The global, decentralised, 24-hour trading cycle of the FX market poses a number of unique regulatory technology (RegTech) challenges. These include breaking down data silos and homogenising data across a patchwork of applications, platforms and execution venues while ensuring quality data on a real-time and batch basis.
Content needs to be sourced, analysed and digested across disparate channels, posing challenges in relation to volumes of documents, accuracy, timeliness, and synthesising content into readily actionable objectives.
Data challenge
“The data challenge is even more daunting when one considers applicability across the FX transaction lifecycle, inclusive of pre-trade, trading and post-trade workflows,” observes Udai Abburi, senior director and head of enterprise solutions and technology at ION Markets (FX).
By employing automated rules, RegTech can rapidly assess the applicability of regulations in various jurisdictions, enabling compliance teams to focus their efforts. Platforms often integrate features such as real-time monitoring and reporting, allowing compliance and risk management teams to recognise new patterns in suspicious behaviour but also stay abreast of regulatory developments and adapt their strategies accordingly.
“The data challenge is even more daunting when one considers applicability across the FX transaction lifecycle.”
Udai Abburi
“Experience gained from other markets has highlighted the significance of agility and adaptability,” says Katarina Pranjic, head of regulation & policy at LexisNexis Risk Solutions. “It has also drawn attention to the importance of user-centric design and functionality.”
When implemented effectively, RegTech solutions can help streamline the complexity of multi-jurisdictional compliance. Lessons learned from other market verticals have underpinned the importance of adaptability and scalability agrees Kristian Davies, head of customer success at Grath.
“RegTech solutions are continually enhancing their capacity and flexibility to collect and analyse regulatory data,” he says. “Larger quantities of data at the top of the funnel provide actionable insights, facilitating proactive compliance measures, trend identification and predictive risk assessment for FX trading firms.”
These firms can achieve true end-to-end compliance by establishing a seamless framework that integrates external regulatory requirements with firm-specific risks and internal controls and procedures.
RegTech has reached the stage of its evolution where it is almost spoiled for choice in terms of where it goes from here suggests PJ Di Giammarino, CEO & founder JWG.
“One of the main themes that emerged from our annual conference in February was that regulators are really doubling down on data quality and controls,” he says. “These are big asks when you are trying to achieve auditability across the whole middle and back office for next generation regulation with transparency at its core.”
Facilitating access
Julie Tuffrey, associate director at fscom says RegTech should ideally support best practice, offer flexible pricing, and be easy to access and connect with.
“There needs to be recognition of the unique needs of firms who focus on their clients’ currency needs and specific trading activities as well as firms that deal with high volume, wholesale FX trading,” she says. “Understanding these differences is key to making RegTech scalable and effective across the board.”
“Experience gained from other markets has highlighted the significance of agility and adaptability.”
Katarina Pranjic
In the area of trade and transaction reporting, regulators have been working towards global harmonisation by coming up with the common domain elements – 110 data elements that CPMI-IOSCO proposed to be used by firms when reporting OTC derivatives transactions.
By using RegTech solutions for their trade reporting, firms can save time and money by outputting files for multiple jurisdictions from a single centralised data source explains Quinn Perrott, co-CEO TRAction, who says firms often have to significantly improve their data platforms and processes to meet new regulatory requirements.
“Some great insights can be derived from joining different sets of data, such as trade reports and reference price data at execution time,” he continues. “The results can then be used to highlight trades that deviated from an acceptable execution price.”
“AI algorithms can be programmed to detect exposures that are left unhedged or even positions that could have been closed out.”
Jeroen van Doorsselaere
Data protection considerations are also crucial when it comes to data analysis, according to Tuffrey.
“Since the data belongs to firms and their customers, getting permission to use it for analytics is essential but where permissible, it can be invaluable to support regulatory compliance,” she says. “Likewise, while machine learning and AI have a valuable role to play in the evolution of RegTech this is not without some downside and risks. Firms must prepare properly before using AI to avoid potential pitfalls.”
Interpreting rules
Regulations are complex and require expert analysis and skilled interpretation, she continues. “There is potential for AI to help, for example by providing alerts and indicators and setting basic rules and parameters for review, offering more insight into regulatory challenges to then be performed by skilled experts,” says Tuffrey.
Di Giammarino describes natural language processing’s role in cutting through the noise of seemingly endless regulatory updates and isolate relevant updates as one of the most important RegTech capabilities.
“Once firms have identified these updates, they have to make sure that all the systems they do business with (in terms of booking trades, for example) are aligned,” he explains. “This is where the Common Domain Model comes into its own. If I have a digital model of an FX trade and the regulatory reporting requirements for it are specified in common code, I can rely on it as a safety rail to ensure I am aligned to my regulator’s expectations in the eyes of the industry.”
In the FX industry, integrating data analytics and automation capabilities into RegTech platforms enables sell-side and buy-side firms to make data-driven decisions and optimise operational processes.
Pranjic explains that machine learning algorithms are integral to RegTech platforms, enabling analysis of vast volumes of regulatory data to identify patterns, trends, and anomalies. “Rather than merely enhancing capabilities, AI-driven RegTech solutions can fundamentally transform how organisations approach compliance and risk management – provided they have the right data to realise this transformative potential,” she adds.
“Some great insights can be derived from joining different sets of data, such as trade reports and reference price data at execution time.”
Quinn Perrott
As the general architecture of FX RegTech solutions entails a scalable data platform able to store and manage historical data, aggregated data facilitates more sophisticated regulatory intelligence.
“This includes sophisticated dashboards to visualise and chart the data and the ability to slice/dice and aggregate the data in various ways and provide for monitoring and alerting through user configurable and rules-based processing,” says Abburi. “More advanced data analytics spanning pre-trade, trade and post trade operations are increasingly the norm.”
Transaction cost analysis can be provided as a complementary solution to measure metrics such as fill ratios and price variations as well as determining market impact and execution hold times. Liquidity trends and anomalies, spreads analytics and skew trends, and execution timing are also key areas of focus.
“Firms must prepare properly before using AI to avoid potential pitfalls.”
Julie Tuffrey
Client insights
“Another important area is client analytics,” observes Abburi. “This includes providing insight on client order flow and execution such as hit rates, identification of toxic flows, client trading activity and patterns, instruments traded, trading volumes aggregated across instruments and time dimensions, and profitability analysis.”
When asked how FX trading firms should leverage RegTech to get closer to achieving true end-to-end compliance, he recommends investing in best-in-class solutions for specific needs. “This implies that solutions from multiple vendors are required and should be further supplemented with in-house capabilities where available.”
By employing automated rules RegTech can rapidly assess the applicability of regulations in various jurisdictions
The selection process should take account of the provider’s ability to support sustained compliance through customisable solutions with a wide range of interoperability options and access to value-added solutions including alerts, monitoring, visualisations and advanced analytics.
It is important when regulators are publishing machine readable content that regulatory technology automates interpretation and compliance requirements adds Jeroen van Doorsselaere, vice president of global product & platform management at Wolters Kluwer. “AI algorithms can be programmed to detect exposures that are left unhedged or even positions that could have been closed out,” he says.
Real time regulatory risk management in the FX market has a long way to go. That is the view of Remonda Kirketerp-Moller, founder and CEO of Muinmos, who attributes the difficulty of lack of real-time regulatory risk management to limited availability of standardised and updated data, and lack of understanding of the meaning of compliance across the ecosystem.
“Aggregating, interpreting, consolidating and cleansing data is a mammoth task,” she says. “However, the industry is moving in the right direction in terms of addressing the challenge of turning data into machine readable code. What we need are more RegTech vendors who get excited about the process of cleaning and connecting data rather than just providing data feeds.”
Kirketerp-Moller says the market is largely populated by resellers who in many cases have no idea of the quality of the data they are selling, what they are selling and what it solves.
“Firms are often drawn in by an attractive user interface – I would go for the solution with the best data quality regardless of the interface,” she continues. “But that is a challenge, partly because the market doesn’t really understand where to look, how to look, and where the issues are.”
“RegTech solutions are continually enhancing their capacity and flexibility to collect and analyse regulatory data.”
Kristian Davies
Kirketerp-Moller refers to the client onboarding process as an example of the complexity of compliance. “To be able to say ‘can I onboard/keep this client yes/no’ takes more than a basic KYC/KYB/AML check. It requires deep learning and AI to analyse dozens of regulatory parameters, both internal and external, and this is what sophisticated Regtechs are solving,” she says.
“Even with a basic screening checker, you would think it should be straightforward to determine whether a potential client is a politically exposed person or on a sanctions list, but it isn’t because it depends on how the authority updating the data issues those updates and the accuracy of the data,” adds Kirketerp-Moller.
Integration important
Few systems deliver true end-to-end compliance, so the best approach is to leverage compliance solution providers that integrate well with back office systems or at least with each other’s offerings suggests Perrott.
When it comes to determining which solutions are most appropriate for specific compliance risks, he suggests starting by asking peers. “There are also some good RegTech directories and industry bodies, and events are a great opportunity to talk to multiple providers and attend seminars.” Davies recommends conducting a comprehensive internal assessment of key compliance risks and operational requirements to identify the most suitable solution(s).
“When selecting a RegTech provider, firms should prioritise factors such as regulatory expertise, solution scalability and flexibility, adaptability to evolving requirements, data security measures, user-friendliness, interoperability with existing systems, quality of customer support, and cost-effectiveness,” Davies says.
“Aggregating, interpreting, consolidating and cleansing data is a mammoth task.”
Remonda Kirketerp-Moller
Pranjic suggests forming a working group, which depending on the size and structure of the company may consist of representatives from risk and compliance, legal, strategy, IT, project management, procurement and data protection. Gaps that need addressing through RegTech solutions should also be identified during this process.
“Requesting demos or proof-of-concept trials for shortlisted solutions allows for evaluation of functionality and usability,” she says. “Compatibility with existing systems and infrastructure is another important consideration, while understanding costs and asking questions about included data coverage, benefits of longer contracts, and support offerings is also crucial.” The ability to digitise a single version of the truth that is baked into the control systems takes a lot of noise out of the compliance process according to Di Giammarino.
“Regulators are really doubling down on data quality and controls.”
PJ Di Giammarino
“An often overlooked aspect of RegTech is that it is not just about compliance or efficiency – it is about freeing people up to do their jobs,” he says. “For example, implementing trade surveillance controls enable better, standardised data cross order management systems, enabling many desks to spot trends and patterns across their customer base.”
Firms need to view the process of collecting customer and transaction data for regulatory compliance as an opportunity rather than a ‘necessary evil’ suggests van Doorsselaere.
“This process gives firms the ability to look through their data and use it to improve decision making by focusing on those parts of the transaction with the highest margin after regulatory compliance,” he concludes.