Introduction
The operating landscape for firms involved in derivatives regulatory reporting is becoming more challenging, with increasing scrutiny from regulators and higher stakes for non-compliance. As regulatory frameworks grow in complexity, firms must be proactive in their compliance efforts to avoid regulatory intervention. This white paper explores practical strategies for minimising the risk of regulatory intervention, the triggers that can lead to it, and the steps firms can take to respond effectively.
Regulatory Interventions: Predictable Triggers
Regulatory interventions occur when discrepancies in data reporting, late submissions, or incomplete records are detected. These issues compromise market integrity, transparency, and adherence to established legal requirements. The most common triggers for intervention include:
Data Inconsistencies: Mismatched or incomplete data in reports.
Reporting Discrepancies: Errors or omissions in transaction reporting.
Late Submissions: Delays in meeting regulatory deadlines.
High-profile firms have been penalised for failing to accurately report derivatives trades, highlighting the importance of identifying and addressing these triggers before they lead to investigation.
Early recognition of potential issues allows firms to take corrective actions before regulators become involved.
Understanding the Regulatory Inspection Timeline
A typical regulatory inspection can extend over several months, from initial notification to the final report. This process can be broken down into key stages:
Notification (Day 0-5): Regulators formally notify firms of an impending inspection, outlining the scope and initial requirements.
Initial Review (Day 15-30): Submitted documents are reviewed for discrepancies.
Detailed Inquiry or On-site Inspection (Day 30-45): Regulators conduct interviews and evaluate systems.
Preliminary Report (Day 45-60): Findings are presented to the firm.
Remediation Plan (Day 60-75): The firm submits a remediation plan based on the regulator’s findings.
Final Report & Potential Actions (Days 75-90): The final report is issued with recommendations for penalties or further actions.
The inspection process can last over three months and requires substantial resources and attention from a firm’s personnel. The time and cost implications make it critical to avoid triggering an intervention in the first place.
It is important to note that investigations' staging, and overall timing can vary enormously, depending on the seriousness and complexity of the matter under review.
Immediate Actions During an Intervention
When a regulatory intervention occurs, swift and decisive action is critical to achieving a positive outcome. Firms should:
Establish a Task Force: Include legal counsel, compliance officers, and key stakeholders.
Review Documentation: Ensure that all data is accurate and readily accessible, ideally within a well-maintained ‘data room’.
Communicate Proactively: Engage transparently with regulators, keeping them informed of progress. Effective communication in the first 48 hours sets the tone for the entire process.
The ability to respond effectively during the initial phase of an investigation can significantly influence the regulator’s final decision. Miscommunication, incomplete submissions, or lack of coordination are common pitfalls that firms should aim to avoid.
Consequences of Non-Compliance
Fines and sanctions are the most visible consequences of non-compliance, but the damage to a firm’s reputation and stakeholder trust can be far more detrimental in the long run. Examples of recent sanctions include:
Keva: Fined EUR 90,000 by the Financial Supervisory Authority for failing to report derivatives contracts.
GlobalReach Multi-Strategy ICAV: Fined EUR 192,500 by the Central Bank of Ireland for breaching EMIR reporting obligations.
Banca Sella Holding: Fined EUR 60,000 by CONSOB for violations of OTC derivatives regulations.
These cases demonstrate that regulatory scrutiny is increasingly focused on transparency and accountability. A firm’s future relationships with regulators, investors, staff, and clients may be negatively affected by compliance failures.
Proactive Prevention Strategies
Prevention is always preferable to managing the fallout from regulatory intervention. Firms can significantly reduce their risk by implementing the following strategies:
Comprehensive Data Management: Ensuring that data is always accurate, timely, and governed by strong quality controls.
Advanced Reporting Systems: Automating data collection and reporting processes to reduce human error and administrative burden.
Continuous Monitoring: Ongoing audits and real-time monitoring systems help catch discrepancies early.
Access to Regulatory Expertise: Having on-demand expertise allows firms to stay ahead of regulatory changes and make informed compliance decisions.
These strategies are not only cost-effective but also essential for the long-term success of the firm.
Emerging Trends in Regulatory Compliance
Looking forward, regulatory frameworks such as EMIR REFIT, MiFID III, and updates from global regulators (ASIC, MAS, IIROC, and CFTC) are set to introduce more stringent reporting obligations. These changes will emphasize real-time data reporting, expanded reporting fields, and enhanced transparency requirements. Firms must adapt their systems and processes to stay compliant with these evolving standards.
Control Now’s Solution Framework
Control Now offers a comprehensive solution that addresses the regulatory challenges outlined in this paper. Their four-step approach—Transform, Submit, Check, and Maintain—is designed to provide end-to-end regulatory compliance management:
Transform: Streamlines data management, ensuring data is optimized for reporting.
Submit: Automates submission processes, reducing the risk of errors and late submissions.
Check: Validates data for accuracy and completeness before submission.
Maintain: Provides ongoing monitoring to ensure continued compliance.
Control Now’s solutions give firms the transparency, control, and flexibility they need to manage regulatory requirements efficiently.
Afterthoughts
To further delve into the subject of regulatory interventions and tech-enabled compliance strategies, the following points may be of interest:
Emerging Regulations: Firms should stay informed about updates to EMIR, MiFID III, ASIC, and other global regulatory standards.
Advanced Data Governance: Implementing more robust data governance frameworks to ensure seamless compliance with evolving regulations.
Training & Development: Continuous training for compliance teams on the latest regulatory changes and best practices.
Industry White Papers: Further reading can include white papers on derivatives reporting, automation in compliance, and strategies for regulatory risk management.
Follow-Up Actions:
Review and enhance internal compliance processes, focusing on data accuracy and submission timelines.
Evaluate current reporting systems to ensure they meet future regulatory requirements.
Schedule a demo with Control Now for a detailed walkthrough of their compliance management tools.
References:
FCA Handbook on Enforcement - https://www.handbook.fca.org.uk/handbook/EG/4.pdf
Final Notice on GSI’s Sanction - https://www.fca.org.uk/publication/final-notices/gsi-2020.pdf