New Regulations Driving Changes to Data Management
Pressure to comply with regulation has always been one of the main drivers of changes in how financial services institutions manage data. And new regulations such as the Dodd-Frank Act, Solvency II, UCITS IV, Basel III, MIFID II and FATCA are proving to do just that. Irrespective of the size of the organization, the scope and reach of regulation is on the increase and with that comes the need to devise sustainable approaches to meeting the resulting data requirements.
In the European securities industry for instance, new regulatory reporting requirements will mean a comprehensive review of how trading data flows to improve identification of instruments and counterparties and allow for timely reporting. The United States' FATCA rules on the other hand will require banks to pay greater attention than before to customer screening and data cleansing.
But all other rules probably pale in impact compared to the Dodd-Frank Act, Basel III and Solvency II where the expenditure banks and insurance firms will have to incur in the process of compliance is going to be in the billions of dollars. Unfortunately, large financial institutions operating in multiple countries and with tentacles in several forms of financial service provision, cannot choose which regulations to comply with and which ones to ignore. Compliance with local and overseas regulators must be done simultaneously if any institution is to stay out of the crosshairs of regulators.
The data challenge
At the core of all these new regulations is the management of data. This of course is nothing new. The difference with new regulations though has been the need to address data management more holistically. Information that could have been previously ignored with no ramifications now has to be factored into reporting.
Remember that the crucial role of data quality in risk management inadvertently received a resounding endorsement from the high profile collapse of large institutions. Poor quality or inadequate data makes monitoring difficult with the catastrophic exposure only becoming apparent when the risk does materialize.
Beyond regulatory compliance
As such, financial institutions must use the impetus from impending regulation to exploit broader opportunities at firming up enterprise risk management. While there is no silver bullet on how to do this, viewing data management and risk reporting solely in the context of the Basel IIIs and Solvency IIs of this world is missing the primary objective of risk management and makes compliance a cost that has no tangible business benefit.
For instance, the risk and/or compliance department of a bank may be contemplating dropping certain parameters from the risk data warehouse or deem the capture or retention of the data unnecessary for satisfying regulatory reports. But while such information may be superfluous for reports that go to the regulators, the marketing team may need it for cross selling or product development.
To mitigate against regulatory compliance negatively affecting the business, financial institutions must take a deliberate and strategic approach that is enterprise wide, cross functional, adequately funded, has senior sponsorship across the organization and clearly defined governance structures.
This may sound straightforward, almost clich© €" but its actualization is far more difficult than it sounds. Not only must all teams in the organization pull in the same direction, but they must also be alive to the fact that certain aspects of risk data warehouse infrastructure design will be unique for the organization. Data that may be discarded by one bank may be crucial for actualizing the business strategy of another.
Collaboration and role of tech companies
Still, there are certain elements of risk management and compliance that will be common across any organization. Collaboration between financial institutions can be a powerful way of quickly developing efficient risk management and reporting solutions that each institution can then take and customize for their own needs.
While there is strong collaboration between financial institutions when lobbying for changes to regulation, there is not as much cooperation in the development of reporting solutions for the obvious reason that each institution would want to use the information in its possession to gain a competitive advantage.
This is where third party developers of risk data warehouses and technology solutions come in handy. Such tech companies can serve as de facto repositories of industry knowledge and best risk technology best practice. Over the course of working with several financial services institutions, the tech companies can develop off the shelf but customizable risk applications and data warehouses that are a product of interrogating what works and what does not.
In the European securities industry for instance, new regulatory reporting requirements will mean a comprehensive review of how trading data flows to improve identification of instruments and counterparties and allow for timely reporting. The United States' FATCA rules on the other hand will require banks to pay greater attention than before to customer screening and data cleansing.
But all other rules probably pale in impact compared to the Dodd-Frank Act, Basel III and Solvency II where the expenditure banks and insurance firms will have to incur in the process of compliance is going to be in the billions of dollars. Unfortunately, large financial institutions operating in multiple countries and with tentacles in several forms of financial service provision, cannot choose which regulations to comply with and which ones to ignore. Compliance with local and overseas regulators must be done simultaneously if any institution is to stay out of the crosshairs of regulators.
The data challenge
At the core of all these new regulations is the management of data. This of course is nothing new. The difference with new regulations though has been the need to address data management more holistically. Information that could have been previously ignored with no ramifications now has to be factored into reporting.
Remember that the crucial role of data quality in risk management inadvertently received a resounding endorsement from the high profile collapse of large institutions. Poor quality or inadequate data makes monitoring difficult with the catastrophic exposure only becoming apparent when the risk does materialize.
Beyond regulatory compliance
As such, financial institutions must use the impetus from impending regulation to exploit broader opportunities at firming up enterprise risk management. While there is no silver bullet on how to do this, viewing data management and risk reporting solely in the context of the Basel IIIs and Solvency IIs of this world is missing the primary objective of risk management and makes compliance a cost that has no tangible business benefit.
For instance, the risk and/or compliance department of a bank may be contemplating dropping certain parameters from the risk data warehouse or deem the capture or retention of the data unnecessary for satisfying regulatory reports. But while such information may be superfluous for reports that go to the regulators, the marketing team may need it for cross selling or product development.
To mitigate against regulatory compliance negatively affecting the business, financial institutions must take a deliberate and strategic approach that is enterprise wide, cross functional, adequately funded, has senior sponsorship across the organization and clearly defined governance structures.
This may sound straightforward, almost clich© €" but its actualization is far more difficult than it sounds. Not only must all teams in the organization pull in the same direction, but they must also be alive to the fact that certain aspects of risk data warehouse infrastructure design will be unique for the organization. Data that may be discarded by one bank may be crucial for actualizing the business strategy of another.
Collaboration and role of tech companies
Still, there are certain elements of risk management and compliance that will be common across any organization. Collaboration between financial institutions can be a powerful way of quickly developing efficient risk management and reporting solutions that each institution can then take and customize for their own needs.
While there is strong collaboration between financial institutions when lobbying for changes to regulation, there is not as much cooperation in the development of reporting solutions for the obvious reason that each institution would want to use the information in its possession to gain a competitive advantage.
This is where third party developers of risk data warehouses and technology solutions come in handy. Such tech companies can serve as de facto repositories of industry knowledge and best risk technology best practice. Over the course of working with several financial services institutions, the tech companies can develop off the shelf but customizable risk applications and data warehouses that are a product of interrogating what works and what does not.