Brokers eye regulatory info as growth dataset to ease banks’ compliance burden

The plethora of new regulations introduced over the past decade—from Mifid II to the Securities Financing Transactions Regulation (SFTR), the Market Abuse Regulation (MAR), and Basel’s upcoming Fundamental Review of the Trading Book (FRTB)—has left financial firms struggling to find and report the data required for regulatory compliance.

Part of the challenge is the sheer scale of the requirements. Michelle Zak, CEO and co-founder of compliance specialist Qomply, notes that compliance is a minefield, where mistakes can be punishable with severe fines. For example, the UK’s Financial Conduct Authority (FCA) has already levied fines of more than £100 million ($131 million) just for transaction reporting errors relating to the first iteration of the Mifid regulation.

“There are 30,000 pages of Mifid regulations … and 28 technical regulatory standards that accompany that. There are 65 fields in a transaction report … and roughly 250 validation rules put forward by the European Securities and Markets Authority (Esma) about what they expect for each field,” Zak says. “Just because a regulator accepts your reports doesn’t mean they’re accurate. If you under-report, you get fined. If you over-report, you get fined. If you don’t report accurately, you get fined.”

The other part of the challenge is locating the right data to fill out those report fields. And the most complete record of that data is held by the inter-dealer brokers who broker trades in over-the-counter (OTC) assets.

So, responding to this demand, inter-dealer brokers are developing new datasets to help their trading clients comply with the new regulations. Brokers are accustomed to providing feeds and files of price data for OTC asset classes generated by trading activity on their voice brokerage activities and trading platforms, but the new datasets provide tailored data on individual firms’ activities that they can use to fulfill their regulatory requirements.

The old new kid on the block

During BGC Partners’ recent 2021 financial results call, chairman and CEO Howard Lutnick stated that he expects the broker’s Fenics Market Data business to triple within the next couple of years. In addition to growing subscriptions—with 40 new contracts signed in the fourth quarter of last year alone—and adding new data products, such as futures data from the broker’s new futures exchange, and cryptocurrencies data, BGC expects to benefit from a new business line, Regulatory Solutions, which was built in-house from scratch, after listening carefully to the needs of customers and the market at large. Indeed, one of the new contract wins in Q4 is an unnamed top 10 investment bank that signed up for the regulatory offering.

“There’s a growing regulatory burden on our customers, who need our help. So, our Regulatory Solutions team will be a part of our growth,” Rich Winter, global head of market data and information analytics at Fenics Market Data, tells WatersTechnology. Winter took on the role two years ago after five years in other roles at BGC and 25 years in capital markets before that. “When I stepped in, there was already some work being done around harvesting information, but we didn’t know how to best utilize it. So then it was about creating a strategy and a business plan.”

Regulatory Solutions provides datasets tailored to the compliance requirements of regulations such as Mifid II, the MAR, Dodd–Frank and FRTB. The data covers government and corporate bonds, inflation products, FX options and interest rate options, and equity and commodity derivatives. Fenics combines and normalizes the data from BGC’s trading platforms and its risk and analytics tools using analytics and data science techniques, then delivers them via FTP in machine-readable flat files for two main functions—Risk and Valuations, and Surveillance Insights and Recap.

The Risk and Valuations dataset provides “evidential data”—observable and executable bid–offer prices and liquidity metrics—for corroborating data to actual market activity, creating what the firm calls “real-time backtesting” for capital calculations such as Prudent Valuation and Additional Valuation Adjustments, and for meeting the demands of FRTB and its Risk Factor Eligibility Test.

The Surveillance Insights and Recap solution combine bank-specific, daily trade and order recap data to perform market surveillance, which Fenics officials say will reduce false alerts and lead to faster alert resolution.

“It allows a bank to surveil its activities in a way they’ve never been able to do before to meet regulatory demands,” Winter says.

Winter is coming

Regulatory Solutions is one part of a broader plan to grow the broker’s data business overall, which Lutnick says is “one of the biggest opportunities we have,” saying that he expects to see accelerating take-up of its data products in the coming years. “Our expectation is, we could have our market data line be three times the size of what it is now,” Lutnick told investors on BGC’s earnings call.

“We’re going to do more of everything. First, we’ll be expanding our customer base and the types of customers we serve, especially the buy side, which is driving a lot of growth and is becoming more sophisticated consumers of data,” as well as creating inflation-related data products, and providing exclusive access to data from the 30-odd brands within BGC for energy and commodities data, he says. Not to mention anything arising from the broker’s nascent crypto business, which Lutnick says will provide a “comprehensive offering” by year-end.

But achieving threefold growth requires the right data, and also the right people. In addition to Winter—who was global head of product strategy and sales for BGC’s Fenics US Treasuries (Fenics UST) platform, before Lutnick picked him to lead its data business—the business has hired around 15 new staff over the past 12 months, including data veterans Andrew Reeve, Elliott Hann, Brandon Rumley, and Ray Bencheikh. In addition, Richard Brunt, who has spent almost 18 years at GFI and BGC—over 15 of those in senior roles at Fenics—became global head of market data sales in January in addition to his existing role as managing director of Fenics’ Kace software business.

The client data burden

But BGC isn’t the only game in town: Rival TP Icap has been providing regulation-focused datasets via its Data & Analytics business—now known as Parameta Solutions—since the introduction of Mifid II in 2018.

“We developed our Mifid Trade and Order Recap service to help customers who trade on our European and UK venues meet their regulatory requirements,” says Steven Holland, head of regulatory products at Parameta. The service provides trade and order data, segmented by asset classes, depending on what a client trades, for each of the 11 venues operated by the broker. Specifically, for each client, it proved an end-of-day file of all their activity on the broker’s venues, comprising all the data fields they would need to fulfill onward reporting requirements through an Approved Reporting Mechanism (Arm).

Though initiated to meet the demands of Mifid, Parameta has since expanded its activity reports to cover its global platforms, reflecting the global nature of its clients’ business. What makes capturing the data difficult for end users is that regulations focus on order activity, rather than just executed trades, and the complexity of the range of data being captured.

“Most of our clients have a view of the trades they execute. But the regulatory scrutiny has focused on the order side: how they capture client orders, where they place them, and how they treat the pre-trade side. Mifid Arms offer trade reconciliation services … but on the pre-trade side, the only place you can get that data is the venue where you placed the order,” Holland says, adding that firms will need to approach all the brokers they use to obtain details of their order activity with each broker.

Then there’s the variety of order types and capture methods, including voice brokerage operations, electronic platforms, and hybrid models, as well as different connectivity methods, ranging from direct order inputs to orders sent through third parties, such as Bloomberg Messenger.

“Orders then could be spread across different desks with a variety of types that make capturing them quite a complicated process,” Holland says. “Getting that data from the venue gives clients the confidence that they’re not missing anything.”

Clients can also use the broker’s data for other purposes. For example, Parameta has seen clients using the Mifid Trade and Order Recap dataset to meet market abuse monitoring requirements under MAR. “The data reported under Mifid is the same data that the FCA would use to ensure markets are operating properly from a market abuse perspective. So there is high crossover between the data needed. … And the more data a firm has, the easier it is to meet the requirements set by regulators,” Holland says.

In addition, Parameta is now working on creating a data service to help clients meet the requirements of the upcoming FRTB regulation, which focuses on the calculation of risk to meet capital requirements, and is expected to come into force next year and be onboarded by the major jurisdictions, including Europe, in 2025.

“A key element of FRTB is to capture ‘real price observations’—a trade or a committed quote. So firms will be sourcing these from their internal trade and order books, and by reaching out to vendors. Where this data is more scarce and OTC in nature, it may be more difficult to find a source for FRTB. This is where we feel we can provide value to clients,” again making brokers one of the first ports of call for this kind of data, Holland says.

TraditionData, the information arm of Swiss-based inter-dealer broker Tradition, was unable to provide a full interview, though global head of sales James Watson says the broker does offer “data that firms can use themselves within those [regulatory] tasks,” adding that “some solution providers and clients leverage our data.”

Besides the major inter-dealer brokers, UK-based advisory firm Eose Data, which helps brokers create, license, and sell data products, is in the process of setting up a technical partnership to offer “a complete set of resources” that will allow its broker clients with more limited resources to provide similar services to their customers, without involving the same level of effort expended by the larger IDBs, says CEO Suzanne Lock, who calls the regulatory data initiatives a “win–win” to help financial firms address an area of growing demand.

“We are seeing demand from end users and appetite from our clients to offer products/datasets that are both focused on these functions and are also delivered directly to the user as tailored individual reports/datasets,” she says. “I think it is a great way for the brokers to start to develop those direct connections for a particular function while continuing the provision of vanilla data through the vendors.”