Decrypting Financial Reform: The Three Dimensions of Transparency

The word “data” is used and abused when it comes to Finance and IT – but with new regulations the need for transparency is bringing data strategies to the top of every organisation’s priority list. This series of blogs will examine the new demands, and give examples of how technology can help companies turn regulatory burden into opportunity.

New Regulations

The regulatory mind-set has been shifting from transactional and institutional oversight, to a systemic focus. For example the Dodd-Frank Act states its intention to “improv[e] accountability and transparency in the financial system”. There is still a way to go before the worldwide reforms are fully defined, but understanding and respecting the philosophy and spirit of the law is the best way to design for compliance. Four clear themes have emerged:

  • Higher capital and liquidity requirements
  • Closer collaboration with regulators
  • More transactional transparency
  • Greater and more effective consumer protection

Three Types of Transparency

At the heart, transparency is a component to all of those, which is affecting the way banks and their partners think about compliance.

Transparency between firms and regulators: A regulator’s role is to both prevent unethical practices and track the overall system’s health. For this they require access to business critical information, to monitor markets and perform stress tests.

Across markets: A bank’s peers, partners, clients, counterparties…. All demand and expect greater transparency, to keep the markets efficient and fair.

Within firms: From a risk and profitability standpoint, organisations must strive to achieve greater internal transparency. This is key to managing their businesses effectively.

Tough Technology Demands

From a technology standpoint, all three will drive much higher demands on the information infrastructure of each organisation:

  • More accurate and detailed data
  • Improved data accessibility
  • Real-time data
  • Data models more aligned to business systems.

The next two posts in this series will go into more detail on this topic.

Adversity into Opportunity

Another big change, from both Dodd-Frank and Basel III, is higher capital requirements. This will have a direct impact on banks’ Return on Assets (ROA). The decline of proprietary trading and complex OTC derivatives will also impact many sell-side firms’ revenue streams.

To combat this means increasing revenue in other areas, reducing costs and improving productivity. Indeed, there may be an opportunity to ‘over comply’ with financial reform to gain important advantages in certain areas.  Four examples come to mind:

  1. Focus: The correct analytics and BI across the organisation will help understand where the best ROA is, giving management the opportunity to direct strategy in a way that was never possible before data transparency.
  2. Client relationships: Systems integration across lines of business can enable an effective CRM strategy. With better market and customer segmentation, and the ability to calculate per-client P&L, banks will have the tools to focus on deeper relationships with their most profitable customers – and understand why others aren’t. This will be essential to drive revenue growth in the new game.
  3. Risk:  Improved risk management capabilities can defend against most operational, regulatory and reputational risks. A complete risk strategy that caters to these three objectives (not just regulatory risk) may also deliver the best ROI.
  4. Efficiency: Streamlining operations and data, in particular with the help of Cloud infrastructure and services, is probably the single-biggest change companies can make to in one fell swoop improve compliance and impact the bottom line.

The worldwide regulatory landscape is constantly evolving, with many implications for the operations and technology of financial institutions, and ultimately for the ability of the Banking and Capital Markets industry to generate higher returns. That said, whilst regulations are a level playing field, how each firm uses technology to turn burden into opportunity may decide who the winners and losers are once the new rules of the game become clearer…

In the second post in this series, read how complying with regulator transparency requirements can make this possible.

This post is the first in a three part series on Transparency:

  1. Decrypting Financial Reform: The Three Dimensions of Transparency
  2. Regulatory Transparency and Data Management Best Practices
  3. The Other Dimensions of Transparency: for Markets and Management