Compliance Moves Out of Silos

Terry Flanagan

Faced with an onslaught of new regulations, financial firms need to rethink their approach to compliance management, and view it as a potential source of competitive advantage.

“The incremental improvement which has been the historical response to compliance is no longer an option,” said David Kubersky of SimCorp North America, during a webinar. “There is a challenge to build a consolidated view of investment data. Asset class specialization by its nature forces operational fragmentation.”

The combination of new mandatory spending on regulatory initiatives such as the Dodd-Frank Act and Emir “has led to a simple and seemingly compelling convergence logic,” said Gert Raeves, research director at CEB TowerGroup. “If firms have to spend billions on regulatory compliance to make the swaps markets more transparent, there needs to be a way for them to leverage that same spend across middle- and back-office functions to have automation across many more product silos.”

More than 27% of compliance spending will fall on buy side firms, according to TowerGroup, so there are significant cross-over benefits if firms can leverage high-quality position data outside control and compliance goals. Firms are targeting more informed trading and investment decisions, as well as reduced collateral and margin requirements.

“Investment management spending on regulatory compliance has been tactical and shortsighted rather than strategic and farsighted,” said Raeves. “We see evidence of a strategic rethink of technology platforms across multiple asset classes and business functions for a more scalable and future-proof approach to consolidated investment data.”

While many firms are evaluating their options, the business case is often too narrowly focused on the balance between cost of change and efficiency savings.

“In the same way that investments in clearing need to be driven by capital and collateral management objectives, any broader post-trade automation project needs to clearly identify the information advantages,” said Raeves.

The traditional approach to compliance management is to create a task force and project teams, and confine the teams to compliance professionals.

“The outcome is not focused on improving business or better transparency, but rather on narrow regulatory reporting,” Raeves said. “We split teams into different strands by jurisdiction, asset class, and regulatory agency. As an industry, we have relied on incremental improvements to compliance.”

The upshot of this “serial” approach to compliance is that it “becomes deadline driven, with lots of fire drills,” Raves said. “This is the result of the siloed approach to implementation. We are creating specialist teams, tools and methodologies, and lots of operational inefficiencies.”

This can have serious consequences in the post-crisis world, when regulators are demanding that organizations build up enterprise views of risk, as in derivatives exposures.

“In the past, asset managers had not been exposed to credit counterparty risk and liquidity risk,” said Raeves. “Now, they are being pulled into collateral management decisions dealing with multiple execution, clearing, and settlement. There is real systemic risk building up in the inability of managers to pull up different risk measures.”

Raeves recommends that firms identify and standardize internal data, such as customers and positions, as well as external reference data, such as pricing, indices, benchmarks, corporate actions and valuations of illiquid instruments.

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