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11:20 AM
Ahson Pai
Ahson Pai

4 Factors Driving Enlightenment & Big-Data Adoption in Regulatory Compliance

Whether seeking to maintain compliance or to drive business value, emerging technologies can unleash tremendous potential.

Just as Buddhist monks endure frigid Himalayan conditions in the pursuit of enlightenment, the financial services industry has weathered multiple financial and regulatory storms, yet still awaits enlightenment. The emergence of recent disruptive technologies may help, however navigating the various complexities internal to banks’ global operations and regulatory nuances is of critical importance on the path to enlightenment.

Certain disruptive technologies such as complex event processing (CEP) engines, machine learning, and predictive analytics using emerging big-data technologies such as Hadoop, in-memory, or NoSQL illustrate a trend in how firms are approaching technology selection to meet regulatory compliance requirements.

At the same time, regulatory pressure, widely felt by global financial institutions for US and foreign banking organizations, has created seismic shifts in financial markets, causing banks to reshape business models in terms of services they offer, clients they serve, and products they take to market.

Banks are looking for the panacea to achieve regulatory and profitability goals within their organizations. To be successful, banks must consider the reality of siloed operations and complex legacy technology infrastructures and overlay these emerging technologies to promote unprecedented visibility on operational and regulatory issues and tap into hidden profitability.

In their pursuit of regulatory enlightenment, banks are considering four key drivers, which are accelerating the adoption of advanced technology in the compliance function:

1.  The changing role of the CCO
Under Dodd-Frank, the chief compliance officer (CCO) now carries ultimate responsibility to ensure compliance programs, operations, policies, procedures, and technology footprints are effectively meeting newly mandated requirements. Naturally, CCOs have become more involved in technology decisions, helping shape the overall compliance function with more integration points and influence on the business across trading, operations, and risk management. Further, as the CCO’s role and area of responsibility expands into oversight of social media interactions of traders and associated persons, it becomes clear that existing surveillance technology is insufficient.

2.  Multiple regulatory requirements
When one looks across Dodd-Frank, Volcker Rule, DFAST, CCAR, BASEL III, FATCA, and LEI compliance requirements, the sheer number of hours and diverse skillsets needed to ingest, interpret, and plan the regulatory response is daunting. As a result, banks and other financial institutions have had to build core capabilities to interpret, plan, and implement solutions using lawyers, consultants, and internal talent. The “check-the-box” compliance response, where existing or new point solution technology is deployed, has little positive impact on profitability. Furthermore, the initial investment to achieve compliance is quickly lost as rules inevitably change, as more asset classes are added, new geographies are entered, and business models evolve. In order for compliance technology to be sustainable into the foreseeable future, its ability to evolve with constantly changing business and regulatory paradigms should be viewed as an intrinsic requirement.

3.  Multiple geographies and jurisdictions
To further complicate matters, regulatory alignment across jurisdictions remains an issue. As a recent example, we don’t need to look further than the requirements imposed by the CFTC, SEC, and Federal Reserve for how the differently nuanced rules caused banks delays in interpretation and implementation of a regulatory response -- affecting banks globally across holding-company/legal-entity structuring and long-term capital plans. Looking across national boundaries, the problem is compounded with multinational rules and jurisdictions such as FSA, ESMA (e.g., MiFID, EMIR), and JFSA to which compliance is required in a similar but nuanced fashion. Banks also face the challenges of navigating substitute compliance, cross-border implications, and suitability of home-country regulations and whether or not the counterparty is a “US person.” Emerging regulatory compliance solutions need to accommodate this global need as the effect of nuances and region-specific complexities will continue to be compounded.

4. Business model changes
As banks react to the swath of new regulations, jockey for a position in an unforgiving global economic climate, and seek to shift their business models, they must have access to deeper data and analytics outputs upon which to base their decisions. Historically, banks have used traditional data warehouse and decision support systems, with substantial manual intervention yielding temporally sparse outputs -- and in many cases the decisions are informed by stale or incomplete data. With a bank’s business model typically spanning 24/7 global operations across multiple legal entities, the bank’s technology solutions must offer visibility across a complex global and rapidly changing operating model, while accommodating global, regional, and national regulatory requirements.

As mandated regulations are driving transparency into the front-, middle-, and back-office across counterparty data, trading/transactions, and risk, wouldn’t it be beneficial to leverage that information for bottom-line impact?

Once technology has been implemented to meet the regulatory mandate for visibility, by overlaying emerging technologies such as CEP, big-data/predictive analytics with supporting data discovery, and data visualization tools, banks can now begin to answer several high-impact issues:

Customer retention and cross-selling the full complement of services

  • Which key customers might leave in the next few months?
  • Under what prevailing market conditions are certain customers most profitable?
  • As business models evolve, are we geared to nimbly engage clients and offer new services based on changing trading patterns?

Pricing, transactions, and trading strategy

  • Which transactions or asset classes are most or least profitable by counterparty or region?
  • Can predictive analytics help identify opportunities to shape trading strategies?
  • How can we price complex instruments readily in the front office?

Trade surveillance, compliance, and risk

  • How can we proactively identify certain rogue trading activity and limit exposure to fines?
  • How can we proactively spot insider trading?
  • How can we prevent certain trade violations from occurring and automate cancelations?
  • How will taking a certain position potentially affect liquidity or capital ratios?

Regulatory change poses new challenges to banks but is also enabling businesses to become increasingly proactive with appropriate use of emerging or disruptive technologies. Employing emerging technologies can unleash tremendous potential, not only to attain or maintain compliance, but to drive business value with relatively small incremental investments. Banks are beginning to incorporate such solutions from the CCO’s office through the compliance function and onto the trading floor, shedding much needed light along the way.

So here’s the question: Where are these technology initiatives on your firm’s path to enlightenment?

Ahson Pai is a partner with SunGard Consulting Services, responsible for operations and technology transformation driven by regulatory risk & compliance. Mr. Pai helps financial services firms take advantage of emerging technologies to improve operating models, and has led ... View Full Bio
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