Making the Buy vs. Build Decision for Regulatory Transaction Reporting Systems in Financial Institutions

After the introduction of the first Regulatory Transaction Reporting regimes, such as the Dodd-Frank Act (DFA), MiFID and EMIR, financial institutions had limited options for using externally developed solutions. As a result, many institutions were left with the task of reporting manually or creating their own automated solutions. Over time, as regulatory requirements evolved and more regimes were introduced, the complexity of Regulatory Transaction Reporting increased.

Today many institutions struggle with a complex and less-than-transparent system. Market participants have recognized this vital need and stepped in to develop reporting solutions. Now, with the upcoming regulatory rewrites and the emergence of the Software-as-a-Service (SaaS) model, the decision to buy or build a reporting solution is potentially more relevant than ever.

This article discusses today’s relevance of this decision, explores the factors that influence the decision, and explores the two models to choose between when a buy decision is taken.

Today’s relevance for buy vs. build

Several factors within the market contribute to the increasing interest in the buy vs. build decision for Regulatory Transaction Reporting systems:

• Inefficient systems: Many reporting systems have been developed under high regulatory pressure to meet the timelines when regulations came into effect. However, by now, it has become apparent that these were not one-time changes. The truth is that the reporting standards are continuously changing, and new regulations are being introduced, while the systems implemented have not been designed for these continuous changes.
• Increased regulatory scrutiny: Regulators are showing increasing interest in the completeness, accuracy, and timeliness of reporting and are continuously introducing new and changing reporting requirements (e.g., EMIR Refit).
• Costs: The combination of inefficient systems and the increased regulatory scrutiny leads to increasing costs for financial institutions.
• Vendor offerings: As the market matures, vendors are actively providing alternatives to reporting systems built in-house. This goes as far as offering financial institutions the option to outsource Regulatory Transaction Reporting through Software-as-a-Service (SaaS) models.

The nuanced reality of the buy vs. build decision

In the context of Regulatory Transaction Reporting, most academic perspectives would favor a buy decision based on the core competencies of an organization. A core competency can be defined as: a unique and strategic capability or set of capabilities that gives an organization a competitive advantage. It represents the collective knowledge, skills, technology, and resources that distinguish an organization from its competitors and are central to an organization’s ability to deliver value to its customers. Typical core competencies of a financial institution are, for example, credit and lending expertise or capital market knowledge. Regulatory Transaction Reporting, however, is usually not one of the core competencies of a financial organization.

We believe the decision is more nuanced in practice. Most financial institutions already have an existing solution in place, meaning that the buy vs. build could also be explained as buying a new, externally pre-built solution or maintaining and future-proofing the current solution. Therefore, there are additional factors influencing the buy vs. build decision for financial institutions when it comes to Regulatory Transaction Reporting:

1. Risk appetite: Even if reporting is fully outsourced to a vendor, the institution remains accountable for the completeness, accuracy, and timeliness of reports. Financial institutions must evaluate their risk appetite and consider the level of control they desire over Regulatory Transaction Reporting. Assessing trust in an external solution versus internal (direct) control is crucial.
2. Cost considerations: Financial institutions need to analyze the costs associated with maintaining and future-proofing their current reporting solution, and compare this to outsourcing a Regulatory Transaction Reporting solution. This assessment should include: development costs, ongoing maintenance expenses, regulatory updates, and the potential costs of outsourcing Regulatory Transaction Reporting. Comparing the total cost of ownership between buying and building is crucial for making an informed decision.
3. Configuration of the existing landscape: Institutions with highly configured ecosystems may face challenges in integrating a pre-built solution from the market.
4. Scalability and flexibility: Institutions with growth plans or potential expansion intentions require a solution that can scale, while the solution should be able to adapt to continuously changing or new reporting requirements.
5. Internal expertise: The availability and expertise of internal resources within each financial institution are critical factors. Building and maintaining an in-house Regulatory Transaction Reporting system requires skilled developers and business analysts familiar with reporting regimes. Evaluating the quality and quantity of internal resources is important to determine whether the existing solution can be made future-proof and effectively managed going forward.

Options for a buy decision

It is important to emphasize that if an organization undertakes the decision to buy a new solution, there are two high-level models to choose from: (1) the on-premises model or (2) the Software-as-a-Service (SaaS) model.

(1) The on-premises model -- involves installing the solution either on the organization’s servers or within its cloud environment. It is a more traditional approach where the financial institution is responsible for maintaining the solution when the implementation is completed. The key advantage of an on-premises installation is the organization retaining full control over the solution and not needing to rely on support processes of a third party. This model is considered more mature, with multiple vendors offering solutions.

(2) The other option is the SaaS model -- which is a growing market, but less mature when compared to the on-premises model. In this model, the service is usually hosted on the vendor’s cloud and the vendor is responsible for maintaining and updating the solution. The benefit of choosing a SaaS solution is that the institution does not need to have developers to fix issues or keep the solution up to date with changing regulatory requirements. Additionally, SaaS solutions usually have a core that is client agnostic, catering to the needs of various financial institutions and thereby becoming ‘market standard’. The downside for financial institutions is that they need to have trust in a relatively immature market, while the solution is used to adhere to strict regulatory requirements. However, it is worth noting that many vendors that traditionally offered on-premises solutions are now moving into the SaaS space.

Our experience has revealed that it is impossible to categorically recommend the single best option – whether to buy or build – for every financial institution. Due to the uniqueness of every financial institution’s organization, taking multiple, key components into consideration is necessary to determine the optimal choice.

Conclusion

With this article we have highlighted some factors that influence the buy or build decision in Regulatory Transaction Reporting, which we believe should be carefully considered. If a financial institution decides to buy, the subsequent decision involves choosing between the on-premises model and the SaaS model. Notably, vendors like Cappitech by S&P Global, Adenza and Broadridge are enhancing their SaaS offerings, making this more and more an interesting option.

However, it is not yet certain whether these SaaS offerings are mature enough to effectively assist financial institutions, based on their own unique situation, with the regulatory pressures they face. In conclusion, we believe that financial institutions should carefully evaluate the factors and models to make an informed decision that aligns with their unique circumstances and objectives. By doing so, they can establish an effective and efficient Regulatory Transaction Reporting landscape that meets today’s compliance requirements and can adjust to tomorrow’s demands, while minimizing risk and in support of overall business goals.

What can Synechron offer in Regulatory Transaction Reporting?

Synechron has, on multiple occasions, been tasked with setting up and improving Regulatory Transaction Reporting processes for our financial services industry clients. This provides us with an excellent understanding and vision of the most relevant pain points and improvements needed to ensure a proper Regulatory Transaction Reporting lifecycle – from the regulation to the vendor selection process, all the way to system implementation (and beyond, as necessary). With our industry-focused regulatory domain knowledge, hands-on change specialists and technology leadership, we are uniquely positioned to assist you in any capacity – from analysis to implementation, and program management to development.