If you work for a financial regulatory agency, you are very familiar with the state of the reporting system. More specifically, you know that it’s in dire need of modernization. One example I like to give is the Dodd-Frank Wall Street Reforms. These reforms introduced new levels of regulatory oversight, and with that came much needed stability to the financial markets. What it failed to address was the data itself—the financial data collected is stored in outdated, document-based formats, which lack clear transparency, standardization, and accountability.
This “miss” is precisely why modernizing financial data regulatory reporting is vital. It will not only bring transparency, it will also drive the adoption of RegTech solutions such as Artificial Intelligence (AI) and Machine Learning (ML) which will usher in high-quality, consistent, and comparable financial data for all parties, including the government, investors, and all stakeholders.
But hope is not lost because on December 15, 2022, both houses of Congress passed the Financial Data Transparency Act (FDTA), which President Biden is expected to sign into law soon. In the works for nearly a decade, DFIN has been a long-time supporter of the FDTA, providing support through our membership with the Data Foundation, a non-profit think tank seeking to improve government and society by using data to inform public policymaking.
We have also shared our views through multiple blogs on the topic. These articles have examined how the government, reporting entities, and the public have been hobbled by outdated reporting systems, which has resulted in the widespread use of inconsistent identifier codes and varying document formats that don’t support structured data formats, the ramifications of which are significant.
For example, without structured data, investors struggle to make informed data-backed decisions, while regulators cannot efficiently pinpoint patterns to identify cases of fraud in a timely fashion. As for public companies, without an agreed-upon document format, they’re stuck exhausting vast sums of money to produce document-based disclosers that demonstrate their compliance.
The FDTA addresses these challenges in a couple of important ways:
- It introduces new interoperable reporting standards and open-source data formats that support the data already collected by seven of the financial regulatory member agencies that comprise the Financial Stability Oversight Council (FSOC). As for why this is important, the Data Coalition states that the use of structured data formats will allow data to flow “into databases without manual re-entry. Structured data formats would allow filers to automate disclosure, markets to digest financial information cheaply.”
- It establishes standard language definitions AND consistent data fields, including a non-proprietary legal entity identifier. Here, the Data Coalition states that use of consistent identifier codes for entities and other concepts will allow “firms to quantify exposure to an entity or product, markets to aggregate all data on a given entity, and regulators to avoid Madoff-style silo failures.”
Perhaps the most significant benefit that results from the elements above is transparency. By implementing standard language definitions and consistent data formats (including a common identifier), governments, industries and people will be able to work together more effectively and make stronger, more informed financial decisions.
A second benefit is searchability. Using fully searchable and machine-readable non-proprietary data formats (e.g., iXBRL/XBRL) gives everyone real-time access to valuable data. Investors and regulators will now be able to access the information they need to support decisions in real time, pinpoint trends, identify fraudulent activity, and more.
I cannot think of a better way to end 2022 than with the passage of the FDTA. DFIN will work with key entities to help ensure its success. We will also continue sponsoring the Data Coalition RegTech updates and will assist with the organization’s RegTech 2023 Series, which will delve into the FDTA implementation and help build a coalition of regulators, technology providers, and financial services companies to support its adoption.
I wish everyone a peaceful and joyous holiday season and New Year.
