What’s it all about, ALFI?

Both had just been to Luxembourg to attend the ALFI (Association of the Luxembourg Fund Industry) conference. Moyer said: “It's interesting to me that when I look at the life cycle of regulatory change and really just in general change in our asset management market, and what really was at the top of the agenda was constant shifts we were seeing, the speed of change and what topped the agenda was still regulatory pressures. We've seen what that looks like and also there's been quite a bit of conversation about the uncertainty around Brexit and what that means."

Katie Kiss said: “At the conference I was shocked to hear about the number of new regulations we have seen and someone was actually talking about an iceberg effect. If we look at European regulation since 2010, we have had 49 new directives and with that, what's more important, the level 2 and the level 3 underneath those directives that are in the region of 800. What that means to the industry and what that means to our compliance is obviously the sheer volume of information they need to consume and the complexities that those regulations are bringing and how they interpret those regulations.

“They were also mentioning MiFID about transaction costs and the implications of how asset managers ought to calculate that cost.”

Miss Kiss went on to suggest that the costs had been grievous and said that she had heard talk about the EU coming out with MiFID III. Another example of updates that she noted was the fifth Money Laundering Directive (not yet passed but being debated vigorously) which is about to come hard on the heels of the fourth in almost a seamless transition.

Lessons to be learnt

When asked whether this European routine differed from the US regulatory environment, Todd Moyer, who thought that the financial crisis that came to light in 2008 was now over, said: “Post-crisis we're seeing the focus on systemic risk reporting and when we really think about what's happened in the US you look at money market fund reform happening in 2010 and now you're seeing money market reform hitting in 2019 in the EU and so when you think about what's transitioned there – and we're talking in the US about several hundred money market funds – the impact was significant but not overwhelming back in 2010 and then as you look to Europe, there are several hundred market funds that are going to take hold in '19.

“What we've seen is a massive transition in the US over the last 12 to 24 months as it relates to the 1940 Act mutual fund world space and there are over 12,000 mutual funds affected by what's called SEC modernisation, also termed N-PORT N-CEN, which are the actual filings that are required learnt is to start early.

N-PORT and N-CEN

[Editor’s note: The US Securities and Exchange Commission (SEC) has developed N-PORT (Portfolio) and N-CEN (Census) as new forms on which public 1940 Act mutual funds and exchange-traded funds (ETFs) – named after the Investment Companies Act 1940 under which the SEC regulates them – must send it reports. Their predecessor for private funds is Form-PF. As with their forerunner, they aim to allow regulators and the investing public to know more – in this case, by capturing data using XML-based disclosure schema and validation that lends itself to comparison between funds, and can be used for predictive analysis by the regulator’s examinations unit. N-PORT is designed to do this at a portfolio level every month, keeping track of the debt involved in derivatives’ and convertible bonds’ usage and exposure, shadowing banking and other activities that incur liquidity risk. The SEC has proposed to ‘bucket’ these exposures and make them public so that shareholders can see them.]

Get your data in order and start early!

Moyer continued: “If you believe that this is ultimately going to hit the UCITS space, there are more than 30,000 UCITS registered currently. The impact will be what's called 3X - even what it was in the US. I think there's a real translation if you follow history as it relates to how these things pan out. So we really have seen a tremendous shift towards data because of that. And so I think that's the biggest lesson learnt right now. Get your data house in order and start early...if you believe that this is a transition that is coming to the UCITS space.”

When asked whether the data-related challenges that the SEC’s modernisation programme posed were a question of sheer volume or whether there other challenges came into play, Moyer opted for the latter: “It's a number of data sources as much as it is the sheer volume. Just as an example, the number of data sources required to create an annual financial statement is maybe 60 to 80 data sources. When you begin to think about systemic risk, you're talking about 30+ data sources. So you have technological challenges where you have nowhere to put this data.

“You're bringing in third-party data data normalisation, and that's going to feed into the data strategy of the asset management space. So each asset manager is going to have significant needs for their data strategy beyond the back-end reporting piece, which is what we're talking about here today. It's going to be much more around how do I leverage data as an asset and how do I leverage data throughout my whole asset management space, not just specific to how do I manage it for...reporting, and that's an important thing but it's a component of your overall strategy.

“I think that when we're talking about some of the marketing documents and some of the investor communication documents you're still going to see some uniqueness to that. I think it's a journey towards getting to a digital output. Digitalisation doesn't happen overnight. There's still a real demand to see some printed documents but we see that going away over time.”

The Semantic Web and Techsprint

People are working on the use of the Semantic Web – an extension of the World Wide Web through standards evolved by the World Wide Web Consortium (W3C) – to solve these problems as well. The standards claim to promote 'common' (presumably this means "used by more than one person" rather than "vulgar") data formats and exchange protocols on the Web, most fundamentally the Resource Description Framework (RDF). According to the W3C, "the Semantic Web...allows data to be shared and reused across application, enterprise, and community boundaries". It is therefore regarded as an "integrator across different content, information applications and systems."

In the context of the Semantic Web people often speak about ontologies as ways of defining and classifying things in relation to each other. There is actually no such thing as a 'semantic ontology,' but this is the term they use. The FCA’s ‘Techsprint’ meetings include some bodies that only handle semantic ontology, along with a kaleidoscope of other ‘RegTech’ experts. Confluence is now a member of the FCA’s ‘round table’ on the subject.

Compliance Matters asked Katie Kiss where she thought that the FCA consultation process was going to end up. She did not claim to have a crystal ball: “Well they're asking the industry for something special in terms of whether it's a risk or not a risk. It can go either way. I think it will be interesting to see what the input from the different asset managers and the technology providers is going to be, but I think that the main objective with that is to assess having a machine-readable regulation and to ask ‘is that risky?’ Are we putting the Bank of Ireland the Luxembourg CSSF and the Banque centrale du Luxembourg, as well as...SEC modernisation.

“They said although I'm looking to...solve this, I realise that there's a cross-pollination of data across the platform. How do I use that data once, bring it into my application and just confirm it one time? And then allow it to cross-pollinate across my various reports? They were looking to use data to meet their clients’ needs more efficiently and to be able to offer reporting globally where a lot of times they weren't able to because of the challenges of sourcing data, the challenges of consistency across the board.

“They were telling the asset managers to handle regulation on their own. The asset management community has come back and said to a lot of these service providers: we want you to do all of it. In that case, they were able to meet the needs of the 50+ reports on a single platform and that's really the evolution instead of just looking towards a single report and solving for that. They're able to then solve across the board for themselves.

“I don't think it's going to be a long time until you're really 'hands off' as it relates to this reporting, so the data should flow in and the data should flow out and technology can help support that transaction.”

When asked whether his firm’s motto was “take care of the data and the outputs will take care of themselves,” he readily agreed.