporting rules, which will go live on December 5, 2022.

Over in the EU, the European Commission has endorsed the European Market Infrastructure Regulation Refit, which will soon start an 18-month implementation period. The European Securities and Markets Authority is also expected to publish its Emir Refit reporting guidelines to support the industry in meeting future reporting requirements.

“For the UK, we’re expecting the policy statement with the agreed technical standards to be released by the UK’s Financial Conduct Authority and Bank of England in Q4 2022. This means preparations for EU and UK Emir Refit will begin in earnest, and we are looking at a go live in the first half of 2024,” adds Crispini.

Other regulatory changes to look out for include the MAS and ASIC, which are both consulting on changes to their derivatives reporting rules to align with global harmonisation efforts. ASIC is proposing to implement changes in October 2023 and April 2024, while the MAS plans to introduce the global Unique Transaction Identifier and collateral and margin reporting rules, which are expected to come into effect in Q2 2023.