Introduction

The Financial Data Transparency Act (FDTA), enacted on December 23, 2022, brought significant changes to the financial regulatory landscape by amending several key statutes, including the Financial Stability Act of 2010 (Title I of the Dodd-Frank Act). Among its many provisions, the FDTA introduced Section 124, which mandates that various regulatory agencies jointly establish data standards for the information reported by financial entities. These standards, codified in the forthcoming Joint Final Rule, will have profound implications for financial institutions subject to reporting requirements.

Understanding the Joint Final Rule

The Joint Final Rule, once implemented, will apply to collections of information reported to the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), and other regulatory bodies. The data standards will incorporate several key elements, including:

1. Legal Entity Identifier (LEI): The rule will mandate the use of the International Organization for Standardization (ISO) 17442 – Legal Entity Identifier (LEI) as a common identifier across all entities reporting to the agencies. The LEI is a global standard that uniquely identifies legal entities engaged in financial transactions. While this aims to enhance transparency and reduce systemic risk, entities will need to weigh the associated costs of obtaining and renewing LEIs, especially since these are managed by third parties under a cost-recovery model.
2. Other Common Identifiers: The Joint Final Rule will also establish standards for other common identifiers, including the Unique Product Identifier (UPI) and Classification of Financial Instruments (CFI) codes for derivatives markets, the Financial Instrument Global Identifier (FIGI) for financial instruments, and standardized codes for dates, states, countries, and currencies. These identifiers are intended to promote consistency, interoperability, and machine readability of financial data across agencies.
3. Data Transmission and Schema Standards: The rule will outline four key properties for data transmission and schema formats, focusing on ensuring that data is fully searchable, machine-readable, and of high quality. The formats must also be nonproprietary or available under an open license, allowing agencies flexibility in their data collection while maintaining adaptability to new technological developments.

Implications for Financial Entities

The implementation of the Joint Final Rule will require financial entities to adjust their reporting frameworks to comply with the new standards. This will involve adopting the LEI and other identifiers, aligning with new data transmission and schema requirements, and ensuring that all reported data meets the defined criteria for machine readability and semantic clarity.

1. Compliance Costs: While the adoption of standardized identifiers like the LEI is intended to streamline data reporting and enhance transparency, it will also impose additional costs on financial entities. The requirement to use identifiers managed by third parties could lead to increased operational expenses, particularly if these entities raise fees or provide substandard service. Entities will need to assess these costs against the benefits of enhanced regulatory compliance.
2. Operational Adjustments: The new standards will necessitate changes in how financial entities collect, process, and report data. This may require updates to existing IT systems, staff training on new reporting requirements, and the development of internal processes to ensure ongoing compliance. Financial entities must also be prepared to adapt to dynamic changes in standards, as the rule does not specify the version of standards to be adopted, which could lead to evolving compliance obligations over time.
3. Public Review and Transparency Concerns: The reliance on standards maintained by organizations like ISO, which may not be freely accessible, raises concerns about public transparency. The absence of a mechanism for public access to these materials during the rulemaking process may limit the ability of stakeholders to fully understand and comment on the proposed standards. Entities should closely monitor the rulemaking process and engage with regulators to ensure that their concerns are addressed.

Conclusion

The Joint Final Rule under the FDTA represents a significant step towards standardized, transparent financial reporting. However, it also presents challenges for financial entities, particularly in terms of compliance costs and operational adjustments. As the rulemaking process unfolds, entities must remain vigilant, proactively updating their practices to align with the new standards while advocating for clarity and accessibility in the final regulations.

Key Takeaways:

• The FDTA mandates the implementation of standardized data reporting, including the use of LEIs and other identifiers, which will impact financial entities' reporting processes.
• Compliance with the Joint Final Rule will require significant operational adjustments and may lead to increased costs due to the adoption of third-party managed identifiers.
• Financial entities should actively engage in the rulemaking process to ensure their interests are represented and to mitigate potential compliance challenges.