FDTA and the Future of Financial Data: Key Takeaways from the Recent Consultation

By integrating financial regulatory data, the Financial Data Transparency Act (FDTA) of 2022 seeks to modernize the financial regulatory framework. The Act requires several U.S. financial regulatory agencies to collaboratively establish reporting data standards that would improve the flow of information and increase transparency in financial reports.

Purpose of Joint Rulemaking Process

The FDTA requires various regulatory agencies to collectively devise a framework of data standards. This integrated approach means that the data standards are applied consistently across all the relevant agencies to ensure that there are no different rules and regulatory measures for the financial institutions. The major regulators to develop the new standards include:

The U.S. Department of Treasury
The Federal Reserve
The Securities and Exchange Commission (SEC)
The Office of the Comptroller of the Currency (OCC)
The Federal Deposit Insurance Corporation (FDIC)
The National Credit Union Administration (NCUA)
The Consumer Financial Protection Bureau (CFPB)
The Federal Housing Finance Agency (FHFA)

The FDTA primarily impacts the following key groups:

Financial Institutions: Banks, credit unions, and other banking institutions are going to have to conform to the new data standards and reporting.
Regulatory Compliance Officers: Individuals who must ensure that their organization conforms to the new regulations.
Chief Financial Officers (CFOs): Decision-makers in financial institutions who oversee compliance investments and strategy.
IT Managers: Experts managing the implementation of new data standards and technologies.
Regulatory Bodies: Government agencies and regulators involved in overseeing financial reporting and data transparency.

These organizations must understand the specific requirements of the FDTA and adjust their procedures accordingly.

Proposed Requirements Under the FDTA

The FDTA has introduced several key requirements for data standards, including:

Common Identifiers: This involves assigning a common Legal Entity Identifier (LEI) to all the entities that would be submitting their information to the agencies. The LEI must be nonproprietary and made available under an open license.
Data Transmission and Schema Standards: Data must be nonproprietary, accompanied by clear metadata, and documented in machine-readable taxonomy. The common identifiers for this include the following standards:

ISO 4914 (swaps)
ISO 10962 (financial instruments)
FIGI (financial instruments)
ISO 8601 (dates)
U.S. Postal Service Abbreviations
GENC (country codes)
ISO 4217 (currency codes)

No New Disclosure Requirements: Section 5826 of the Act does not create new obligations for the SEC, MSRB (Municipal Securities Rulemaking Board), or any national securities association to gather or disclose additional data.
Considerations for Implementation: It is not possible to stick rigidly to the set of standards that have been developed. Agencies need to consider the applicability, achievability, and effectiveness of the data standards in view of the FDTA’s objectives.

Impact on Financial Entities

The FDTA will create new obligations for financial entities like banks, credit unions, and other related institutions. They must ensure that their data systems accommodate this new regulation, which means that the firms will have to spend a lot of money on both technologies and processes to achieve this goal.

While the initial costs for the compliance may be high, the standardized data formats are expected to reduce long-term operational costs, improve data accuracy, and simplify analysis.

Role of Technology in Compliance

Technology will become a vital tool for financial entities to respond to the new demands of FDTA. Key areas of technology include:

Automation of Data Reporting: Special applications such as XBRL software that converts financial data into machine-readable and standardized formats will be applied to eliminate manual errors.
XBRL Validation Tools: These tools will verify the accuracy and consistency of the information before submission to the regulators. This will protect the entities from penalties for providing incorrect or non-conforming data.
Advanced Data Management Systems: Robust systems will manage, clean, process, and safely store large amounts of information so that the data is easily retrievable for reporting and audits.
Real-Time Monitoring and Analytics: Real-time alerts for non-compliance and data analytics to detect trends and risks should be available. This allows proactive compliance management.

Challenges in Implementing the FDTA Requirements

Implementing the FDTA’s requirements poses several challenges, including:

Cost of Upgrades: Financial institutions may incur additional costs when reinventing existing systems or investing in new technologies.
Data Security Concerns: The risk of data breaches or unauthorized access increases as financial entities collect and communicate more standardized data.
Integration Complexity: Implementing new data standards in legacy systems may be difficult, especially for small institutions.
Operational Disruptions: The transition to new data standards may affect current operations, leading to temporary delays and errors in reporting.

Strategies for Ensuring Compliance

To navigate the new requirements under the FDTA, financial entities can take several practical steps:

Conduct a Gap Analysis: Identify areas where current data practices lack conformity with the new standards.
Invest in Compliance Software: Use automated validation and reporting to enhance the process of data submission.
Train Staff: Ensure that all the employees who will be affected by the new requirements are aware of the changes and what tools will be required.
Engage in Continuous Monitoring: Compliance strategies should be reviewed and updated in line with the laid down rules from time to time.

Benefits of Compliance

Complying with the FDTA offers several advantages, such as the following:

Enhanced Data Quality: Optimizing data collection and reporting improves the quality of financial data.
Better Regulatory Relations: It will also ensure a positive relationship with the regulators by complying with their set regulations.
Increased Investor Confidence: Making the disclosures transparent and standardized will improve investor confidence in financial institutions.
Enhanced Data Analytics Capabilities: Using machine-readable standardized data formats improves data analysis. This results in better decision-making, managing risks, and finding opportunities within the market.

Timelines and Deadlines

The FDTA will roll out the new data standards in phases to allow financial institutions to adapt and comply with the standards. The key deadlines are as follows:

December 2022: The National Defense Authorization Act (NDAA) for FY2023, including the FDTA, was passed into law.
June 2023: The SEC issued a mandated report on data standards in the corporate market.
June 2024: Joint regulators proposed data standards.
December 2024: Joint regulators are expected to finalize the data standards.
December 2026: The SEC will adopt rules to apply data standards on information submitted to the MSRB. The exact dates are not yet determined.
Beyond 2027: The timeline for implementing rule changes by the MSRB is not set in the statute.

Conclusion

Compliance with the FDTA is the key component to sustaining the required regulatory standing and competitive edge for financial firms. Future changes in the regulatory environment require financial organizations to be aware and compliant in order to benefit from the increased transparency and efficiency promised by the FDTA.

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