Five recommendations for executing derivatives regulatory transformation

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The Global Financial Crisis in 2008 triggered a number of regulatory reforms which until this day require financial institutions to constantly adapt and adhere to never ending landscape of regulatory change and execute regulatory transformation projects.

Challenges with regulatory driven implementations

While business change implementations have usually clearly defined scope and objectives that is very often not the case for regulatory driven projects. Some of the challenges are:

  • Numerous reiterations of regulatory guidelines, very often at short notice
  • A vast amount of regulatory text which needs to be analysed in order to define any potential implications to respective business areas
  • Ambiguity of the regulatory text itself which frequently needs to be discussed at industry forums and further guidelines need to be provided by regulatory bodies
  • Cross border implications across several different regulatory jurisdictions the financial institutions may be subject to and their worldwide spread client base e.g., different rules for US and EU domiciled clients.
  • Some of the regulatory requirements have multi system, process and business areas implications covering legal client documentation, trade execution, risk and valuation, collateral management and settlements. Therefore, adding complexity to implementing such changes across entire IT architecture.
  • Many of the regulatory changes affect only transactions executed post go-live date adding complexity of having a split between back and front book and different treatment across the IT stack

Success criteria for implementing complex regulatory driven projects

Active regulatory horizon scanning throughout the duration of the project ensures any changes to the regulations and industry agreements are tracked and requirements are constantly updated ensuring future proof solutions which are configurable.

Every element of regulatory text needs to be mapped to the existing activity of the business to establish the business impact. It is crucial this is performed in collaboration with legal, compliance, risk and regulatory change business analysts with detailed knowledge of day-to-day business activities across multiple areas of the business.

Once the detailed business impact assessment is complete and consensus is reached it is paramount to engage relevant business stakeholders impacted by the regulatory change. This also covers mapping the rules against existing controls, procedures and defining any potential training to affected business areas.

Based on the business impact assessment, the requirements gathering can be initiated followed by implementation of the required changes. This very often covers multiple systems from trade capture, risk and valuation platforms to collateral and settlement systems.

Equally crucial is adherence to any governance requirements covering changes to legal documentation, procedures, controls and supervisory oversight of day-to-day activities. These should be tested alongside any system changes.

The final stage comprises of independent testing of incorporated changes and transfer of new processes to a business-as-usual basis. Clear ownership should be established from respective business area covering procedure and policies control and their maintenance.

Our recommendations

  1. Keep tracking regulatory change and industry reactions by ‘scanning the horizon’
  2. Produce a thorough and detailed business impact
  3. Engage business stakeholders to bring energy and ownership to the project
  4. Put in place an appropriate governance framework to link stakeholders to the outcomes
  5. Use independent testing to validate changes to systems and procedures

by Wojciech Dolczewski, Derivatives Regulatory Lead, Prodktr

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