Open Data Standards: New Opportunities for RegTech
Modernizing financial regulatory reporting is no easy task. Regulators and regulated entities continue to rely on outdated technology and reporting systems. Open data standards are the key: by replacing document-based reports with standardized data, regulators can spur modernization.
Data companies behind the Data Coalition have the solutions to make financial regulation more efficient and transparent for both regulatory agencies and the industry. Standardized data can be instantly analyzed, updated, and automated.
On September 12, 2018, we brought together current and former Treasury and SEC officials, global reformers, and industry experts to explore the ongoing shift in financial regulatory reporting from documents to data — and its profound benefits for both regulators and regulated.
“Modernizing Financial Regulatory Reporting: New Opportunities for Data and RegTech” was an opportunity for attendees to better understand how data standards will enable new RegTech and blockchain applications for the financial industry at our first-ever New York City event. The event informed and encouraged key stakeholders to move forward with financial regulatory reporting reforms.
The half-day gathering at Thomson Reuters headquarters in Times Square highlighted the modernization initiatives already underway and looked to the future. Here is a glimpse of what attendees learned throughout the event:
Open data standards are becoming the norm – Thomson Reuters is leading the charge, Washington is making moves
Thomson Reuters has moved away from the traditional model of charging for a standard, signaling the growth of the open data ecosystem. Rather than selling the standard itself, financial services leaders view the data and analysis on financial entities and instruments as a value-add service for clients. Thomson Reuters developed the Open PermID, which exemplifies open data developments in financial services, and is in line with the open-data movement happening in Washington.
The PermID has created an efficient, transparent, and systematic market. As Thomson Reuters states:
The ID code is a machine-readable identifier that provides a unique reference for data item. Unlike most identifiers, PermID provides comprehensive identification across a wide variety of entity types including organizations, instruments, funds, issuers, and people. PermID never changes and is unambiguous, making it ideal as a reference identifier. Thomson Reuters has been using PermID in the center of our own information model and knowledge graph for over seven years.
Open data standards like PermID, used for financial instruments, and the Legal Entity Identifier (LEI), can provide meaningful changes in the way financial data is collected and synthesized. Both the PermID and LEI are examples of how scalable open standards can improve internal efficiency and external transparency for financial regulatory reporting. While the private sector develops viable use cases, policymakers in Washington are taking action to drive modernization in financial regulatory reporting.
State of Financial Regulatory Reporting
In Washington, three key policy milestones have occurred over the past 18 months, which demonstrates that agency officials, the Administration, and Congress are driving modernization.
July 16, 2018: House Financial Services Committee ultimately did not include an anti-SEC data measure in their House passed JOBS & Investor Confidence Act — a package of thirty-two bipartisan job creation bills. The Small Company Disclosure Simplification Act (H.R. 5054) was ultimately not included in the compromised JOBS Act 3.0 package remains a controversial measure lacking broad support in the Committee (see more here).
June 29, 2018: The SEC voted to adopt Inline XBRL for corporate financial data disclosure (see the final rule). The move to Inline XBRL will end duplicative documents-plus-data financial reporting and transition to data-centric reporting. This initiative is a part of a broader modernization of the SEC’s entire disclosure system. The Data Coalition and its member companies (see comments from Workiva, Deloitte, Morningstar, and Grant Thornton) have long been supporting the adoption of Inline XBRL a the SEC. The Coalition’s comment letter further explains our support of the SEC’s decision to adopt the use of iXBRL (see our comment letter).
June 13, 2017: Treasury Secretary Steven Mnuchin testified before the House Appropriations Committee in defense of the Treasury Department’s Fiscal Year (FY) 2018 Budget request. Mnuchin’s testimony showed an opening to standardize data fields and formats across the nation’s overlapping financial regulatory regimes – just as the Data Coalition has already been recommending to Congress.
Regulators need standards for accuracy, analysis, and fraud reduction
Financial regulators rely heavily, in some cases solely, on corporate filings and data analytics to detect fraud schemes – including the practice colloquially known as ‘Pumping and Dumping’. This scheme attempts to inflate the price of a stock through recommendations based on false, misleading, or greatly exaggerated, statements. Corporate financial filings are essential to accurately identifying and extracting fraudulent activities, ultimately protecting investors.
If financial regulators adopted data standards across all reporting systems, it would make identifying fraud far easier. That is why our Coalition is working to persuade Congress to pass the Financial Transparency Act (H.R. 1530) (summary here). The FTA would require the eight major financial regulators to adopt common data standards for the information they collect from the private sector. The bill has gained thirty-two bipartisan cosponsors. When passed, it will be the nation’s first RegTech law.
Most notable “pump and dump” scheme include: ZZZZ Best Inc., Centennial Technologies and Satyam Computer Services.
Why the financial industry should embrace open data standards
During the final panel of the day, attendees heard financial industry experts describe why their colleagues should get behind open standards, and why the financial industry should welcome regulatory action.
Currently, financial entities rely on mostly manual reporting processes as they send information to government regulators. Under this outdated system, companies typically have one group who is responsible for preparing and another who is responsible for issuing the reporting. For larger companies, error is nearly inevitable in such a structure that is heavily reliant on layers of human oversight.
Data standardization means lower compliance costs for the financial industry, more efficient enforcement for regulators, and better transparency for investors – but only if regulators work together to modernize.