Capital Markets’ Regulatory Burden: The Case for FIBO as a Relief
The financial industry expends so much effort to meet its difficult regulatory requirements that its ability to invest in innovative technologies is severely curtailed. However, many in the industry now find that investments in data standards—such as Financial Industry Business Ontology (FIBO) —may create an improved path to meet the requirements of BCBS239 and similar regulatory initiatives.
By its very nature, the capital markets industry sells investment vehicles, or “securities,” that are contractual cash flow exchanges rather than tangible merchandise. Capital markets contracts—transaction confirmations, investment deals, clearance and settlement obligations—are filled with data that tie together the sometimes disparate facts that define the agreements between the parties. In order for all parties to the transaction to agree to the terms by which they exchange these contracts, the parties need to ascribe similar meaning to the data in the contract. Simply put, they want to speak the same language.
Surely, the solution to standardizing these contracts rests in the process and technology applied to define and understand these solutions. In fact, much of the solution boils down to data.
Dun & Bradstreet
I’ve often written of the need to make our data smarter, rather than simply bigger, and I will again associate the “smarter” theme here. Smarter data will make for smarter—and more certain—contracts.
The nature of (often loosely defined) data within contracts leaves open the possibility for counterparties (and regulators) to interpret this contractual information differently. As a result, regulators and industry participants seek the ability to more precisely understand these contracts—to make their language and meaning more transparent—in order to functionally decompose each of their elements. Firming up the semantics (embedding the contracts with “smartness”) brings us closer to that goal. FIBO is best applied in this case.
FIBO creates standardized executable code to identify all components in the contract that give clear meaning to the data used. It associates that data precisely to each term’s legal characteristics and all of the interpretations associated with it. Using FIBO, the industry can make these smart contracts machine readable, easily applying common meaning to all industry participants.
As capital markets products become more highly engineered and creative (for example interest rate swaps with derivatives) the contract data behind them becomes increasingly robust and complex. As such, the industry’s approach to make these contracts smarter should focus on the properties and the relations between the data—the ontology. In other words, the contracts require common and easily understood semantics that clarify the relationships between all parties. This will remove misunderstandings in their meaning, enabling these “smart” contracts to quickly create terms that satisfy participants as well as regulators.
Catalyzed by the EDM Council, the industry is looking to FIBO to prove data through standardized, demanding semantics. Together with a major bank and a smart data platform, D&B has been an integral part of a proof of concept for FIBO, to harmonize the data across all systems and use it to generate analytics dealing with relationships. These analytics draw information from the data that had not previously been possible. As our proof of concept progresses and extends to include additional use cases, we are discovering more of the value offered by the new standards.
FIBO gives capital markets institutions the opportunity to bring together information across all participating investment firms in ways that standardize their accepted definitions. These firms have committed a great deal of resources to the current data models that define the securities and relationships so integral to their daily business. FIBO can provide an information layer connecting the many disparate systems that house data elements that have shared meaning, creating improved ability to reduce the risk inherent in any contract. For banks and brokerage firms, this certainty offers an increased ability to service all customers.
With continuing pressure to create regulatory transparency, all major financial institutions are looking to FIBO as a basis for making their contracts smarter.