SDS GEOS MANAGEMENT CIRCLE APRIL 2019

Speaking of tradition: This year, the SDS GEOS management circle took place for the last time in its current form. Due to our growing portfolio and the fact that several of our products are often used simultaneously, we have decided to hold one joint event for all our products from next year onwards. But now back to the content of the management circle:

SDS is a sound, organically growing company

The most important news first: We can present steady growth in all areas of our portfolio over the past years. The number of employees, the turnover and the EBIT have increased according to plan and we have reason to believe that we can continue this success story in the years to come. This shows that our decision to expand the portfolio a few years ago was the right one and it gives our customers the reassurance that they have a long-term stable and attractive business partner.

Optimising the data volume for securities master data

The number of available securities on the market for index certificates and warrants is in no reasonable proportion to the instruments actually purchased by investors. This issue has been a topic of discussion across the industry for several years now. Recent analyses paint a dramatic picture: On the Austrian market, ÖWS provides more than two million instruments, over 90% of which belong to the aforementioned securities types. Only about 1% of these, however, have actual holdings. The rest – about 90% of the FI master data – is irrelevant for securities processing. This useless data volume has become a serious organisational and technical problem.

Therefore, it is an obvious idea to remove the unneeded master data or to only provide it on demand. At first glance, this task may seem manageable, but it requires thorough analysis of the affected processes as well as coordination between all parties concerned and it is probably not entirely trivial from a technical point of view either.

In the weeks to come and in collaboration with ÖWS and the Austrian banks, we will work out a solution which takes the technical and financial framework conditions into account and which is likely to offer an attractive business case for all parties involved.

Event-driven architecture

In addition to this current topic, we have focused on the future architecture of our company’s software products. We are faced with multiple challenges:

  • The way our product portfolio is expanded creates the demand for an ideal architecture for the interaction of these components during joint usage.
  • Modern user experience requires technologically advanced functions such as full-text search, statistics, configurable dashboards, etc.
  • External systems should be able to react to status changes in the transaction processing system near time.

In order to accommodate all this, we are currently verifying a so-called event-driven architecture within the framework of a proof of concept (PoC). The core of this architecture is the relief of a transaction processing system (in our case SDS GEOS) from the preparation of data for user interaction, the creation of statistics and complex queries as well as from the process of making data available to external systems.

We have already taken steps in this direction in the past (for instance by supplying data for the Business Information Store) and we now intend to implement the interactions via front-end and the communication of changes back to SDS GEOS. The PoC deals with a specific task from the area of Corporate Actions and should ideally be further developed into a corresponding product for the processing of corporate actions. For this step, we are looking forward to a development partnership with a renowned financial service provider from custody business.

Gossip

In addition to these topics, informal communication over brunch and during the breaks was, of course, not neglected either. Since the composition of the circle has changed compared to last year, we were also able to welcome some new members to the community, and we are looking forward to an exciting and successful collaboration.

News about securities at the Banking Congress KURS 2019

The imh Banking Congress KURS, which is held annually in Vienna, was received with great interest also this year. The multifaceted segmentation of the conference into the topics “Compliance & money laundering”, “IT in banking”, “Post-trade settlement & back office”, “Security” and “Payment transactions” attracted a wide audience from many different areas of the banking industry. Once again, SDS was present this year as sponsor and exhibitor at the “Security” conference.

On the first day, the conference started as a plenary assembly with presentations and discussions on current economic and political matters (Brexit, the trade conflict USA/China, the economic situation in Europe as well as the possible merger of Deutsche Bank/Commerzbank).

Initially, the main focus of the KURS 2019 “Security” conference was on the topic “Blockchain”. After presenting basic information and the potential of this technology, the successful productive use of the blockchain platform in the issuing process was illustrated by the example of a blockchain-based open-market credit. The impressive presentation led to lively and interactive communication in the auditorium.

The further course of the first conference day was characterised by information on current legal topics, with the focus on the following items:

  • Compliance changes for increasing investor protection and avoiding conflicts of interest
  • Research: Handling financial analyses which can affect the market
  • Information on the Central Securities Depositories Regulation (CSDR), with the focus on settlement discipline measures for avoiding settlement fails (sanctions, coverage procedure/buy in) as well as the internalised settlement, which obligates banks to report their internal transactions

The first day of the KURS 2019 “Security” conference was concluded with the topic “Robo-advisory”, the digital investment counselling which is an option particularly for retail customers with few liquid assets.

On the second conference day, the EU Shareholder Rights Directive (SHRD) was subject of conversation twice. Currently, the bill “Change of the Securities Supervision Act 2018” is in the appraisal phase in Austria. The productive start is expected for the autumn of 2020. Both the challenges for banks and the expected consequences for customers and investors were examined. The areas data protection and bank secrecy still pose unresolved issues, particularly the saving of shareholder data and the obligatory identification of shareholders by the custodian. The practical implications on the customers are seen critically as well, since an information overflow is expected on the one hand and frequent requests for disclosure of personal data due to the shareholder surveys by the issuers are anticipated on the other hand. The banks will also have to find ways to meet the demands of customers who do not want this kind of information. This contrasts with the advantages of the customers’ extended possibilities of exercising the shareholders’ rights. Some banking representatives expect high costs with doubtful value. From a legal standpoint, the costs may be passed on to the customers, in practice, however, this option is doubted.

Another item on the agenda was the SFTR (Securities Financing Transactions Regulation), which aims to increase the transparency of securities financing transactions. The risks inherent in such financial transactions shall be recognised at an early stage and monitored accordingly. All counterparties whose branch offices are within the EU must report each securities financing transaction as well as each change or termination to a registered or acknowledged trade repository. Moreover, the further use of financial instruments received as collateral is only permitted under certain conditions. The Regulatory Technical Standard (RTS) is currently under review in the EU Parliament and the Council of the European Union. From today’s view, reporting is expected as of 11 April 2020.

In the overview of the recent essential tax innovations, the new procedures for CYT reimbursement, foreign CYT and exchange of securities based on the Kapitalmaßnahmen-VO (Austrian corporate actions regulation) were described. Furthermore, fund taxation in Austria and Germany, the account register, the Common Reporting Standard (CRS) as well as FATCA/QI and IRS 871m were outlined.

The consolidation of TARGET2 and TARGET2-Securities is scheduled for November 2021. It extends liquidity management and effects a separation of central banking operations from RTGS transactions. All of this is based on ISO 20022 and is implemented as a big bang migration. There will be no co-existence with ISO 15022 MT messages. The first customer tests are scheduled from March 2021 onwards.

After that, the Eurosystem Collateral Management System (ECMS), whose goal is the harmonisation and centralisation of the collateral management systems, is scheduled to go live in November 2022. In this context, the strongly fragmented environment of 19 national systems is to be consolidated into one uniform Eurosystem-wide collateral management system. One trigger is the increasing importance of collateral. The standardised messages are exchanged exclusively in ISO 2022 format. Additionally, new standards in the area of triparty and corporate actions will be introduced. The expected benefits are a harmonised settlement of collateral in the Eurosystem, an efficient mobilisation of collateral and another contribution to the establishment of the capital market union.

Our core business fields cover all of these topics for which our products SDS GEOS, SDS IREG, SDS MCOST and SDS CCONFORM offer corresponding solutions.

For SDS GEOS, for instance, we are currently implementing the last requirements for the reporting of internalised settlements as part of CSDR and simultaneously, we are already analysing the requirements for SFTR reporting and SHRD.

SDS IREG Customer Group Meeting 2019

On 11 April 2019, the annual SDS IREG customer group meeting took place in Vienna. Numerous SDS IREG customers seized the opportunity to discuss topics related to the product and the reporting regimes CRS, FATCA and QI with SDS. On the night before, a joint dinner was organised for the participants at the “Salonplafond” restaurant in the MAK – Museum of Applied Arts, Vienna.

The event did not only reflect current and past developments and challenges, but primarily offered a preview of the innovations planned for the product in the coming months and years. The opportunity of discussion within the product community provides all customers with the option to actively participate in the further development of the product. We are pleased about the valuable input which will help us to customise SDS IREG even more specifically according to the users’ needs and to ensure that it will remain the leading solution for the international exchange of information in the years to come.

The positive feedback on the last as well as the current reporting period was, of course, also very delightful. This feedback encourages us to continue our approach of consistently and continuously enhancing SDS IREG. This development is one of the results of the SDS IREG customer group meetings of the previous years.

The lively exchange of experiences was particularly interesting for many participants. This is the advantage of a multi-faceted community with partly different challenges. The discussions provided insights into the advantages and disadvantages of different approaches and were not limited to the various options of utilisation and parameterisation of SDS IREG, but also covered the environment on a larger scale. This is especially important for SDS in order to gain a detailed understanding of our customers’ varied needs relating to bank-internal processes.

Last but not least, most of the participants gladly accepted our invitation to the “Salonplafond” restaurant. The relaxed atmosphere did not only provide the perfect platform for discussions regarding SDS IREG, but it particularly offered the chance for the participants to get to know each other better. This was, of course, especially interesting for those participants who attended the SDS IREG customer group meeting for the first time. In this context, we are very glad that we could welcome new participants this year as well.

Many thanks to all customers for their participation and the interesting discussions! We are looking forward to welcoming at lot of participants again next year.

20th anniversary of SDS GEOS.

SDS (Software Daten Service) is known as a leading provider of outstanding solutions in the area of financial market operations, regulatory reporting and compliance for the international financial services sector. With renowned European financial institutions in its customer portfolio and with almost more than 100 million transactions per year, SDS is one of the key players in the field of banking technology in Europe. The company’s portfolio encompasses sophisticated software products and services for all customer and market-related processes, ranging from global securities and derivatives processing to regulatory, tax-related and compliance automation as well as solution-based consulting.

For the last 20 years, the flagship product SDS GEOS has ranked among the leading solutions for financial market operations and covers the entire value-added chain within one single solution – from the securities order and the settlement to corporate actions processing for all securities classes. SDS GEOS’ service spectrum is complemented with software solutions for compliance with regulatory requirements such as MiFID II, CRS, FATCA, QI and MAD/MAR. The SDS product portfolio is continuously adapted to technical, functional and regulatory market requirements by more than 250 experts. Thereby, new application standards are set. The high flexibility that comes with SDS GEOS’ parameterisation and platform independence allows for a multitude of operating models for optimisation that are tailored to the respective customer situation.

Current SDS GEOS customers are, among others, the Austrian financial institutions UniCredit Bank Austria, the Raiffeisen banking group and BAWAG P.S.K., as well as the BCEE in Luxembourg and HSBC Transaction Services, the German market leader in the securities BPO business, which is active for European private banks and online brokers and acts as a regional sub-custodian for the HSBC group. Due to the cooperation with Commerzbank, which was announced at the beginning of 2018, the transaction volume of HSBC Transaction Services GmbH processed via SDS GEOS is doubled. Hence, SDS belongs to the major providers of standard software for the international financial industry in Europe.

The success story of SDS GEOS has been holding up for over 20 years now and constitutes an interesting example of how a highly complex software solution can be kept state of the art in a tight market.

For a financial institution, the implementation of a new securities processing system was and still is a risky and costly endeavour and therefore a long-term investment. Developed over 20 years ago, SDS GEOS was designed based on cutting-edge standards and with a functional and technical architecture oriented towards long-term maintainability. To this day, it has always been kept functionally and technically up to date. In the case of SDS GEOS, this has proven more than beneficial for the licensees, since most customers that have been with us from the very beginning are still highly satisfied SDS GEOS users.

The functional development was based on principles like an unrestricted multi-client institution capability, the support of numerous sourcing models as well as multi-country and multi-currency capability. Thus, the options that SDS GEOS offers its users go far beyond the optimisation of their own settlement processes. The division of labour within groups is, for example, facilitated through the centralisation of market and custodian access, and the supply of services like asset servicing is supported efficiently. It is not without reason that HSBC Transaction Services, with an excellent service portfolio based on SDS GEOS, has become the undisputed market leader in terms of cost and service quality in Germany. Of course, the functional complexity of SDS GEOS developed over the years contributes to this as well. Nowadays, there is hardly any transaction, fee model or corporate action that cannot be processed in an extensively automatic and clean manner via SDS GEOS.

Given the numerous functional and technical standards, it was already obvious during the designing process of SDS GEOS that these standards would be subject to regular changes, and for that case, according provisions have been made. Rules that are subject to fast and individual changes can largely be altered via parameterisation – immediately and without the vendor’s intervention. Examples for this are fee models, routes, custodians, approval rules or taxes. Standards that are subject to regular changes, such as the WM revision service for FI master data or SWIFT messages, have been maintained neatly and delivered on time for 20 years by SDS.

Aside from these foreseeable and thus predictable development steps, there are market changes that are significantly more time-consuming, involve higher risk and are a lot more challenging to implement. Since its commissioning, SDS GEOS has witnessed numerous fundamental changes, ranging from the euro conversion and the adaptation to the German and Swiss market through to the implementation of ISO 15022 and 20022, TARGET2-Securities. US QI, flat rate withholding tax and CYT new, as well as to the big market reforms MiFID und MiFID II.

20 years is a long time from a technological perspective as well, and the technical maintenance of a product as large as SDS GEOS forms the basis of keeping it up to date in terms of functionality. This task is anything but trivial, as there are numerous examples of software products of similar size that needed to be decommissioned due to outdated programming languages and system environments alone.

With SDS GEOS, SDS has proven that there are other ways. SDS products do not only operate on conventional IBM mainframe environments, but also on open operating platforms like LINUX/Oracle. This is not a small matter, because for a truly performant operation, these environments differ significantly in terms of programming. But the possibilities that thereby present themselves to the users are endless. In order to facilitate changeover, SDS is working on an architecture that allows for a partial migration of functions from mainframe to open system environments. At the same time, this results in a step-by-step revision of the front-end and the whole user experience.

Not only do new front-ends provide a better working experience for traditional users of SDS GEOS, but they also open up possibilities to new users. This way, monitoring tasks can be accomplished more efficiently, the application can be embedded into separate applications and even third parties, such as institutional customers, can directly access the application at minimal IT cost in order to give instructions, for example. This thought can obviously be developed further, right up to private investors, who could, for instance, authorise instructions via apps and take part in Annual General Meetings.

The integration and interaction with these latest possibilities is one of the driving forces for the further development of SDS GEOS. This year, one of our customers managed to offer a processing platform to a FinTech through a streamlined project. For SDS, this is only the first step towards ever more cost-effective and granular services that can be offered in the company’s portfolio. Additionally, a continuation of the ongoing technical and functional development of SDS GEOS into separately usable and implementable products is being planned. The first steps on this path have already been taken and will enable users to offer new services on the market in the foreseeable future.

Even 20 years after SDS GEOS’ first deployment, both the software and the company still remain youthful and agile. In the years to come, we will continue to systematically take the necessary steps to define the future of securities processing and its environment in accordance with the SDS customer promise.

Learn more about SDS GEOS.

Is “Banking as a Platform” the model of the future?

On 4-5 December 2018, the 24th Handelsblatt Annual Conference Banking Technology took place in Frankfurt. We as SDS had our exhibition booth to present our products GEOS, i:Reg, m:Cost and c:Conform as well as our company. The major topic of the event was “Banking as a Platform”.
Platform economy has already been an integral part of other industries for years. Amazon, as the best example, acts as central international digital market place. Flights are often booked via travel platforms and not directly with the airlines, like hotels, to name just a few well-known examples.
A similar development is well underway in the banking sector. According to the consulting firm Roland Berger, platforms already have a market share of more than 30% for products for new retail customers – with an upward tendency. A bold thesis was put forward: “In 5-10 years, banking services will be used in the background, i.e., the customer won’t care which bank offers the service”. The banking service will then become a commodity.

A common topic is the increasing challenge for banks to maintain their current operating models in times of technological transformation and changing customer expectations. Some market watchers expect that a considerable part of the banks’ revenues, especially in the retail business, is at risk within the next ten years. Others predict that the banks can either accept the new competitors or compete with them, while they will at the same time improve their own performance and efficiency.

The most important question regarding the future scenarios of the banking sector is which actor will manage the customer relationships and the interface and which actor will finally render the services and take the risk. The rise of Fintech innovations and the development of tech giants in the banking area has already resulted in a fight for customer relationships and customer data. The result of this struggle will be decisive for the future role of the banks. All experts emphasise that a single bank will not be able to cover all financial needs. Opening up the systems (keyword “open banking”) to third parties will be one of the key success factors here.

E.g. Deutsche Bank’s digitisation strategy, on the one hand focuses on the transformation of its core business and on the other hand on the development of new business models via digital ventures. According to Mr. Pertlwieser, Deutsche Bank already offers a multitude of platform-based options, e.g. the digital house bank, various financial marketplaces as well as “beyond banking” ecosystems (via the Deutsche Bank API). Deutsche Bank plans to become the platform for all questions relating to financial issues. Mobile banking is regarded as critical success factor for the digital platform. Even today, the share of mobile login is about 62% at Deutsche Bank.

In terms of data security – an important element of digitisation – banks still seem to be the winners in the tough competition with Fintechs and tech giants. According to a survey of Deutsche Bank in 2018, 46% trust in their house bank, a value way above those of the new competitors.

Meanwhile more and more market participants pursue a platform strategy. Since a platform primarily relies on economies of scale, a tough selection process is expected. Like in other industries, most of those involved assume that only a few banking platforms will dominate the market and expect this competition on a national level in the first step. BBVA in Spain, BNP Paribas in France and the Dutch ING are considered to be in a good position.

Deeper insights into digital transformation at Commerzbank as well as insights into the modern open banking solution of Hypothekarbank Lenzburg AG rounded off the agenda of the Handelsblatt conference.

Get prepared for DAC 6. Wrap-up of the 2018 Operational Taxes for Banks, Europe

The first Infoline conference “Operational Taxes for Banks” took place in London in June. Now a second conference with the same title followed in Zurich, Switzerland in November 2018. In our view, the main topic of this conference was clearly DAC 6, which will be the “next big issue” from a regulatory perspective. It seemed to SDS as if the importance of this topic has not yet been fully recognised by all institutions. We see two reasons why this might be the case.

SDS took part in both conferences as an exhibitor and sponsor. Both conferences have been very informative, with lots of interesting and knowledgeable speakers from all parts of the financial industry and many interesting discussions.

Although both conferences used the same title, it was interesting to see how the topics of the conference have evolved during these few months since the event in London. In our view, the main topic of this conference was clearly DAC 6, which will be the “next big issue” from a regulatory perspective.

However, it seemed to SDS as if the importance of this topic has not yet been fully recognised by all institutions. We see two reasons why this might be the case:

  • It is not yet clear which department in a financial institution will be responsible for the implementation, and no department feels responsible. DAC 6 is a reporting requirement, but it is also strongly related to tax, compliance, risk management and even the core business. Depending on the business model of a financial institution and its customer base, the topic could be located in either department, but it is clearly a cross-functional topic which needs to be addressed as such. Clearly, this makes it even more necessary to start thinking about the implications as early as possible.
  • Since it is “only” a directive, the EU member states are responsible for the country-specific implementation, and they have to finalise the requirements by the end of 2019 and provide the necessary guidance. This gives financial institutions the feeling that there is still ample time and it is impossible to start now without the final regulations. However, it should be considered that reporting starts in mid-2020. It will be impossible to wait until the end of 2019 and then have a solution ready within half a year.

Financial institutions will have to prepare for DAC 6 much earlier, even if not all requirements are already yet. This is especially true for institutions which are operating in several countries, since it must be expected that the different countries will issue different requirements, a practice to which we are already familiar from CRS reporting.

RegTech for CRS/FATCA. A snapshot.

During the last few years, the international financial service sector had to extensively deal with the most important operative tax and regulatory challenges according to CRS. In addition, corresponding technologies which meet the comprehensive CRS requirements have been implemented.

Since the introduction of the Common Reporting Standard (CRS) of the OECD – by signing the multilateral CAA as master agreement in October 2014 – not only a few years have passed by, but also the number of member states grew from originally 51 to 103 (status September 2018).

However, more than half of the CRS countries articulate requests which deviate from the master agreement or partially exceed it significantly. A number of financial institutions are nowadays facing the disillusioning situation that their existing RegTech solutions are not sufficient regarding the range and depth of market-driven requirements.

In the context of this dynamic and increasingly challenging issue there are new and/or extended requirements to the design, operation and the management of modern technologies for taxes and regulations.

High data volumes

Due to the expected accession of further countries to the CRS the necessity of processing high data volumes in bilateral and multilateral exchange relations will increase further. The demand for highly performant solutions which are able to automatically process large data volumes will naturally rise.

High data quality

Especially where different source systems (e.g. by different IT systems from various countries) are used, the requirements to ensure the data quality of source data will grow. This calls for solutions which can detect incorrect data of the source systems and correct data via exception handling in a reliable and automatic way.

High data requirements

More than 50% of the current CRS countries articulated requirements (data requirements or deviating schemes) which deviate from the standard and/or partially go beyond it in a significant way. A modern technology solution must therefore be able to flexibly parameterise different requirements and to create various country-specific schemes.

High reaction rate

Reporting standards can also be changed or extended in productive operations for specific countries during the year. Solution providers who can implement new requirements on time for the next reporting period will become preferred partners.

High complexity

The difference from CRS to FATCA reporting is characterised by a higher complexity and more extensive volumes. Many financial institutions underestimated this essential differentiation for the selection or implementation of their technology solution. They notice that the extension of FATCA solutions partially developed by themselves has no perspective and is not feasible due to missing practicability. Therefore, they recognise the necessity to replace them by modern and comprehensive standard software.

Summary

Since the introduction of the Common Reporting Standard (CRS) of the OECD through signing the multilateral CAA as master agreement in October 2014 several years have passed. The dynamic and challenging issue results in a number of new and/or extended requirements to design, operation and the management of modern technologies for taxes and regulations. Based on these growing regulatory challenges – with more or less unclear or more complex details – many financial institutions ensure the compliance through solutions which do not yet sufficiently represent the necessary degree of automation and the high performance requirements.  Therefore, a number of financial institutions face the disillusioning situation that the RegTech solutions currently used demand optimisation regarding range and depth of market-driven requirements. SDS customers, however, have already started with the preparation of the next regulation wave with i:Reg for CRS/FATCA and are excellently prepared to fulfil the variety of requirements of the next generation quickly and in a highly professional manner. The reporting engine i:Reg is specifically designed for this purpose and provides the highest degree of automation for the typical reporting processes. Automatic data enrichment and automatic resolving of exceptions, handling the most complex issues and using the solution in several jurisdictions make i:Reg the best choice for large multinational groups and service providers – and preferred choice for leading, globally acting financial institutions.

Wrap-up of 4th Annual Post Trade Forum: Capital Markets, Regulations and New Technologies.

Almost exactly 10 years after the bankruptcy of Lehmann Brothers triggered the financial crisis, the Annual Post Trade Forum – which was already held for the 4th time – took place in Berlin. On 13-14th Sept, 2018, around 80 professionals from the securities services industry and financial market authorities across Europe and beyond met in the inspiring atmosphere of the Crowne Plaza to discuss a rich list of current hot topics. The presentations offered room to exchange opinions and the schedule provided enough time for a well-organised, relaxed walking tour through Berlin in the evening. We joined the event as sponsor and participants.

And it goes on … capital markets regulation, impacts and barriers

As opening session, Genni Caratozzolo from the European Commission gave a comprehensive update on the recent developments of the EU regulatory space.

A crucial point for the EU commission is the question whether a regulation really meets its purpose. Therefore, analysis work like EMIR REFIT is undertaken and more will follow. The expectation is that the progress on ongoing initiatives will help removing obstacles identified by the EPTF (European Post Trade Forum). Lots of progress has been made over the last years, yet there is still a busy EU regulatory agenda to cope with remaining obstacles and to address new challenges for the future.

This was a good starting point for more discussion about that progress and the expectations by the market, tackled by Werner Frey from AFME, who compared the results of the EPTF Report 2017 with the current regulation status. As known since then, the EPTF Report found out that 3 of the Giovannini post-trade barriers were removed, 8 partially removed and 4 not removed. In addition, the report identified a couple of new barriers and bottlenecks. A point of criticism was that the remaining barriers are legal and tax topics, which the public and not the financial sector is accountable for.

The estimated costs of WHT tax reclaim of EUR 8.4 bn per year in Europe and the lack of a common definition of “shareholder“ were stressed as one of the current issues. A slightly unsettling soundbite was “The next financial crisis will be caused by post-trade”.

SFTR Reporting

SFTR, together with CSDR, was the most present topic at this forum. The main information in the beginning: it´s not clear yet when live going will take place. The EU commission is still working on a regulation update which is expected for October 2018. Assumed that this is the reference date, the live going will then be expected for Q1 2020 for banks and investment firms.

Expected impacts of SFTR are the increase in transparency of SFTs and therefore the mitigation of systematic risk, as well as the way repos are processed today. This means a much higher level of automation, electronic trading and more standardised processes.

Although there is a good number of overlaps with EMIR reporting, many challenges for the SFTR implementation are waiting:

  • Granular data requirements
  • Strict LEI and UTI requirements
  • Complexity of the transactions stemming from their individual specifics
  • Information sources fragmentation
  • Double-sided reporting obligation
  • Global reach and multi-institutional effect
  • The inter- and intra-trade repository (TR) reconciliation

Interesting and ready for download in this context: ICMA published the “Guide to Best Practice in the European Repo Market“.

CSDR and its impact

CSDR was the key topic of two presentations and one panel discussion. It is expected that CSDR will lead to more competition and consolidation and T2S is seen as the main driver. But competition and consolidation can be hindered by the remaining lack of EU cross-border harmonisation, including regulatory differences, variations in tax administration as well as corporate actions local requirements. As reminder, CSDR is not only relevant for CSDs, but all clients of every European CSD will be affected by dematerialisation, harmonisation of settlement periods, settlement discipline and reporting of internal settlements.

In general, CSDR is seen as a good thing which will need some time to develop and some questions will probably be answered later: will CSD monopolies stay “monopolies“ and will some of the well-functioning market specifics be kept? Moreover, the question came up how cryptocurrencies will be treated in the future. Is the cryptocurrency cash, a security, a fund or a commodity? Can the cryptocurrency be treated as CeBM (central bank money) or CoBM (commercial bank money)? We will see. In 5-10 years, much greater efficiency through technology and T+1 is expected.

What else…T2S and MiFID II transaction reporting

Beyond SFTR and CSDR, the lessons learned during the implementation of MiFID II transaction reporting were shown by Nordea Investment, which chose the way via ARM (Approved Reporting Mechanism).

Their biggest challenge was the quality of static data (as there is no guarantee whether the data is correct), which comes from multiple sources. Now, MiFID II transaction reporting helps Nordea to increase the quality of their data, which currently ends up with almost 100% acknowledgement of transaction reports by the NCA.

What are the implications of transaction reporting for Nordea? First, Nordea will force the business that all trades go over OTF`s, which will improve efficiency. Second, they recognise the need to “document everything”, and third, they will use transaction reporting as an internal tool to detect and avoid market abuse.

Another topic was the future of T2S. In short, one of the key statements was that post-trade costs may remain high for the next years because of the following reasons:

  • T2S increased DVP price to 23.5 eurocents.
  • Infrastructures have changed fee schedules ahead of T2S.
  • Volume growth expectations may not be met due to increased CCP netting and expected future European economic growth rates.
  • Further cost-drivers are ongoing harmonisation activities, new regulatory requirements (CSDR etc.) and practical experiences of T2S markets.
  • Moreover, it was stated that the full benefits of T2S can only be seen after the removal of the EPTF barriers.

Technology innovations drive new business models

Of course, today no post-trade event can exist without some new technology sessions. This time, key topics were machine learning, digitalisation as well as client services and challenges by FinTechs. Obviously, a big advantage for the presenters of such topics is the chance to show more fancy, colourful and exciting slides than their regulatory predecessors (this is no criticism; this I would simply call a natural advantage).

Since one speaker cancelled, Chairman Philippe de Brossard jumped in with a good presentation about digitalisation in banks. He is of the opinion that for the digitalisation a bank should work on both digital processes and digital platforms. A data-driven approach is crucial to offer new valuable services to the customers, but still data is distributed in multiple banking systems today. The understanding of customer needs has to be the focus in all those transformations. Moreover, it is also important that the change of internal processes happens before providing new services to the clients, which in turns needs a new entrepreneurial, collaborative and innovative company culture.

Another session was about the challenges that FinTechs present the larger organisations. The main message: there is only one solution – a bank must invest with the vision to have an open, fully automated, flexible and scalable back-office operation with full transparency control of processes and process execution. To stay relevant against FinTechs, banks have 3 main operational levers: system, partnerships and leadership. The suggestion is to invest in the core systems, into your people and don´t be scared of partnerships.

Interesting side note: „The new front office is the back office which provides products“.

Concerning machine learning, two risks/obstacles were mentioned: the use of internal data due to GDPR and the increased risk of a cyber-attack.

How does SDS deal with these issues?

Our GEOS securities processing platform always complies with current regulatory requirements. We already dealt with the issue of MiFID II transaction reporting for our customers and are currently working on a good solution for SFTR and CSDR reporting. The successful implementation of T2S lies behind us and our customers are using SDS solutions highly satisfied in daily practice.

And we are steadily improving our existing product suite, exploring new products as well as working on the next technology and partnership models to embrace the upcoming chances for us and our customers.

Opportunities and possibilities of a universal tax engine for the financial industry.

The tax issue will in the near future remain an essential factor in the efforts of the financial industry towards achieving better regulatory compliance. Fragmented system environments, legacy systems which are difficult to maintain and a business segment-oriented silo architecture often pose an obstacle for an overall view of the customer as well as a reliable, correct tax treatment of his assets and transactions. Can the calculation, with-holding and certification of taxes by the financial service sector represent a future-oriented scenario for a central software solution?

The financial service sector has increasingly been involved in guaranteeing the tax conformity of its customers in Europe and worldwide during the last few years. This includes the calculation, retention, payment and reporting of taxes. In this light, the tax issue will remain a key factor in the financial industry’s efforts to improve regulatory compliance in the foreseeable future.

High complexity and diverse requirements

This is a challenging situation for the affected financial service sector in a number of ways. Frequent changes of the relevant legislation, confidential customer data, in particular duty to due care and attention, cost aspects and audit requirements represent a range of demands for IT, operations and management, which are difficult to balance. For internationally active groups, the complexity additionally increases due to the often significant differences in the country-specific tax laws.

Competence centres instead of silos

Fragmented system environments, legacy systems which are difficult to maintain and a business segment-oriented silo architecture often pose an obstacle for an overall view of the customer as well as a reliable, correct tax treatment of his assets and transactions.
Established application environments reach their limits with a classic silo architecture. They should be supplemented by applications which can handle taxes centrally and beyond multiple asset classes. This does not only facilitate the check of tax conformity, but also provides the technical basis for the creation of cross-country “competence centres”. It is important that such central applications represent cross-country as well as country-specific taxes in an appropriate, accordingly encapsulated form. Due to the mostly short implementation times for tax changes, the applications should also be able to represent a lot of functional logic through configuration instead of program logic.

A universal tax engine for the financial industry

Can the calculation, withholding and certification of taxes by the financial service sector represent a future-oriented scenario for a central software solution?

A centralised solution, which is based on the experiences of past years and considers the special challenges in this environment, maps the following design specifications:

  • Taxes are country-specific
  • Data demand and calculation logic can-not be determined with certainty at the time of solution design
  • Cost and risks for operation and implementation are to be minimised
  • Results must be explainable and transparent
  • Handling of large transaction volumes must be possible
  • Service-oriented architecture is to be supported

As a result: A general framework for tax calculation and the supply of tax-relevant data with high flexibility and reliability.

Conclusion

Especially in an environment of internationally largely uniform tax regimes such as, for example, double taxation agreements (DTAs), in particular US withholding tax, such a central special product for the international financial industry would make it possible to implement attractive and service-oriented solutions up to APIs for a future “banking as a platform” world.
For large institutions in particular, the cutting-edge architecture offers the chance to implement the sensitive issue of taxes in a more easily maintainable and manageable system environment.

Data quality as a chronic challenge.

It is an unpleasant truth which people often tend to overlook: The master data is often not as good as one would like it to be. Specifically for CRS and FATCA reporting, very high data quality is required to generate correct and complete reports to the tax authorities. In practice, the data gaps that often remain can be time-consuming and expensive to correct. With our software solution i:Reg, these gaps are detected in time and can be eliminated by the financial institutions.

We are talking about data quality or, more accurately, insufficient data quality and how it can be permanently improved. Specifically for CRS and FATCA reporting, very high data quality is required to generate correct and complete reports to the tax authorities.

Today, financial institutions have clear and comprehensive requirements about which customer information must be recorded. Some requirements are legal, others come from internal processes. Fewer provisions and forms existed in the past and that poses challenges today regarding the completeness of the master data. Data gaps that arose this way are usually not corrected until the next customer meeting, some time in the future. For example, in 2015 CRS contained no requirements TIN verification or a validation checks.

Data gaps must be eliminated in the core system

It may be irrelevant to the core system of a financial institution whether a particular attribute is recorded for a customer. But it may still become a stumbling block when some later processing requires this information. Since the different downstream systems require different information, the list of attributes that are mandatory in the core system becomes very long, even when they are not absolutely necessary in the core system itself.  So everything begins in the core system – either there is no field for certain information where the customer data is originally entered, or it was not mandatory to fill in these fields in the past.

Issue: mandatory fields

In fact, mandatory fields are a double-edged sword because, on the one hand, the customer should be completely recorded, but, on the other hand, the customer creation has to be fast and should not be blocked by details that can also be recorded later – provided, of course, that these subsequent additions are actually made. And provided that there is an adequate field for this purpose.

Whatever the cause, in the end there are often gaps in the data that can be time-consuming and expensive to correct.

Our software solution i:Reg detects data gaps in time

Due to the legal reporting obligations to international tax authorities, data gaps are especially unpleasant if they can prevent correct reporting. In order to create these complex reports it is now necessary to use a software product such as i:Reg. Because i:Reg detects and displays the gaps automatically, financial institutions become able to correct them systematically.

The gaps can be filled directly in i:Reg (so that at least the reports are correct), or this valuable information could be sent back to the data source – thus permanently improving the data quality for the benefit of other systems.

Conclusion

It pays off to correct the data quality directly at the source in order to avoid recurring problems while saving costs at the same time. In the words of John Wooden, “If you don’t have time to do it right, when will you have time to do it over?”