The role of technology in streamlining transaction reporting

With the introduction of EMIR Refit in the UK and EU, and a litany of fines issued throughout the year, 2024 was a landmark year for transaction reporting regulation.

With ever-shifting regulatory guidance and the development of new technologies, many financial firms are now looking to enhance their reporting procedures. While potential fines can strain cash flow, the real danger lies in the immeasurable reputational damage, a problem exacerbated by the competitive nature of the financial services industry.

A single misstep can erode the trust between clients and advisers, a loss far more damaging than any financial penalty. This brings us to the focus of this article, the role of technology in streamlining transaction reporting and why an automated solution/relationship with an experienced vendor is now the chosen route for many financial firms.

Understanding transaction reporting

While transaction reporting plays a critical role in fulfilling regulatory obligations, it also plays broader role in financial markets.:

Market integrity

The key to market integrity is trust - the trust that all investors and traders operate on a level playing field. Maintaining a clear record of all transactions supports trust in markets and creates an environment of relative stability. Transparency and accountability are also two words heavily associated with investment markets — both supported by the global regulatory transaction reporting framework.

Prosecuting illegal traders

A review of the 1980s and 1990s reveals the relative complexity of insider trading prosecutions and the challenges faced by regulators. In recent times, the introduction of new technology to facilitate transaction reporting has not only helped to identify suspicious transactions and instances of insider trading but also ensured there is a comprehensive audit trail of trading activity. This is critical to supporting prosecutions and is now acting as a deterrent for those seeking illicit gains.

Regulatory oversight

Financial markets are adept at changing and adapting to new trends and financial instruments. Consequently, it is critical that regulators are able to maintain accurate oversight of market activity, alerting them to issues of illegal trading and unethical activities. Analysis of transaction reports also enables regulators to identify new trends and potentially new types of market abuse and then take action much quicker than in previous years.

Because of the historically close relationship between the EU and the UK, the FCA has retained the vast majority of MiFID regulations. There has been a limited divergence in some areas, but on the whole, the UK and the EU are singing from the same regulatory hymn book. In the US, the Dodd-Frank regulations have been extended in light of the 2007/8 financial crisis, now taking in a broader range of investment instruments.

Technological advancements in transaction reporting

The role of technological developments on the act of transaction reporting has been profound. Beyond simply improving processing power, recent technological developments have introduced the ability to compare and contrast suspicious trading patterns against historical data, greatly increasing the ability of regulators to spot potential red flags. Limited human involvement in the end-to-end transaction reporting process has also significantly improved accuracy levels and removed any element of bias.

Benefits of technology in transaction reporting

To say there have been significant advances since 1993 would be an understatement. Today, the entire transaction reporting process is automated from start to finish, integrates and collates a huge number of data points, and can be reported in almost instantaneously.

The collation and automated analysis of trade data facilitates the creation of transaction reports to fulfil various regulatory obligations. The ongoing integration of AI, and especially ML, into the transaction reporting process makes it much easier to identify and record instances of market abuse and insider trading.

While regulators and the financial community have a proactive mindset and strong appetite to pursue the criminal fraternity, these are still reactive measures.

The benefits of new technology stretch far and wide, taking in issues such as:

• Reduced errors
• Enrichment of data
• Cost savings
• Deeper insight into transaction data
• Better decision-making
• Potential scalability
• Invaluable flexibility

When we strip away the layers of technological advancement and examine the outcomes, one thing stands out: a reduction in false flags. There will invariably be cases that approach the boundaries of market abuse or insider trading. Still, by comparing and contrasting current activity against illegal activity in the past, the picture is now much clearer.

Addressing false flags is a time-intensive process for financial institutions, leading to additional costs, and often involves regulators. False flags are particularly relevant for eflow and the TZTR Transaction Reporting services we offer. Embracing the latest technology within a structure that identifies and utilises the experience and expertise of our company, we have created a focused transaction reporting service, reducing the number of false flags.

The introduction of third parties such as eflow has seen many financial institutions outsourcing their regulatory and compliance obligations. This approach allows them to leverage our established expertise and leadership in the industry, left to focus on their core operations.

Future trends in transaction reporting technology

Investment in the broader FinTech sector has been particularly volatile in recent years. However, it’s interesting to note that investment in WealthTech and, more recently, RegTech has held up exceptionally well. The ongoing integration of AI and ML allows systems to learn from historical data and analyse and adapt to real-time information. This ensures that the reporting process is continually developing, optimising, and becoming even more efficient.

There will always be a degree of protectionism when it comes to regulators and regulations, whether for financial services, consumer products or any other sector. Interestingly, regulators have been keener to communicate in recent years, finding a comfortable middle ground and working with broadly compatible regulations. RegTech solutions are helping to streamline overlapping and conflicting regulations and encouraging a move towards global standardisation.

As markets become more integrated and traders can transact in overseas markets at the touch of a button, a united approach to regulations is required. Rest assured, if those looking to undertake market abuse and insider trading spot weakness in the system, they will exploit it. While regulators across the globe are in constant communication and discussing future frameworks, it is down to companies such as eflow to lead the way in putting these theoretical talks and new ideas into practice.

Conclusion

Technology is transforming lives and businesses, and having a growing influence on finance. As trading volumes increase and investment strategies become more complex, the original transaction reporting processes of 1993 are now considered to be from a prehistoric age. Today, we can automate the end-to-end transaction reporting process and create the appropriate regulatory summaries. Real-time analysis also means that potentially suspect trading can be identified relatively quickly.

Many observers believe that we are just scratching the surface regarding AI and ML, reflected in the ways in which structured and unstructured data is used today. Just a few years ago, the automated analysis of unstructured data was expensive, available to very few and not considered economical or efficient. The situation is very different today. Indeed, unstructured data such as voice, email or other communications can often flag potential illegal activity before it starts.

As an integral part of your company, perhaps a compliance officer or a board director, the repercussions of any errors or oversights in your regulatory procedures could prove expensive. We are not just talking in financial terms; we are talking about reputational damage, which will very often far outweigh any penalties and fines.

If you would like to discuss our cutting-edge services and the long-term benefits of outsourcing elements of your regulatory and compliance obligations, don’t hesitate to book a consultation.