SWIFT and Suade Labs team up to explore how to give regulators better and faster insights on market liquidity – all while reducing the reporting burden on financial institutions
Tom Zschach, Chief Innovation Officer, SWIFT
Murat Abur, Chief Technology Officer, Suade Labs
Liquidity reporting is ripe for innovation. Regulators need insight into the status of financial institutions in order to maintain the strength and stability of the global financial system. But ever since the 2008 crisis, the number of regulatory and reporting requirements have mounted, putting increasing time and cost pressures on institutions.
It is in this context that SWIFT and Suade Labs teamed up as part of the G20 TechSprint initiative to explore how our combined strengths could help drive innovation in financial reporting.
When the G20 announced the TechSprint initiative back in April – calling for new innovative technologies to resolve operational problems in the areas of regulatory compliance and supervision – we immediately saw the potential for SWIFT and Suade to join forces.
Since its inception in 2014, Suade has worked to help financial institutions automate their regulatory reporting requirements, and in 2016, the firm received funding from the European Commission to develop the financial regulatory (FIRE) data standard. The Suade team have developed innovative software based on this standard – leveraging machine learning and natural language processing to help financial institutions turn large volumes of their data into the granular reports required by regulators.
SWIFT, created over 40 years ago to solve one of the biggest global challenges in payments, has been at the forefront of innovation in financial services ever since. The cooperative remains the backbone of global financial communication, carrying a significant proportion of the world’s high-value transactions between 11,000 financial institutions in 200+ countries. Transaction data exchanged on the SWIFT platform therefore provides a unique real-time view on the peaks and troughs of the global economy.
SWIFT also has extensive experience in delivering business intelligence solutions for central banks. The SWIFT Scope solution, for example, combines financial messaging data with other information sources to monitor markets and transaction flows. This helps central banks understand the impact of monetary policies, meet prudential and supervisory objectives, and support national economies.
So, given our combined assets, SWIFT and Suade decided to collaborate on a project that aims to give regulators an automated, near real-time view over institutions’ liquidity positions and the wider picture in the market, all while reducing the regulatory burden on the financial community.
The test case: Liquidity reporting and the repo market
In response to the 2008 crisis, and the need for regulators to have a better view over the liquidity of financial institutions globally, G20 countries adopted the Basel III regulatory framework. Amongst many other things, Basel III requires institutions to report their Liquidity Coverage Ratio (LCR), which provides regulators with monthly data on the liquid assets that financial institutions hold compared to the liabilities they have to meet.
The LCR’s monthly reporting requirement gives regulators important data that they use to evaluate current market conditions – but the reports do not give the full picture and create significant workload on firms.
The LCR offers some reassurance that financial institutions have enough liquid assets to meet their liabilities Regulators, however, usually only receive the data on liquid assets in these reports once a month. While they can ask firms to send the reports more often, overseers don’t generally increase the monitoring frequency unless there is a crisis.
Therefore, there is always the risk of a dip in liquid assets in the interval between monthly reporting dates. Such an intermittent reduction of liquid assets could remain unaccounted for in the LCR reports, posing significant risks.
As such, we think that automated reports produced by Suade that analyse SWIFT data from repurchase agreements (often termed ‘repos’) have the potential to offer regulators greater market visibility than LCR reports.
The significance of repo data
In pre-crisis years, repos were important to financial institutions’ liquidity holdings. Firms used repos to access short-term cash for investments in the real estate market. When real estate prices collapsed, the securities pledged in repos lost their value. As repo investors engaged in fire sales, the value of assets was suppressed further until it finally collapsed. A liquidity crunch emerged that left firms unable to sell their assets to access cash and meet their liabilities.
The Repo Market is still a significant source of short-term loans today, and, as such, Repo reports have the potential to highlight the likely emergence of a liquidity crunch and fill in the gaps between reporting periods for the LCR. In other words, this project could lead to a solution that gives regulators the insight needed to proactively manage developing crises and ensure financial stability.
Due to the significance of repos in the 2008 crisis, the Suade and SWIFT team focused on credit risk in the repo market to develop our proposal for the G20 TechSprint. We think that combining repo transaction data exchanged by institutions on SWIFT with Suade’s software has the potential to offer unparalleled insights to regulators.
As part of the project, the team first designed a consent mechanism between the regulator and the financial institutions to allow their transaction data going over SWIFT to be shared with the regulator.
The team used dummy messaging data for the purposes of the test, and mapped it against the FIRE standard, supplementing it with reference data and some external data. The data was then pushed via an Application Programming Interface (API) into Suade’s software, where its unique standardised calculators determined the credit risk of the repos.
Finally, the software produced a credit risk report in the format requested by the regulator.
And the outcome?
The messages that are exchanged via the SWIFT network between the different parties of the repo transactions contain vital information to create the required reports.
With the explicit consent from these parties, SWIFT can gather this information in a central database, and make it available to regulators. This coupled with Suade’s powerful regulatory reporting software, could offer a solution that provides near real-time regulatory reporting and digital supervision.
We believe this combination of unique data and powerful technology offers an approach that could both help regulators reduce systemic risk and reduce the considerable burden on institutions. We look forward to the G20 TechSprint judges’ verdict in October.
Find out more here about how SWIFT is collaborating with firms from across the financial ecosystem to solve industry challenges.