Goldman Sachs and four other global banking giants are working together to establish a standard interpretation of securities position reporting regulations, and use technology to apply those rules.
The consortium, dubbed Endoxa, is aiming to mitigate the risk of under-reporting or misreporting securities positions globally, said Pete Chisholm, who leads regulatory management and entity
"Efficiency isn't really the driver," Chisholm said. "It will be more efficient, but it's more about managing the risk of incorrect reporting. That's at the heart of regulatory reporting. The biggest problem we face is that we're trying to remain completely compliant with the rules, but the rules are written in English. We need them in digital code."
Chisholm said that Endoxa's goal is to interpret the hundreds of regulations on position reporting, with legal assistance from international law firm Allen & Overy, and turn those rules into code that banks can apply.
Market participants must report their securities positions to regulators globally to increase transparency and mitigate concentration risk, said Steve Gatti, a securities regulation lawyer and partner at Clifford Chance. For example, in the U.S., beneficial owners need to report to the Securities and Exchange Commission if they acquire more than 5% of a class of equity securities of a public company.
There's a risk of innocuous mistakes in securities position reporting, due to its complexity, Gatti said. Different jurisdictions around the world have distinct reporting requirements, and market participants, like banks, often have to aggregate securities positions across separate affiliated entities, he added.
"An initiative like Endoxa makes sense for the biggest financial institutions that have so much data in so many different businesses in so many different jurisdictions," Gatti said. "I think what probably motivated the collaboration is [that] everybody struggles with this."
Chisholm said position reporting is also complicated by the rapid pace of rulemaking. The risk of misreporting securities positions has been a known issue in the industry, he added, but it takes industry collaboration to develop a standard solution. Working as a consortium also saves costs, and Endoxa hopes more banks will join the initiative, he said.
One of the banks' concerns of securities position reporting is that they're outliers among their peers, Chisholm said.
"We cannot delegate the accountability of your reporting, because regulators expect us to hold ourselves accountable," Chisholm said. "If we as an industry have control of the way the rules are implemented ... this will allow us to be as compliant as is expected by the regulators, but also have this safety blanket that we're all performing the rules in the same way."
The Securities and Exchange Commission has also proposed regulation to "level the playing field" in the equities market.
Goldman will eventually replace the bank's internal securities position reporting processes with Droit's platform, Chisholm said. Droit's position reporting platform will automate the position-evaluating process based on the group's understanding of regulations.
Technology designed for regulation and risk management across functions, like operations, liquidity and compliance, is
"We believe this partnership can be extended to many issues the industry is facing," said Brock Arnason, Droit founder and CEO, in a prepared statement. "With Endoxa, we have the opportunity to break through the complexity head-on and find clarity together on the most challenging regulatory obligations."
