Embracing open source standards to revolutionise regulatory reporting

Embracing Open-Source Standards to revolutionise Regulatory Reporting 

 In the dynamic and complex world of financial reporting, the imperatives of transparency, accuracy, and efficiency are paramount. As the financial landscape continues to evolve, data standardisation has become a critical tool in unlocking the transformative potential of regulatory reporting (see our latest white paper on data standardisation here). Standardisation not only simplifies the harmonisation of various data formats and reporting practices but also fosters greater comparability, interoperability, and efficient data processing across different institutions and jurisdictions. Such harmonisation is crucial for improving the effectiveness of regulatory oversight and for making financial data more accessible and usable for a range of stakeholders. 

Equally important to having a good standard is how that standard is developed. Currently, the landscape of legacy regulatory reporting solutions and internal tools all leverage proprietary data models that actively prohibit sharing and collaboration to create data silos for the sole benefit of legacy software vendors. The alternative, which has proven its efficacy in many other sectors, is the adoption of an open-source approach in the development and maintenance of a regulatory data standards. Open-source methodologies champion continuous improvement, leverage wider expert participation, and offer adaptability, which are all key to driving innovation and building resilience in regulatory reporting frameworks. They also underscore the value of transparency and collaboration, essential elements for navigating the rapidly evolving and increasingly complex demands of the financial sector. 

This article delves into the use of open-source regulatory data standards in the financial industry. It highlights how this change in methodology revolutionises the management, maintenance and reporting of financial data, enabling institutions and regulatory bodies to more effectively navigate the intricacies of data management in today's fast-paced financial environment. 

The Need for Open-Source Standards for Financial Regulation 

The '2023 State of Open Source in Financial Services' report¹, collaboratively presented by the Linux Foundation, Red Hat and GitHub, plays a pivotal role in highlighting the growing significance of open-source practices in the financial sector. It brings to light the consensus among industry professionals regarding the value of open source for the future of financial services. Open-source standards offer several key advantages in the realm of financial and regulatory reporting: 

• Transparency and Trust: Open-source solutions ensure unparalleled transparency by revealing their source code, data structures and discussion of changes. Such openness is vital for stakeholders who rely on clear understanding and trust in how data is processed and reported, especially in an industry where accuracy and reliability are non-negotiable. 
• Collaborative Development: These projects thrive on collective intelligence, drawing expertise from a diverse array of professionals including industry experts, academics, and representatives from different financial sectors. This collaboration results in standards that are not only comprehensive and unbiased but also highly adaptable to the multifaceted needs of the financial industry.  
• Enhanced Accountability and Quality: Open sourcing a project invites scrutiny from a global community. This leads to more rigorous quality control as external contributors identify and rectify bugs and errors, enhancing the overall integrity and reliability of the standards. 
• Resource Optimisation: Embracing an open-source model effectively addresses resource challenges. By leveraging collaborative technologies and frameworks, financial institutions and regulatory bodies can access a shared pool of expertise and innovation, enabling them to curtail costs.  
• Customisation and Flexibility: Open-source standards offer higher levels of customisation compared to proprietary solutions. Financial institutions can tailor these solutions to their specific needs, which is particularly beneficial in a sector with diverse and complex requirements. 
• Reduced Vendor Lock-in Risks: With open-source standards, financial institutions are less likely to become dependent on a single vendor. This reduces risks associated with vendor lock-in, such as high costs and limited flexibility, and gives institutions more control over their data and technology solutions. 

Challenges in Adopting Open-Source Data Standards in Financial Services 

However, the report also acknowledges challenges such as regulatory hurdles and cultural and organisational barriers within larger financial institutions: 

• Cultural and Organizational Barriers: Many large financial institutions with traditional models and legacy systems face challenges in adopting open-source culture, which emphasizes collaboration and rapid innovation. Resistance from staff used to proprietary systems, coupled with a general lack of awareness about open-source benefits, can hinder adoption. Overcoming these barriers requires a shift in mindset towards valuing open innovation and educating employees on open-source practices. 
• Regulatory Hesitancy: Regulators often show reluctance in making technology decisions, particularly regarding open-source solutions, due to the cautious nature of their operations and fear of potential liability. They avoid specifying particular data formats or technology solutions to prevent any liability for incorrect advice, which may result in incorrect submissions. This cautious approach, while mitigating risks, can sometimes prevent the adoption of innovative and efficient technology solutions in the regulatory process. 
• Integration with Existing Systems: Integrating open-source solutions with existing proprietary systems can be a complex and challenging task. Financial institutions often rely on a mix of legacy systems and modern technologies, and the process of integrating open-source software into this ecosystem can require significant time and technical expertise. This challenge is exacerbated when dealing with legacy systems that may not be compatible with newer open-source technologies. 
• Long-term Sustainability: The sustainability of open-source projects can be uncertain, especially if they rely purely on community contributions. There may be concerns about the long-term viability of a project, its ongoing maintenance, and whether it will continue to evolve to meet future needs. Therefore, it is important that an open-source project is led by clear objectives and has the necessary funding from technology companies and/or the public sector.  It should be noted that while security might be a concern for open-source software (as it is for any new piece of software) despite the concept of more eyes-on-code, a data standard is not ‘executable’ in the same way that software is and therefore these concerns are less applicable. 

It's essential to approach these challenges with strategic planning and a clear understanding of the specific needs and constraints of each financial institution. 

Best Practices for Open-Source Standards for Financial Regulation 

Adopting open-source standards in financial regulation requires strategic planning and an inclusive approach. The following best practices are essential to ensure these standards are effective, widely adopted, and maintain their relevance over time: 

• Engage the User Base: Active engagement with all stakeholders, including publishers, software developers, and end-users, is critical throughout the development process. This ensures that the standard addresses the diverse needs of all parties involved. Involving software vendors is particularly crucial, as they often play a key role in implementing these standards. Establishing principles that mitigate vendor bias and promote impartial contributions is vital. Likewise, contributions from banks and other private sector entities should be monitored for firm-specific biases. 
• Form a Focused Core Team: Start with a small, dedicated team with minimal turnover to establish a set of clear principles for contributions. This team should comprise individuals with diverse expertise, including those with regulatory experience. A focused team ensures efficient decision-making, effective communication, and rapid iteration, which are essential for developing a standard that meets varied use case requirements. 
• Careful Platform Selection for Hosting: The choice of hosting platform for the standard is crucial. While platforms like GitHub are popular, consider the implications of their status as private companies. A dedicated project site or hosting through a neutral organization like the W3C (World Wide Web Consortium) can offer more control and stability. Ensure the platform chosen aligns with the long-term goals of the standard and provides the necessary stability and neutrality. 
• Fully Open-source: Open-source also implies that the standard should not depend or require any proprietary standards, tools or information. Open standards often serve as foundations for other open standards. The internet for example is built on layers of open-source standards such as HTML, CSS, Javascript, IEEE 802.11 WLAN. 
• Training and Education: Provide comprehensive training and educational resources to ensure stakeholders understand and can effectively implement the standard. This is particularly important for less tech-savvy users who may require additional support to transition to the new system. 
• Security and Compliance Measures: Given the sensitivity of financial data, embed strong security protocols within the standard. Ensure it complies with relevant regulations and industry best practices for data security and privacy. 

Advancements in Financial Regulation through the FIRE Open Data Standard 

One notable example of open-source innovation in the financial and regulatory reporting space is the FIRE (Financial Information in a Regulatory Environment) open data standard. Established in 2016 with grant funding from the European Commission and the Monetary Authority of Singapore, FIRE was developed to streamline and improve data collection and reporting processes in the financial industry, aiming to create a more unified and efficient approach to handling financial data. FIRE revolutionises regulatory data management at financial institutions by creating a data infrastructure using a common input layer and data model that permits financial institutions to deploy technology solutions to achieve compliance across the spectrum of prudential regulation. Across the world, FIRE simplifies regulatory reporting and pillar 3 disclosures under the Basel standards, and risk reporting under BCBS 239.  

Key Innovations and Benefits of FIRE: 

• Efficient Data Processing: FIRE's capability to rapidly ingest and map data simplifies the creation of regulatory reports. Unlike traditional approaches that rely on extensive data mapping, FIRE's more efficient process reduces the workload and time required for data preparation. 
• Regulatory Harmonisation: By standardising data for regulatory disclosures, FIRE facilitates consistency across different jurisdictions without compromising local laws or accounting standards. This harmonisation ensures comparability and consistency of data across various financial institutions, countries, and regions, enhancing global financial stability.  
• Adaptability to Regulatory Changes: FIRE is designed to adapt to new regulatory reports, mandates, and directives. Data already mapped in the system can be automatically redirected to new calculations and reporting templates, reducing the ongoing cost of ownership compared to traditional solutions. 
• Flexibility Across Jurisdictions: FIRE's adaptable framework allows it to be applied in various regulatory environments. It addresses jurisdiction-specific requirements, enabling contributors to identify and fill gaps, making it a versatile tool for global financial regulation. 
• Data Reusability: FIRE's core principle is to define data once and reuse it across multiple reports, enhancing processing speed and decision-making. It ensures data consistency across an organization, even in cases of missing or incomplete data. 
• Operational Efficiency: By implementing FIRE, banks can significantly reduce manual labour and risk associated with regulatory reporting. This includes reducing tasks like data aggregation, manual checks, and reconciliations, thereby saving considerable time and resources. 
• Consistency and Performance Maximisation: FIRE provides data consistency, minimizes errors, and maximises performance, even with large volumes of data. This leads to an increase in regulatory efficiency by up to 70%. 
• User-focused: FIRE is easy to understand and easy to use. By leveraging good semantics, practical relationships, and simple flat files, FIRE's learning curve is quick and concise. To ensure minimal disruption to ongoing operations and processes at financial institutions, FIRE uses traditional relational concepts and presents them in the language of the web, JSON. As JSON objects, FIRE data can be natively used with Relational, NoSQL, and Graph databases. This ensures that FIRE can be implemented without drastic and fundamental changes to how data is identified, conceptualised, created, stored, and managed within a financial institution. 
• And of course, FIRE is free! 

FIRE has been successfully implemented by numerous financial institutions globally, demonstrating its effectiveness in reshaping the landscape of financial and regulatory reporting. Its innovative approach and wide-ranging benefits mark a significant advancement in how financial data is managed and reported, paving the way for a more integrated and efficient global financial system.  

If you are interested in contributing to the FIRE project or would like to attend a demonstration, please feel free to reach out here and join hundreds of financial institutions using the FIRE to standardise granular data with free and open-source regulatory definitions! 

Embracing the transparency, collaboration, and cost-efficiency inherent in open-source technologies represents a significant leap forward in the way financial institutions approach regulatory compliance and data management. Platforms like Suade, leveraging the FIRE open data standard, exemplify this transformation, offering robust, highly scalable tools that empower institutions to meet the challenges of financial reporting with greater agility and precision. 

This evolution towards open-source solutions is a testament to the industry's commitment to fostering a more integrated, transparent, and efficient global financial ecosystem. As these technologies continue to evolve, they promise to unlock new levels of innovation, streamline regulatory processes, and enhance the overall integrity of financial reporting. The journey towards a more open and collaborative financial landscape is underway, and it is poised to redefine the future of financial services, driving efficiency and compliance in an increasingly complex world