Compliance

02:20 PM
Gary Cable, Freeborders
Gary Cable, Freeborders
Commentary
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The Dodd-Frank Act: A Catalyst for Change

Dodd-Frank and other regulatory requirements have banks examining their independent financial controls.

July 2012 marked the two-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Two years into the implementation of Dodd-Frank, related change continues to be determined by regulatory agencies. However, this is not stopping financial institutions from making change to reduce risk and improve transparency.

Chief executive officers have acknowledged that the legislation places stringent requirements on financial companies to increase transparency, clear more products on exchanges, establish appropriate liquidity and hedging mechanisms, and improve risk reporting and compliance management.

Migration of OTC instruments continues into the exchange-traded books of business for Credit Swaps Fixed Income-based derivatives. Many of the platform and operations initiatives focus on onboarding of new clearing counterparties and the development of processes to handle the additional capacity. Platform upgrades continue, but on a less broad base and primarily to address capacity and reporting requirements.

New Focus on Specific Areas of Financial Controls

Dodd-Frank and regulatory requirements such as SOX Section 404, as well as pressure around internal and external audit requirements, have many banks examining their independent financial controls. Instead of a pursuing a broader focus on platforms and processes across the enterprise, many C-level executives are focusing their efforts in specific areas like financial risk mitigation as trades progress from trade execution through the various subsidiary General ledgers (GL) of each legal entity to the corporate GL.

As global visibility is required for positions and trades, valuation models, risk characteristics and the like, many are finding that a focus on areas of financial controls, such as reconciliations, are providing the most value. This focus can provide visibility into relationships between independent controls, legal entities and lines of business (LOB), accountable groups, systems, and products – and quickly point out areas of significant risk.

By focusing on these variables, banks can identify gaps that might otherwise go undiscovered until the next audit. In addition, viewing commonality and differences between controls across various LOB, products and accountable groups can quickly identify common or best practices. This discovery provides immediate value to the organization and can become the foundation for broader, incremental initiatives that address the intent of further transparency, clearing more products on exchanges, establishing appropriate liquidity and hedging mechanisms, and improving risk reporting and compliance management.

Reporting Requirements Can Reduce Costs

Financial services companies are finding that compliance requirements don’t necessarily mean significantly increasing reporting costs. On the contrary, new reporting requirements can be used to initiate business process improvements and ultimately reduce operational costs. When coupled with initiatives like mapping independent financial controls, immediate value can be identified and also act as a foundation for change and improvement within the organization.

Financial services organizations that at are leveraging the regulations for positive change are doing this in several ways.

They are mapping independent controls and creating independent controls databases to identify gaps, support reuse, improve data provisioning, expand automation, better support common business process and reduce or eliminate costly and time consuming batch processing and error prone manual intervention.

As control maps are created, they are also enabling the development of recommendations and roadmaps for the C-suite, to reduce risk and enable compliance. By focusing of the stages in a process where financial risk is anticipated, each of the identified risk areas can be candidates for additional deep dives and remediation.

They are also establishing new operational processes and change management so that as new clients and products are on-boarded, the organization is prepared to meet new capacity, reporting and risk management requirements, as well as incrementally preparing for change to traditionally fractious business or IT practices of the past.

They are implementing long needed data rationalization, consolidation and provisioning to improve accuracy, reduce cost, better centralize and evaluate risk, support regulatory reporting and business decision support processing. This will be critical for both centralized risk management and for regulatory reporting.

Finally, they're addressing legacy platform migration and consolidation, based on decades of tactical siloed development to reduce operational costs and risk. Most companies at one time or another have sought out ways to improve their enterprise IT systems – with the expectation that these enhancements would reduce costs by improving business processes. With the proper scope and focus, changes need not be sweeping to provide significant benefit.

With two years past, and a bright future ahead, isn’t it time to leverage the requirements of Dodd-Frank to drive positive results for your organization?

Gary Cable is Vice President of Financial Services Business Consulting at Freeborders.

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