Trading tools

Banks’ compliance investments at risk

Banks are to spend US$50billion on risk and compliance initiatives by 2015, according to a Celent report. 

However, the Oliver Wyman Group consultancy firm found institutions could do more to assimilate their IT solutions into their daily operations.

Recent regulatory initiatives have provided the impetus to automate compliance, as well as programs to calculate collateral value added (CVA) on complex derivative trades with callability.

The Basel Committee now requires firm-wide risk aggregation and reporting, and the US Federal Reserve enforces regular stress-testing and comprehensive capital analysis and review. Yet Celent found variable standards in the effectiveness of banks’ IT infrastructure.

The Celent report, ‘Strategic Innovations in Risk Management’, described many “legacy architecture traps”, which involve “degrees of fragmentation that either do not reflect adequate support for the firm’s business risk-taking strategy, or ones that entail a mix of disjointed approaches that are technologically cumbersome and operationally expensive.”

Equally, it praised the widespread uptake of technologies like parallel processing technologies, and in-memory databases, which perform detailed analysis on RAM datachips rather than remotely stored data. This has greatly reduced time windows for end-of-day risk analysis, the report said.

According to Celent, effective models for calculating collateral optimisation and CVA have been installed ‘at-scale’ across the organisation only at Barclays, BNP Paribas, Credit Suisse, ING Bank, JP Morgan and Societé Générale. But Celent feels the banks could make their proprietary technology work harder for its money by contracting it out. It points to Citi and UBS which have partnered to offer Post-Trade Plus, a full roster of clearing-associated services including middle-office, back-office, settlement and custodianship.

The report mentioned an unnamed  bank that had succeeded in striking a balance between addressing quality issues flagged in its risk data and asserting ownership of data quality at source where information is captured, from a network straddling over 12 European countries. The anonymous institution assigns 20 ‘systems steering groups’ to different business divisions, which refer specific needs and targets to a ‘reference group’, for final sign-off by an executive board.

Celent said that the net migration of banks should be “towards full trade optimisation to achieve the right ‘equilibrium’ between trading efficiency, collateral efficiency and operational efficiency,” so as to minimise the opportunity cost of unread data and fragmented departments.

The report said ideally, an automated “risk-adjusted best execution decisioning” process would include pre-trade scenario analysis, liquidity analysis, at-trade transaction cost analysis, as well as optimisation of collateral assignment across a portfolio.

The report also promoted cross-product netting as a means of reducing cost of settlement. This would all be informed by a panoramic, risk-adjusted view of customers and counterparties.