What's regtech made of?

What’s regtech made of?

There is far more to regtech than regulatory technology, or at least there can and should be. Regtech, as it is coming to be understood, must be something qualitatively different from what it’s replacing and not just a faster and better version of the same thing.

The most important aspect of regtech systems – an ability to generate different kinds of data very rapidly from different sources and for different purposes, and then to reuse it for others – can, in fact, bridge the gap between what financial regulators are now asking for and what conventional technology has been able to furnish.

That’s according to Wolters Kluwer‘s Richard Bennett, VP of EMEA regulatory reporting, and Richard Reeves, VP of OneSumX strategy, who have provided a useful breakdown on what features actually make up regtech.

Looking from the inside out – from the point of view of someone working in IT – the features that make regtech disruptive yet incredibly appealing are adaptations to the specific needs of financial compliance and reporting of broad developments in computing along several fronts. These include:

In-memory data grid (IMDG)

This is a group of servers configured to permit their random access memories (RAMs) to behave as a single entity, allowing massive datasets to be stored in RAM so that individual bits can be retrieved as much as 500 times faster than if they had been stored on conventional drives within the servers.

In-memory computing grid (IMCG)

The next step beyond the IMDG, in-memory computing links RAMs across servers so that they can process data, not just store it, maximising the speed with which data can be manipulated and analysed.

Cloud computing

Hardware has been moving out of the basement and into dedicated, usually third-party, hubs. This reduces infrastructure and IT staffing costs and lets companies concentrate on their primary lines of work. Storing data remotely also allows companies to add or subtract servers owned or leased at a hub to adjust to changes in business volume with minimal effort and expense.

Service oriented architecture (SOA)

A cousin of cloud computing, with many of the same cost and logistical advantages, this is a way to furnish application programs for various functions remotely. This ensures that the latest version of each piece of software is available to an organization wherever and whenever it’s needed.

Artificial intelligence (AI)

AI is essentially an ability to mimic sophisticated human thought processes, rather than merely making calculations very fast. That can facilitate the recognition of patterns and trends in data, even those governed by complex, interrelated variables. The ability to tease out trends, moreover, can be used to spot changes in them and signal problems before they are readily apparent through conventional analytical methods.

Regtech: from the executive’s view

From the outside looking in – from the vantage point of senior executives pondering the merits of regtech solutions – the key attributes that these computing advances afford – speed, agility, scalability and adaptability – are manifested in a set of features that analyse and present data, especially the complex interactions among various interrelated sources of risk and performance, in ways that are sophisticated, not complicated.

That permits their impact on the principal functions within an organisation to be understood, evaluated and acted upon without overwhelming users. This is the essence of what regtech is and does. These features include:

Centralised data management and analysis

Shared analytics and calculation engines facilitate the integration of key functions like risk and finance, helping to break down barriers between silos by rapidly retrieving information wherever it’s stored on a firm’s servers. By streamlining the collection of contractual, account, risk, finance and transactional information, a holistic oversight of the entire firm can be produced, helping to create truly integrated and consistent data.

Data mapping

In conjunction with a centralized management system, this helps establish connections among pieces of data generated through different collection or analytical methods to match equivalent items stored in different locations. Like an analytical Rosetta Stone, data mapping allows details to be compared and reconciled with one another to discover their meaning and ensure consistency, identify the impact and implications throughout an organisation and establish a truer picture of conditions.

Data visualisation

In the future, as in the past, a picture will be worth a thousand words – or a thousand numbers. Visualisation software presents information in a pictorial or graphic format to make it easier to detect patterns that otherwise might escape notice. In general, it provides a means for users to get their heads and eyes around large, otherwise unwieldy chunks of data and draw useful inferences from them.

Smart cubes

These are multidimensional matrices that permit data to be presented and interpreted more clearly. They are standardised, automated formats for representing, validating and reporting compiled datasets that leave individual items available to be reused for different purposes.

That ensures greater consistency and flexibility and lower cost. Smart cubes were developed by Austria’s central bank, Oesterreichische Nationalbank (OeNB), to help banks and regulatory authorities make sense of all the data that will be required under the Basel guidelines and the various supervisory frameworks that firms will encounter around Europe.

The Austrian authorities are at the vanguard of another trend in financial supervision. They are asking firms they monitor to take a kitchen sink approach and submit essentially every piece of data they can muster. The central bank then draws conclusions from the data about each firm and the financial system. As originally envisioned, a bank would have needed a solitary smart cube to represent all material information. In the real world, six or seven appears to be the norm.

Working to meet compliance obligations

These tools work in concert to help meet compliance obligations and produce reports of the highest quality reliably, quickly, consistently and cost effectively. They also serve key operational goals related to risk management and financial performance that go well beyond compliance.

What makes that possible is that the processes used to meet both sets of needs are more similar than it might seem at first. They require facile manipulation and management of data in ways that permit a firm to analyse current conditions and forecast future ones, and to gauge the impact on the organisation as a whole and on particular segments within it.

In addition to answering every question asked of it efficiently – if we get into a particular business line, say, how well will it mesh with our others and what impact will it have on overall return on capital? How will increasing exposure to one type of asset in a particular portfolio by a certain amount affect key ratios? – a system must be able to alert users to other questions they should be asking themselves, such as why a central bank is prodding us for information about some arcane and outwardly benign criterion.

It also must highlight potential sources of trouble ensconced in the data, such as some improbable but not impossible set of economic and financial circumstances that could present an asymmetrical threat to a firm’s health.

The answers to questions like these are unlikely to be discovered in any single place. That’s why, in our view, the most effective regtech software functions through a combination of analytical breadth and depth. There must be tools that can work across silos by pulling out relevant details from anywhere within the data lake.

Firms are looking for comprehensive, cost-effective, end-to-end solutions that pull double duty, meeting the demands of regulators and maximising financial performance and risk management. This is where the speed, agility and adaptability of regtech offer the greatest prospective benefit and become a desirable investment, not just a necessary one – if its potential is envisioned correctly.