The need for real-time data on transactions amid regulators’ requirements and investors’ demand for higher transparency
Let’s picture this for a second, a world where Spotify had no real-time data and used no AI and ML algorithms. You would need to send an email to the support center, indicate a list of your past songs and genres that you like, wait a couple of hours or a few days based on how busy the client support is, and only then receive a recommendation for listening to a new song. Crazy, isn’t it?
This is exactly what is happening in financial institutions. Old processes, old systems, and late and old data. Today, many financial institutions continue to take decisions involving millions of Euros (if not billions) on the basis of outdated (and often inconsistent) data deriving from manual processes, usually processed using excel.
Regulators are well aware of the risk in using aged (e.g. year old financial reports) and not updated and homogenous data (coming from different sources and based on different definitions) when assessing new investment opportunities.
An example is the new definition of defaults set by the CRR (Capital Requirement Regulation). In September 2016, EBA published final guidelines on the application of Art. 178 related to the definition of default and Regulatory Technical Standards on the materiality threshold of past-due credit obligation.
Paragraph 106 – Timeliness of the identification of default states that “Institutions should have effective processes that allow them to obtain the relevant information in order to identify defaults in a timely manner, and to channel the relevant information in the shortest possible time”.
This RTS does not only require a fast process but also indicates that the identification of default should be performed on a daily basis. This becomes paramount for the industry as it requires moving processes and procedures to the next level in order to comply with this requirement.
On 1 January 2021, all of this will be real, and credit institutions and investment firms using both IRB or Standardized approaches will be required to comply with the above.
Taking as an example the securitization industry, credit originators or vehicle servicers report data on a monthly (if not quarterly) basis using excel, or in some cases PDF files. This requires a relevant amount of time to manipulate data (cleaning fields, merging files, linking items, standardizing output) and extract relevant information making investors constantly running behind data.
Regulators are clearly pushing the financial industry to set advanced technological solutions to improve the way they manage data. Another example is the Draft Regulatory Technical Standards on the prudential treatment of software assets published in October 2015that directly support investments by financial institutions in these solutions.
Another need for new and improved technologies to manage data comes from the increased volatility of financial markets (that became even more evident with the Covid-19 pandemic) requiring prompt reactions even in private markets. But how could you react fast in your portfolio if your data are one month old?
The buy-side industry (including Asset Managers, Pension Funds, Investment Funds, etc.) requires an additional level of transparency when it comes to financial data. To establish trust among investors, managers of securitization vehicles are asked to provide detailed information that goes far beyond the publishing of a monthly report but encompasses asset-level information to be provided on a daily basis. This requires a rethinking of the reporting processes of securitizations, leaving aside excel and pdf files and starting to embed technologies that allow all stakeholders involved to access real-time data 24/7.
Technology is now available off-the-shelf also to small players, not only the top ones. Thanks to fintech developments and the use of cloud computing, any actor (small or big) can take advantage of advanced ready-to-use technology propositions. This will, in turn, avoid the large and risky project-specific capital expenditures.
The Tortoise and the Hare
What makes the difference is the time to market in terms of the adoption of such new technology propositions, not the deep pockets to invest in the development of any proprietary tool as it was still the case a few years ago.
Draft Regulatory Technical Standards on the prudential treatment of software assets under Article 36 of Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR) amending Delegated Regulation (EU) 241/2014 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the council with regard to regulatory technical standards for own funds requirements for institutions