Records retention strategies for Wall Street broker-dealers are being challenged by existing and new regulations that require an increasingly large amount of complex transactional data to be stored for longer periods. Helping to meet this challenge are new technologies that can reduce the total cost of ownership while meeting the requirements of the law. There are many regulations that dictate records retention requirements for the sales and trading businesses at Wall Street banks. For records retention specifically, SEC rule 17a-4 requires broker-dealers to store records in Write Once Read Many (WORM) format, which can be onerous and expensive to maintain. In regards to new regulations coming into effect in 2019, the qualified financial contracts (QFC) recordkeeping rules will require large banks (with greater than $1 trillion USD in consolidated assets) to develop a detailed report of all QFC positions, including their governing legal agreements, on a daily basis. In addition, these QFC Stay Rules require entities to maintain a repository that captures all legal agreements related to open QFC positions, including master agreements and credit support annexes, schedules, netting agreements, supplements, agreement modifications, trade confirmations and acknowledgments. In summary, each regulation dictates the transactions in scope for being retained, the data elements to be captured, and the amount of time the records need to be maintained for compliance.
To meet compliance requirements efficiently and cost effectively, a bank needs to decide if their records retention strategy will be centralized versus decentralized versus a hybrid model and adopt a governance strategy to ensure ongoing compliance with all applicable regulations. A driver of having a centralized records retention strategy is cost savings. A driver for a decentralized records retention strategy is highly disparate business lines, each with unique regulatory requirements, where customized technology solutions are needed. For broker-dealers that want to transition to a new records retention model, creating a transition roadmap and effectively managing the execution of the initiative are key to a successful transition.
The financial services industry has battled to stay compliant with the WORM record keeping requirement for decades. Certain regulations are amended every 10-20 years to allow for advancements in technology. SEC rule 17a-4 was amended in the 1970’s to allow for records to be stored on microfilm instead of hard copies. The rule was amended again in 1993 to allow broker dealers the option to leverage optical disc storage technology as a way to meet the requirement. This rule continued to evolve until broker-dealers were allowed to store their records electronically. Although this may seem like the rules are changing with the times, the technology revolution of the 2000’s grew faster than anyone could have predicted. The evolution of phone, chat, video and email communications has made the amount of data that could be tied to a certain transaction grow exponentially. Although modern day banks are well versed in their own data when it comes to the price, terms and maturity of the products they offer, they may not be as well versed in capturing data from chat or social media conversations surrounding a transaction. This is why many banks have turned to partnering with third party vendors to find solutions for managing their growing data, in an effort to remain compliant with new and old regulations across the jurisdictions where they operate.
Given the amount of communications that can surround one trade, managing the data for a specific trade now goes far beyond simply tracking the price, quantity, and settlement details. Communications surrounding the trade must be captured, duplicated, indexed and their systems maintained for up to six years, along with all position and counterparty information, according to §240.17a-4. This requires massive amounts of storage and highly sophisticated and diverse data capture tools depending on the media type. The skill set required to adhere to these archaic record keeping requirements in today's technologically advanced world is a skill set possessed, in entirety, by very few. This has led broker-dealers to investigate outsourcing some, if not all, of their records retention efforts.
Outsourcing data retention efforts requires a thorough analysis of transactions included in the regulatory rules themselves, the data sources of those transactions, the data retention length required to remain compliant, the data fields applicable to the transaction that are required to be maintained, the architecture needed support a request for data from the regulators, and the practicality of moving massive data sets outside the security of the bank. Certain net capital requirements, such as 15c3-1, require broker dealers to be able to manage the numerical data behind the trades and positions their clients hold on a day-to-day basis. This quantitative data management is clearly defined and reasonably manageable for most larger banks to handle in-house. Other regulation such as SEC rule 17a-4, require capturing media types outside of your traditional data structure, and managing these non-uniform bits of data in a way that allows you to search your database, analyze data among varying media types, and then extract the data that is relevant to your initial search in a form that can be handed over to the regulator.
When deciding between a centralized records retention strategy vs a decentralized, vendor solution, banks must consider the implementation and maintenance costs of each path. While a centralized strategy can offer cost savings initially, for financial institutions offering highly unique and disparate business lines, each with varying regulatory requirements, a vendor solution could be the answer helping the firm focus its efforts back on its core business. Maintaining these third-party solutions can get expensive, often leading some banks to ultimately transition back to a centralized strategy. Once a path is chosen the financial institution must adopt a governance strategy to ensure ongoing compliance with all applicable regulation.
The massive growth in storage needs, in financial services and beyond, has created a burgeoning industry of billion dollar publicly traded firms that didn’t even exist just a decade ago. Some of these leaders include Bloomberg LP and their archiving solution, Bloomberg Vault, Global Relay (Archive), Proofpoint (Enterprise Archive), Actiance (Alcatraz, Vantage, Socialite), Smarsh (Archiving platform), Micro Focus (Digital Safe, Retain Unified Archiving), ZL Technologies (Unified Archive). Each of these solutions has their own advantages and disadvantages. A firm looking to adopt one of these vendor solutions will need to look into what aspect of records retention they need help with. Whether it be data capture, repository solutioning and management, or search, analyze, and extract capabilities to meet regulatory requests, there is almost certainly a vendor solution available to address their needs.
Monticello Consulting Group (MCG) assists clients across the financial services industry in implementing the necessary infrastructure to ensure compliance and reduce regulatory risks. This experience, coupled with our in-depth knowledge of the financial regulatory environment, uniquely positions MCG to guide financial institutions, regardless of their size, in the adoption of records retention requirements.
Get In Touch
LEARN MORE ABOUT MONTICELLO AND PURSUE OPPORTUNITIES WITH OUR TEAM