The complexity of financial markets is an ever changing beast, particularly when it comes to compliance. Traders operate in a market where each jurisdiction can and does impose unique reporting requirements and its own interpretation of transparency directives, all creating major challenges for those responsible for keeping their firms compliant.
For example, when a significant purchase is made, shareholder disclosures can quickly make an otherwise simple trade a backend headache. Suppose a client buys a Swiss incorporated stock listed on the NYSE and also listed in France. Reports disclosing shareholder and transaction information are sent to the SEC; traders are also obliged to report to Swiss regulators and also to the French regulators even though it's only listed there. Switzerland is not part of the EU, so it has different disclosure requirements and reporting timeframes than France.
And all parties may have different ideas about what makes a trade "significant." In the US, if beneficial owners with more than 5% of an asset class make a change to their position, the firm must file certain forms with the SEC. In other territories, significant ownership is 3%, more in others. These nuances make it tricky.
Christof Bays, sales executive for trading and compliance tools at the technology solutions firm Linedata, tells us it's not uncommon to find clients with more than 50 billion AUMs manage these complexities in a spreadsheet. "They have written very conservative rules, so almost every transaction triggers a challenge for them to review," he says. "They follow a checklist, determining if anything has changed in the territories. It's a long manual process that takes roughly one hour per person per day just to find out if they need to file something."
Bays finds it disheartening that in this automated age, shareholder disclosure reporting is a largely manual process. It involves data entry, printing the document, passing it around for signing, and then scanning and emailing a PDF to the proper regulatory body. It's a process ripe for fat-finger mistakes.
Not only is human error a problem, Bays says it's becoming more common for firms to be fined not only for their disclosure errors -- consequences of which range from public shame to jail time -- the bigger problem is they are starting to be fined for not having adequate systems in place. "Going forward," he says, "it's not just about tweaking systems to make sure you can meet reporting standards, it's making sure you have the right infrastructure in place and don't get it wrong.
"Firms need a solution that is aware of what disclosure regulations are out there, a software that knows what all of your holdings are, and knows which sorts of securities you actually have to disclose -- yet they still think they can do it all in a spreadsheet."
The lack of harmonization of global transparency requirements has led to a rise of an equally differentiated and complex range of automated reporting strategies. From working with the big OMS players, startups, installing vendor applications, or building their own proprietary systems, Bays has observed a great variety of approaches to disclosure management. Most of the home-grown solutions, in his view, are inefficient, including those that go beyond the spreadsheet approach.
Bays spoke of one firm that claims to have spent in excess of $10 million on shareholder discloser systems and spends millions more each year just to keep it running. "Meanwhile, some firms have one clever guy in compliance who thinks he can do it all. If he leaves, the company is in trouble."
It's in response to this risk and chaos that Linedata recently launched its own disclosure management platform on the back of its OMS. It runs in collaboration with a top UK law firm, Allen and Overy, which applies its "Rule Finder" database to keep the platform updated with the latest reporting rules in more than 85 jurisdictions. When a trading event triggers a disclosure, the forms are automatically populated and printed, ready to be signed.
"Proprietary builds cost more than software, and take a long time to build," and spreadsheets are simply not up to the task, says Bays. "There's a lot of interest in automated systems at the moment, and it's important for people out there to know there's a solution in the market waiting for them."Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio