The need for real time transaction data amid regulators’ requirements and investors' need 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 the financial institutions. Old processes, old systems, 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many financial institutions continue to take decisions involving millions of Euros (if not billions) on the basis of outdated (and often inconsistent) data deriving from manual processes, usually processed using excel.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 is becomes paramount for the industry as it requires to move 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 approach will be required to comply with  the above.

Taking as an example the  securitization industry, credit originators or vehicle servicers report data on 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 investor 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 on October 2015[1]that 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 date are one month old?

The  buy-side industry (including Asset Manages, Pension Funds, Investment Funds, etc.) requires 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 securitisations, 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 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 adoption of such new technology propositions, not the deep pockets to invest in the development of any proprietary tool as it is was still the case a few years ago.

[1]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