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August 25, 2022

The Newest Trade Repository in Town Preps for Uphill Battle

Waters Technology | LONDON ― Where some have failed, others hope to succeed. Jonathan Thursby, CEO and founder of startup trade repository and regtech provider Kor Financial, is hoping that he can succeed in an industry where large incumbents have been winding down their businesses.

As regimes like the European Market Infrastructure Regulation (Emir) brought in post-financial crisis transparency rules, large market infrastructure providers leveraged their capabilities to offer trade repository and trade and transaction reporting services. But over the past two or three years, these businesses started closing. In 2020, CME Group scaled back its regulatory reporting and TR services. Deutsche Börse exited the market the following summer. UnaVista, the matching, reconciliation, and regulatory reporting platform of the London Stock Exchange, shuttered its Securities Financing Transaction Regulation unit in January of this year.

These businesses found that trade reporting is a tough area in which to thrive, due to costly overheads and having to keep up with the relentless cadence of regulatory change. For businesses that offer trade repositories and swap data repositories (SDRs) in the US, there is an additional layer of cost: as highly regulated entities, they face penalties for reporting infringements. The European Securities and Markets Authority, for example, has slapped the DDRL trade repository of the Depository Trust and Clearing Corporation (DTCC), UnaVista and EU trade repository RegisTR with fines over the past two years

This is apparently a harsh landscape in which to be launching a new business, but Thursby, who headed up CME’s repository services and EU TR before the businesses were wound down in November 2020, believes that the incumbents exiting the sector have created a vacuum for rival companies to fill. “This is a very skilled and specialized area, and you must deeply understand what the problems are and come up with ideas of how to solve those—that was the genesis of Kor,” he says

With this belief, Thursby launched Kor about two years ago to provide a reporting-as-a-service offering for over-the-counter derivatives, and as a swap data repository under the Commodity Futures Trading Commission (CFTC)

He has since stacked Kor’s C-suite with expertise from the reg reporting firms that scaled back their businesses. Tara Manuel, the former head of Ice’s Trade Vault, is Kor’s chief compliance officer; Tom Wieczorek, former managing director of products for regulatory reporting and post-trade operations platform at UnaVista, is chief product officer; and Rahul Cherukumalli, CME’s former head of regulatory reporting, has been brought in as director of client success.

In the future, the vendor has ambitions to create a marketplace for regulatory reporting services that would work in a way analogous to Apple’s iOS app store

But for now, Kor’s focus is on its SDR, which was registered with the CFTC in March—the first such approval granted by the commission since 2014. The startup announced in June that it had completed a Series A funding round led by venture capital firm Mosaik Partners, to accelerate the deployment of the SDR and kick-start expansion efforts. Kor plans to go live with the SDR by the end of next week and will support the CFTC rewrite changes. The number of clients it will launch with is in the teens

Once its registration process is out of the way, Kor will later move on to the second phase of its expansion. The company intends to develop and offer regulatory reporting services that will complement the TR endpoints but will operate as separate businesses.

“In terms of the trade repository itself, you want that to be fairly straightforward and well defined,” Thursby says. “It’s tough to offer additional value-added services under the regulatory purview, and so you operate those separately.”

While Kor’s executives have big plans, the first step is convincing trading firms that a startup can do the job of reg reporting better than the stalwart incumbents—essentially, they’re looking to prove that disruption is possible in this challenging marketplace

Thursby recalls during his time at CME running a unit starved of resources and investment—a common complaint of many working in post-trade functions in all kinds of companies across capital markets. “It became this dreaded experience and you always felt like you’re at the other end of the club. None of that has changed in the last 10 years—there really hasn’t been any evolution [for trade reporting],” Thursby says.

But firms might have to invest in post-trade now, as a second wave of regulatory action on transparency regimes drives significant demand for reporting services. With regimes like the EU’s Emir and the CFTC’s Dodd-Frank Act now firmly established, regulators are getting to the point of reviewing them to improve the quality of reported data and harmonize regulatory rule books. Emir is going through a Refit; the CFTC is rewriting the reporting rules for OTC derivatives.

“Initially, the expectation [of reporting entities] from regulators was getting the information to them,” says Vinod Jain, a strategic advisor at consultancy Aite-Novarica. “The focus is now to improve the data quality, consistency, completeness, and the clarity of the data.”

Building blocks

In the reg reporting space, scale is important to offset overheads and run a sustainable business. Kor won’t have size on its side, at least not to begin with. But Thursby believes that by starting a company from scratch, and by using tools like the cloud that were either non-existent or too nascent for live production a decade ago, his startup will have the advantage of agility, onboarding new customers quickly

He says Kor’s cloud-native platform was built with the intent of resolving data problems first, and trade reporting second. For example, reporting firms are having to reconfigure their systems and translate their data to fit schemas like ISO 20022, a standard for financial data exchange.

“The platform we’ve built is more powerful, in our opinion, than what trade reporting actually needs, because we were trying to solve a more fundamental issue in the industry about data management and the evolution of schemas over time.”

Kor’s technology shares some qualities with distributed ledger technology, but one key difference is that Kor is a centralized platform. It is an event-driven system: it always houses one version of the data, and the data is immutable.

“Everything that comes onto our platform is an event. One event can trigger another event, can trigger a third event, can trigger a fourth event, and we store all those events. We always have an instant audit trail of everything that ever occurred and all the metadata related to it, and we store all of that infinitely,” Thursby says.

Thursby, who spent 13 years at CME, says most large enterprises will spend 30–35% of their technology resources on maintenance, re-engineering, and patching systems. But there are ways to design systems to significantly cut the cost of operations and upkeep

Most of our competitors today run very separate applications, very separate installations, with very separate code bases. We get a lot of efficiencies from effectively having a common code base across everything that we build. And the way that we design the software into small services means that it’s much more supportable,” he says

David and Goliath

The trade repository market is still dominated by incumbents like the DTCC, RegisTR, and UnaVista. And many companies, both large and small, specialist and generalist, exist in the regulatory reporting space. But observers say there is still a growing need for these services.

Virginie O’Shea, founder and CEO of consultancy Firebrand Research, says there is a need for more services in the space that Kor is trying to disrupt. Many vendors in the regulatory reporting market deal with initial regulatory reporting tasks, such as cleaning and managing reported data.

However, a startup like Kor would have to be able to convince banks and asset managers that its business is sustainable, as firms have little appetite for building new connections to yet another TR. This work is a painstaking process that involves migrating the firm’s historic data to the new provider.

“That would be the investment, and even if it’s just time—sometimes it isn’t a massive amount of cost—but it could be the time required by operations or the IT team to look at these things and do their due diligence. So, there must be a compelling argument to do that,” she says.

As several large trade repositories and reg reporting providers have bowed out over the last three years, end-users will need assurances that Kor will still be around in a year’s time, O’Shea says.

Aite-Novarica’s Jain says there is pressure on reporting firms to resolve exceptions and data breaks sooner in the reporting lifecycle. To do this, investment firms need better analytics, dashboards, and visibility from their service providers to be able to compare their side of the trade with that of their counterparties

Jain says Kor has the core infrastructure necessary to run such a business, and it has the in-house experience to run a trade repository. But for any new reporting firm to succeed in this next phase of regulatory reporting, they will need to have a sophisticated analytics proposition—one that keeps both the client and the regulator happy.