Finance IT - figuring out the impact of regulatory change

Rather than scratching their heads (as a bank recently commented to us), IT teams could use regulation as a driver to delivery more accurate information.  Especially in Finance IT which, as another bank mentioned, has sometimes been “very close-chested about [changes]…they often do, to my mind, very manual things that could easily be automated”.

Risk management is one of the issues driving Finance IT projects and demanding more accurate information, in particular, real-time P&L calculations. Financial institutions know that incorrect prices mean inaccurate risk valuations, which can leave the investment bank incorrectly calculating its risk positions and its P&L. Price valuation can also be very complex for long-term or exotic derivative products, as products can only be marked to market by mathematical models. Providing immediate and accurate pricing is one of the challenges facing Independent Price Verification (IPV) projects.  Improving IPV and reducing operational risk is therefore going to be one of the effects of regulatory change.

Our IPV team recently created a strategic tool to meet a bank’s technical and functional architecture principles and which consequently become the IPV system for any business and asset class. On the back of this experience, we’re recommending that banks consider;

A basis for daily IPV process

Reducing dependency on manual legacy processes

Enabling month-end IPV volatility testing (earlier)

Business agnostic applications

This should then standardise methodology, reduce operational risk issues and improve the bank’s risk assessment provision.

Risk management issues can be resolved through the pragmatic implementation of technology, but banks need to consider these carefully. This is not just to ensure that the right decisions are taken, but that the change is effectively absorbed by the team and the benefits are clear.

Figuring out the impact of regulatory change will involve effort and expenditure from the bank, but change is possible in Finance IT divisions and using regulation as a business driver will create a leaner, fitter bank, fit for the next economic cycle.

Miquel Febrer, GFT Iberia