60 attendees across the buy and sell-sides came together at Markit’s seminar in Stockholm last month to discuss today’s industry challenges. They concluded that a new focus on establishing a flexible banking operating model to meet both business and regulatory demands for data, processes and standards, is top on their wish list for 2015.
Financial services institutions are under pressure. Not only are their former customers now, in some cases, competing against them, but there are new entrants with bold claims looking to grab market share – sometimes through disruptive technology. Add in a healthy external push for change from the regulators and we have a recipe for winners and losers to emerge by the end of the decade. So what matters most next year and what does one do about it?
According to Alaric Gibson, JWG analyst, the financial services industry has been bombarded with over 50,000 regulatory documents and has been penalised by $260 billion in fines since their regulatory reform agenda was agreed at the 2009 Pittsburgh summit. However, this is just part of the story – JWG research shows a vast array of regulatory requirements in the pipeline that will force the market to rethink the ways it operates.
By 2020, a pile of print-outs of all the regulatory documents will equal the height of three Eiffel Towers – impacting the entire value chain. From how we deal with customers to what we trade on new types of venues to how we measure and report risk, over the next 3 years little about how we do business will remain the same. Therefore, given the scores of initiatives, deadlines and intertwined business drivers, it is critical to put ‘upgrade the way we operate’ as a performance target next year so that it can be fully operational for when things get truly difficult in 2017.
Perhaps one of the most significant implications of regulatory reform is the need to manage data in a much better way. The data requirements coming from regulations such as MiFID II, CRD IV, EMIR and Solvency II are increasingly granular, and firms need to be able to put them in context across many different business drivers, functions and regulatory requirements. While many of these data requirements are explicit, many are not (e.g., BCBS 239, EMIR) and firms need to be able to infer the requirements’ impact on their business.
A key concern in both the risk and trading spaces, addressed by Sebastian Dalheimer, was the huge number of regulatory drivers for risk measures and independent valuations. Examples such as CRD IV, AIFMD, UCITS, Solvency II, EMIR and IFRS are requiring firms to collect and report valuations across a range of asset classes and instrument types. In a recent example from CRD IV technical standards on prudent valuation, the EBA required all EU banks to calculate Additional Valuation Adjustments (AVAs) for their fair valued positions. As a result, evidence that robust, consistent and transparent valuation approaches are being followed, and that these approaches are aligned to industry standards, are needed more than ever. Having repeatable, reusable and scalable processes at the enterprise level to ensure data meets regulatory data quality criteria provides a massive advantage in the current regulatory landscape.
A data management platform that allows a firm to ‘bend in the regulatory wind’ is necessary, therefore, for the management of the volume and variety of regulatory data requests. This was a key theme of the presentation ‘Using EDM to future proof your operational infrastructure from regulatory change’ given by Robert Styles, director, Enterprise data management sales, Markit. He highlighted his experiences with leading firms which are adopting central hubs to manage the acquisition, validation, storage and distribution of data in a consistent, fully-audited environment.
As the OTC derivatives space continues to evolve, with new regulatory requirements coming into effect around the world, firms are confronted with a patchwork of standards around clearing, trade execution, processing and reporting requirements. It’s not just regulators providing different standards – each piece of market infrastructure will likely go its own way. Without new capabilities, complex and expensive situations such as ‘API spaghetti’ are likely to occur.
Jose Salas, head of sales processing, Markit, in the closing presentation ‘Post-trade processing under regulation pressures’, argued that firms should be leveraging their existing data sets through a central hub when taking into account new requirements globally. Implementing a central platform allows automation, reduces operational risk and avoids the necessity to continue reworking solutions when new regulatory standards emerge.
In sum, traditional ‘regulation by regulation’ implementation is going to be increasingly difficult over the next three years. Rather than trying to survive on management by regulatory deadline, audit points and lots of human intervention, upgrading your operating model to be holistic and comprehensive will ensure your regulatory risk is managed and your business opportunity is maximised.
At the end of the day, given the breadth, depth and scope of regulatory reform and business change, it will be too late to begin this transformation 3 years from now.
Whether it is for financial crime compliance or knowing your risk position in the market, an operating model than can easily take on new requirements as ‘business as usual’ is critical for success. The bottom line … 2015 will be a critical time for leading firms to put in place the foundations required.