With its LBChain blockchain sandbox, the Bank of Lithuania is the first financial market regulator that has created a platform which combines technological and regulatory infrastructures. LBChain offers a selected group of financial market participants the opportunity to test their financial products and services within an innovative environment. BearingPoint was part of the project and was given the chance to test and adapt its distributed ledger technology (DLT)-based regulatory reporting approach for EMIR transaction-based reporting requirements.
Ongoing digitization, rising expectations regarding transparency in regulatory reporting and increasing costs force financial market stakeholders to consider new technologies like DLT. DLT offers the potential to face challenges of post-trade processes and can help banks to reduce their reporting efforts including their reporting costs. New regulations, for example in the area of transaction-based reporting, AnaCredit, or intra-day liquidity monitoring, require financial institutions to consider new technologies to cope with comprehensive reporting requirements, such as granular data, high data quality, live data or inter-entity matched data.
Due to transaction-based regulatory reporting requirements, such as EMIR and SFTR, banks need to report every single transaction to the respective authorities, which is a complex and time-consuming process. Additionally, there are overlapping requirements for the data. Thus, different reporting often results in data inconsistency and data quality issues. Recent developments show that regulatory authorities pay an increasing attention to aforementioned issues and have started punishing false transaction reports (e.g. FCA, MAS and ESMA).
In a PoC, BearingPoint RegTech could show that DLT-based regulatory reporting is feasible. They recently deployed a prototype of its blockchain-based Abacus solution on Bank of Lithuania’s LBChain. Within this environment, BearingPoint RegTech tested the regulatory reporting of a plain-vanilla interest-rate swap fulfilling EMIR transaction-based reporting requirements through smart contracts. Three virtual banks shared their reporting relevant information on the platform as counterparties. Test data was submitted through smart contracts, enabling automated data validation and data consistency checks. The regulator can become part of the network and thus has access to granular, high quality, live and inter-entity matched data.
The consistent data model and logic behind this approach can also be relevant for other regulatory reporting requirements.