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21 November 2014

Tabb Forum: Overwhelmed by Regulation? You’re not alone


Financial regulators worldwide are developing rules that often conflict with rules in other jurisdictions. This new regulatory culture is changing the way that banks think about their businesses.

Capital market firms are overwhelmed by regulation. Regulators worldwide, working within their proprietary jurisdictions, are developing rules that not only cover the entities they regulate, but that also often conflict with regulatory requirements in other jurisdictions. This creates a web of overlapping and conflicting rules, making life especially difficult for banks, other market participants and their technology vendors.

This new regulatory culture is changing the way that banks think about their businesses. Banks’ high-level GRC requirements, capital thresholds, and lower risk and leverage facilities are forcing management to make strategic decisions about their business portfolios. High-capital-risk and low-return businesses are being shuttered, and virtually every new business opportunity is analyzed not only through the lens of profitability, but also for capital and financial risk.

From a strategic perspective, firms are developing governance infrastructure, including risk, compliance, audit, and surveillance policy, and oversight committees to ensure that they have the proper structure and focus on everything from business mix to running a clean, flexible, and compliant organization. While having an appropriate governance structure is critical, however, many executives now are focused on the tactical aspects of compliance.

From a tactical perspective, firms are focused on the day-to-day: ensuring that their operations – whether running a dark pool, setting up a swaps desk, or managing margin for OTC trading – are in compliance with their direct regulators. From a high-level perspective, their core challenges are protecting the organization both from outside threats (cybersecurity) and from internal threats (through access-level protocols); managing trading market, credit, liquidity, and infrastructure risk; and ensuring that their tactical regulatory and compliance programs support the intense scrutiny from a barrage of regulators.

The real challenge, however, is that many firms’ infrastructure is either aged or outsourced, and the ability to aggregate, analyze, monitor, and police this information is extremely difficult. To accomplish this, firms are attempting to extract, virtualize, normalize, and integrate their traditionally siloed information. While many firms would love to develop a consortium or outsource significant infrastructure to a third party, many others believe that the effort, expense, and risk in extricating themselves out of their legacy technologies is just a bridge too far. This leaves most firms with the options of finding vendors to help them focus on the tactical exercise of extract, virtualize, normalize, and integrate, or completely outsourcing their infrastructure to a third party. Few intermediate options currently exist.

Full article on Tabb Forum (subscription required)



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