We’re helping many of our banking clients to effect the implementation of regulatory change. These programmes are extensive and complex. In order to help get our head around this, we took some time to reflect and identify key themes in these programmes.

Taking a macro view allows us to consider how to implement these changes in a flexible and scalable manner. Our belief is that institutions that are setup to roll out compliance change effectively and quickly will be in a better position to focus on the business rather than the upheaval of change and we want to be sure that we’re supporting our clients on this journey.

Many of the new regulations find their genesis in the Pittsburg G20 commitments (2009) where heads of state committed to reforming financial markets by reducing risk and improving transparency of the derivatives markets globally. Dodd-Frank (America) and EMIR (Europe) are some of the first to impact the sector, but there will be more.

The broader intention of many of the regulations is similar and so there are practical commonalities throughout their implementation.

Reporting to global trade repositories

In an effort to improve transparency in the markets, both Dodd-Frank and EMIR require banks to report trades to a global trade repository (e.g. the DTCC).

Certain trades need to be reported on a near-real time basis, others will need to be aggregated before reporting. In order to achieve this, significant consideration needs to be given to both software architecture (e.g. cross-platform messaging, unique trade referencing, cross platform-integration, data warehousing, etc.) and hardware (data bandwidth internally and externally). Furthermore, the regulator specifies what fields are reportable and the trade repository (e.g. the DTCC) will have additional data requirements which they want to receive on top of this.

It is also important to be mindful of which trades are reportable. Typically this is dependent on the counterparty and the product type. For example, under Dodd-Frank certain commodity swaps which are intended to be physically settled are excluded from the ‘swap’ definition, and so they are not required to be reported. At a business level, this means that deep understanding of particular trading products is required within the transaction reporting teams in order to specify which trades are to be reported. At a systems implementation level, this brings added complexity as the system needs to differentiate between different types of trades and treat them differently.

Client on-boarding – knowing which buckets to classify your clients into has never been this important

All of the G20 reforms require banks to classify their counterparts into multiple different categories.

As an example, under Dodd Frank, banks need to know whether their clients are considered “Financial Entities” and whether they are “US persons”. This information is needed to be able to determine the amount of business done with these types of clients, which in turn impacts whether the bank needs to register as a Swap Dealer with the CFTC (a US regulator).

Under EMIR, banks need to know whether their counterparts are considered “Financial Counterparts” or “Non-Financial Counterparts”. If the latter, do they fall above (NFC +) or below (NFC -) a specified threshold of derivative trading activities? This has many implications, one of which is how much time they are permitted to confirm the trade with the counterpart. For example, if the counterpart is an NFC + and the bank trades equities with them, they’re allowed only 2 days to have confirmed all legal and trade details with them (volume, price, timelines etc). On the other hand, if they are NFC – they’re allowed 5 days to do so.

What we’re illustrating here is that when classifying counterparts, although the definitions and implications are different, the procedures for taking on new clients and the system impacts are very similar. When I’m on-boarding a client, I need to consider which category they fall into as the implications are significantly and materially different across categories.

Building consistent client on-boarding procedures and flexible systems becomes essential. And when considering this in light of the fact that additional counterparty classifications are going to continue to crop up as the remaining G20 commitments are fulfilled, taking a cross-silo view of the procedures becomes crucial.

Change management – who needs to know?

Change can be unsettling, especially in a world where the penalties associated with not changing the business can threaten the ability of the business to operate.

Ask anyone involved in a derivatives reform programme and they’ll tell you there have been a few hairs turned to grey over the past year. These regulations may have been intended to bring transparency to the market, but they certainly weren’t intended to be simple. Nevertheless, they are becoming so entrenched in the way banks operate and they’re impacting daily operations to such an extent, that pretty much everyone working in the bank needs to have a basic knowledge of the regulation and its impact.

One of our investment banking clients has itself a set of clients who are small-medium sized corporates and who, by the nature of their business, are indirectly impacted by these regulations. Very few of them have dedicated Compliance departments, and so they look to their investment bank for advice in understanding their obligations under the legislation. Naturally, the sales team and client account managers at the bank can’t be giving their clients legal advice because the implications of giving the incorrect advice is far too great. That said, client-facing staff certainly do need to have some training in the regulation to understand, at a minimum, which of their clients could be impacted.

Change management is a very important aspect of any programme of work, and this is no exception. Building a work stream into the programme structure which is dedicated to internal communications, including training, is a very important part of a compliance change programme.

Navigating these stormy waters needs great captains. Who is steering your ship?

To effect sizable change, it is necessary to have engaged, courageous and inspirational leadership.

As with any complex change programme, a regulatory programme needs a group of people at the helm who are accountable for making these important decisions. They are the folk who know that it’s necessary to change the business model to prevent losing US clients, or that implementing a new confirmations system isn’t in line with the overarching business strategy, or that a decision is so significant it needs to be escalated to the organisation’s executive committee.

There are inevitably a multitude of these decisions which will need to be made over the course of a regulatory programme’s lifetime and so it’s important that the Steering Committee or Project Board is comprised of all the right representatives (Operations, Front Office, Compliance, Risk etc.) and that they’re kept informed of all the risks.

In this continuously changing landscape with so many moving parts it’s not always easy to see the wood from the trees, and so how the project team work together and engage their governing body becomes all the more important.

“Compliance speak” is different from “business speak” and “IT speak”. How do teams bring together their expertise to deliver pragmatically?

There is a need for someone who can ensure that there is a common understanding across the various stakeholder groups. Typically, this is a BA’s role.

Let’s illustrate with an example. Under Dodd-Frank and EMIR, only certain types of trades are considered “reportable”. There’s a specific legal phrase in the technical standards which identifies whether the trade is within the regulatory scope and therefore reportable or not. Consequently, IT needs to have a set of rules that can be built into code in order to identify which trades to report.

The first question from IT in this instance will be ‘How do we determine whether the trade is physically delivered or not?’. There is a need to identify which attributes of the trade entity in the system can be used to determine this.

Legal’s response will inevitably be that it depends on the situation and on what the counterparty’s intention is at the time of entering into the legal agreement. Do they intend to take physical delivery? Would the bank commit to delivering $500k in gold at the end of the contract? Or are they more likely close it out and enter into a new agreement – keep it rolling? In most instances this level of detail would be captured in the legal terms of business, not flagged in any trading system.

Of course, whilst this response is accurate, it’s not conducive to building system rules. A pragmatic solution is required from the BA to do further analysis of the trade data to be able to identify whether there are in fact any specific attributes which could be used to identify these types of trades, or whether changes to the trade systems are required to encapsulate this requirement.

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The industry has become synonymous with society’s ills – greed, immorality, recklessness – and bankers are emblazoned in scandal. They’re responsible for everything from miss-selling insurance products to being conduits for money laundering and rigging Libor (or, if you like, Lie-bor). All of this comes in the wake of a financial meltdown. Caused by bankers. Saved by the taxpayer.

In some ways, banking and cycling have been hit by the same blow. For years, problems have been building and they’ve finally surfaced, smothering any positive practices which may indeed lie beneath.

Armstrong has said that for him, it was about “winning at all costs”. He was prepared to do whatever it took to keep winning and keep yellow. And it seems some bankers will do whatever it takes to avoid red.

But these scandals aren’t isolated. They’ve weaved their way throughout the financial industry and spilled over into the shadow banking system (hedge funds, money market funds etc). In cycling, Armstrong had a network of doctors and team managers involved in what’s been labelled the ‘most sophisticated doping programme in the history of sport’ by USADA.

Throughout, their reputations have been tainted and the people running the teams and organisations are less respected. We only have to look at the spate of resignations from senior players in the banking industry to know they don’t feel the love. Something needs to change at the very core.

Slow and steady wins the race. Culture doesn’t have a quick fix

An organisation’s culture is the shared belief of ‘why’ the organisation exists – it’s reason for being. It is the collective behaviour of the people who are part of it, and it’s the values, visions and habits which drive those behaviours.

A bank’s culture is passed down from long standing employees to newer employees and it affects the way people interact within the organisation, with their industry partners and with their clients.

In my organisation, our reason for being is clear. It’s evident in every internal meeting and every client meeting. As Business Analysts we’re all driven by the same passion for positive change. We talk about our ‘why’ and share our organisational values.

But cultures, by their very nature are evolving things and they take time to develop and change. Changing the culture of banking will take time. In the view of Stephen Hester (CEO of RBS) it will ‘take a generation’ and it doesn’t have a quick solution.

Regulate to renovate. What role do rules and regulations play in changing culture?

There’s a minefield of new regulations on the radar. Regulations designed to increase transparency and reduce risk in the banking system. To prevent ‘too big to fail’ and protect consumers. Banks are coping with so much change in order to comply, but will these changes bring about a cultural shift? Or even, can they bring about a cultural shift?

We create rules for the things we think we need rules for. We cannot identify every eventuality.

In cycling there are rules about the weight of your bike, what gear ratios are allowed and when you can use race radios. There are also unwritten rules about racing on the last day of ‘Le Tour’ and when to slow for a ‘comfort break’. But when new performance enhancing drugs come about, and the line becomes just that little bit greyer, we have to write up new rules.

In banking there are rules about which trades must be cleared centrally, how much capital must be held, what you can and can’t advise customers and even how many hours you have to report incidents to the regulators. But when we identify that traders have manipulated the Libor, will we have to write another regulation? Can a fraud exist even if has not yet been identified in a regulation?

Blind spots will inevitably exist and we don’t know what we don’t know. In the “conscious competence” learning model  there are places where we’re unconsciously unskilled. Because our industry is forever changing, these will always exist.

But rules exist as in a cultural context too. They’re not created for the rule’s own sake, but because of a broader intention. In sport, typically, the broader intention is fair play. In business, it’s usually about enabling fair markets and protecting the consumer. But in both sport and business, it’s the culture which guides us through the blind spots. It is the cultural principals which ensure that we navigate in the right direction and which give us clarity in the decisions we make.

We’re just touching the surface. But, as BAs, we’re still touching it.

Regulations play an important role in building a more stable and transparent financial market, and I’m not for one moment implying they’re not crucial to the future of the banking world. But we also need to keep a wider viewpoint about what motivates people and organisations to do what they do. And so something far deeper and more fundamental has to change. Something which affects every aspect of our work.

It’s easy to view regulatory change projects as purely about responding to external forces and just about being compliant or ‘ticking the boxes’. For us, whilst it is about all of these things, it’s also about understanding the broader context of what the regulation is trying to achieve and why. The key to successful regulatory change projects is about communicating this broader regulatory message and in keeping the organisational culture in mind throughout. For example, if the broader framework of the European Markets Infrastructure Regulation (EMIR) is about having more transparency in the OTC derivatives markets in order to reduce risk in the market place, then, if people understand ‘why’ this is important in the context of their organisational culture, it aids the implementation and shapes the resulting projects.

As BAs, part of our job is to challenge assumptions, question how things are done, why it’s important to store this data here and whether this procedure could be run like this, rather than that. As agents of change however, our broader role is to help organisations effect cultural change. We have a role to play in questioning motives, or at least in understanding the reasons people do what they do in the context of the organisational culture. Only when we understand this can we truly effect meaningful organisational change.

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