new requirements come along, for it is impossible to foresee everything that will be required in the future. Nevertheless, the aim is to have a flexible, robust architecture that can greatly ease the task of meeting new requirements as well as providing a much more holistic and detailed view of the business, thereby bringing improved control and management information as well as the ability to satisfy the regulators. The plethora of impending new regulations will cause a fundamental change to the business model of many financial institutions. Basel III, Dodd-Frank Act and EMIR have been the most sweeping and high-profile but there are plenty of other regulations as well, under implementation or in the pipeline, at a national, regional or global level. But how effective will they be and what will be the systems and data implications? There are those that argue that a major shift will only


come through addressing risk from the bottom up, breaking down the business and system silos to reach the underlying exposures, rather than feeding everything up through those silos to a central data repository and then seeking to address each regulatory


requirement from there. However, the


disjointed nature of this next regulatory wave might well once more encourage a top-down approach.


Regulations: the bigger picture


In terms of the bigger picture, the regulations are expected to drive some financial institutions into new markets and cause retrenchment elsewhere. A survey in late 2010 by Ernst & Young concluded that ‘already there are signs that investment banks are seeking to focus on less capital-intensive activities, such as M&A advisory. Meanwhile, retail banks and insurance companies are turning their attention to fast-growing emerging markets.’ There is a concern that lack of harmonisation could give some markets an unfair advantage, with the opportunity for ‘regulatory arbitrage’ as a result. Within that survey of more than 500 senior executives in Europe and the US, 62 per cent had increased their expenditure on compliance and 59 per cent had done so for risk management. And 53 per cent agreed that, in the long run, profits would be significantly lower as a result of the increased regulations. So as well as meeting the regulations, there could well be yet more of a drive for greater efficiency and reduced costs.


On the one hand, this is good news for some technology suppliers. A number are bucking the trend and growing at a steep rate, with the right applications at the right time. For instance, at long-standing financial risk, reporting and accounting specialist, Financial Architects Now part of Wolters Kluwer), founder and CEO, Dirk de Beule, believed Basel III would be a ‘big gift for us, it is in our hot-spot’ because it represents a further fusion of accounting and risk. However, he pointed out that there were still plenty of countries that needed to do IFRS and Basel II. In fact, life sounded fairly simple for Financial Architects: its country-focus is dictated by regulatory deadlines so, in late 2010, for instance, it had six good prospects in Egypt, because IFRS was on the way here.


6


In Europe, much of the current interest was on liquidity risk, said De Beule; there was quite a lot of interest as well from North America, particularly from fairly large retail banks. The demand has also seen the emergence of new suppliers, such as OpenGamma. It is not just suppliers that have seen a boost. Mike Atkins, managing director of the Enterprise Data Management Council, was hopeful that the demands would finally bring standardisation to the sector. To meet the regulations, there needs to be the underlying data in place and it needs to be comparable. ‘All require this infrastructure and a measurement of data quality and assurances about that quality.’ He felt standards were high up on the regulators’ priority lists, ‘because you can’t do comparisons without them’. For instance, the rules for transparency around derivatives need instrument and counterparty identifiers, and he believed that this was being written into the regulations. As a result, standards efforts had ‘ramped up to a feverish


pace’, although Atkins admitted it had taken ten years to reach this level. ‘Can the standards efforts step up or not? The requirement is on the table, so we have an opportunity as an industry to get this done and done correctly.’ The sector has been seeking to put in place an entity ID, for instance, for the last decade but there have been problems with the business case, bureaucracy and ‘entrenched self-interest’. ‘If we can’t make it happen now, we might as well conclude the standards process.’ There are interesting aspects around how the regulatory bodies interact. Capco partner, Maurizio Bradlaw, felt the liquidity management requirements would really ‘up the ante in terms of technology, reporting and analysis’. As well as the global regulations, there will be local and political agendas, with countries wanting a say in how their liquidity is managed. Collateral management will be a huge issue, he felt, and there is likely to be a demand for repo and bond trading platforms. He believed some large banks had seen this coming and had put in place sophisticated collateral management systems, improved general ledgers and addressed their reference data, especially around the client. The lower tier one and tier two banks might be some way behind and, indeed, some were only now putting together the budgets, he felt. There has been particular complexity in relation to the


over-the-counter (OTC) market. Clearly, a prime focus for regulators, the shift of OTC derivatives to central clearing was a major change (albeit with this already a trend, pre-crisis) and has given prominence to Credit Valuation Adjustment (CVA), whereby the value of a derivative is influenced by the associated counterparty risk. CVA is used to incorporate counterparty risk into the pricing of deals and for inter-desk charging within institutions. Collateral management has moved firmly into the spotlight, with this typically shifting from the operations department to the front-office. How can institutions tackle all of this? The advice from Dr


Mario Onorato, head of balance sheet and capital management at Algorithmics, was ‘start from where you want to get to and work backwards’. This is different from the traditional ‘bottom


Risk Management Systems & Suppliers Report | www.ibsintelligence.com


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