dodd frank

9
1 The Dodd-Frank Act – A Catalyst for Change BY GARY CABLE This paper discusses why Dodd-Frank may be the impetus for companies to reassess their existing technology to become more competitive. WHITEPAPER

Upload: gcable

Post on 01-Nov-2014

910 views

Category:

Business


1 download

DESCRIPTION

This paper discusses why Dodd-Frank may be theimpetus for companies to reassess their existingtechnology to become more competitive.

TRANSCRIPT

Page 1: Dodd Frank

1

The Dodd-Frank Act – A Catalyst for ChangeBY GARY CABLE

This paper discusses why Dodd-Frank may be the

impetus for companies to reassess their existing

technology to become more competitive.

WH

ITE

PAP

ER

Page 2: Dodd Frank

2

On July 21, 2010, President Obama signed into law the Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173), the most significant piece of financial services legislation since the Great Depression.

This legislation places a number of 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. It may present an excellent opportunity to reduce redundancy of siloed systems, increase straight through processing and help institutions be more responsive in introducing new products and services to emerging market opportunities.

As the implementation of Dodd-Frank is being determined by organizations such as the SEC and CFTC, many CIOs are struggling to figure out how they will consolidate the data and operations between disparate systems to support the emerging requirements. These changes both pose challenges and offer opportunity for IT organizations. They could actually be the impetus to transform IT.

This research note first reviews the major provisions of the Dodd-Frank Act and then considers how these new compliance requirements will affect financial services organizations. Next, it considers the relative changes required for technology organizations and concludes with some suggestions for positioning technology to support Dodd-Frank.

Executive Summary

THE DODD-FRANK ACT – A CATALYST FOR CHANGE / EXECUTIVE SUMMARY

President Obama signed into law the Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173),

Page 3: Dodd Frank

3

Prior to the recent global crisis, departments within financial services companies had autonomy in creating their own platforms – without coordinated ability to assess overall system functionality and information Systems were built to address the needs of a specific asset class or legal entity and had regional variations. Dodd-Frank will require them to look beyond their previous siloed implementations and address risk and liquidity much more holistically.

• Transparency & Accountability for Exotic Instruments, including the Exchange Trading, Payment, Central Clearing, and Settlement of standard OTC products

• Making Risks Transparent, requiring hedge funds and private equity advisors to provide information about their trades and portfolios necessary to assess systemic risk.

• Disclosure of information about underlying assets, along with data collection and publication through clearing houses or swap repositories – with those trading mortgage-backed securities to retain at least 5% of the credit risk.

• Unwinding of internal assignment of swaps and generation of back-to-backs between various legal booking entities within a bank holding company to quickly sort out which entity controls and which party has what rights in those assets

• Volcker Rule – risk-mitigating hedging activities and the determination of documented correlation between the asset and the hedging instrument

• Credit Exposure from derivative transactions added to banks’ lending limits and a 15:1 leverage requirement ensuring dealers and major swap participants have adequate financial resources

The Business Objective of Dodd-Frank

THE DODD-FRANK ACT – A CATALYST FOR CHANGE / THE BUSINESS OBJECTIVE OF DODD-FRANK

Dodd-Frank will require them to look beyond their previous siloed implementations and address risk and liquidity much more holistically

Page 4: Dodd Frank

4

CIOs will need to look at the integration and consolidation of functions and data between disparate systems. They will need to collate data to build an organization-wide and integrated view on risk and provide flexible reporting so data can be shared with external regulatory bodies.

• Overcoming siloed implementation of Regional-, Business Unit-, Asset Class- or Legal Entity-based trading systems and migration to a centralized risk management environment

• Global visibility into Positions and Trades, Valuation Models, Risk Characteristics, Liquidity and Capital Reserve information

• Migration of OTC instruments into the exchange-traded books of business for Credit Swaps Fixed Income-based derivatives and off balance sheet instruments, derivatives which trade fuel, power, emissions or other commodities, Currency Forwards, Spot and Options, Exotics and Strategies to name a few

• Increased Straight-Though-Processing (STP) and reduced inter-entity transfer to reduce cost & complexity, to reduce or eliminate back-to-backs and better track assignment of Swaps

• Global availability and validation of data of analytical models for consistent valuation, risk identification and disturbance testing

• Evolution from the traditional Front-, Middle- and Back-office model to an environment that supports global views of positions and trades and use of specialized business functions based on events within the trade lifecycle

The Impact to Information Technology Organizations

THE DODD-FRANK ACT – A CATALYST FOR CHANGE / THE IMPACT TO INFORMATION TECHNOLOGY ORGANIZATIONS

00101010101010100100101101

0101011101001001010101000101001001

100101001

00101010101010100100101101

0101011101001001010101000101001001

100101001

00101010101010100100101101

0101011101001001010101000101001001

100101001

00101010101010100100101101

0101011101001001010101000101001001

100101001

00101010101010100100101101

0101011101001001010101000101001001

100101001

CIOs will need to look at the integration and consolidation of functions and data between disparate systems

Page 5: Dodd Frank

5

Over the last decade most companies have sought out ways to improve their enterprise IT systems – with the expectation that these enhancements would reduce costs by improving business processes. Unfortunately, far too many of these IT initiatives have been shelved before they could yield the desired outcome.

Financial organizations are beginning to see that Dodd-Frank will require IT organizations to implement some of these projects that have taken a back-seat to other priorities over the past several years. Finally, enterprise projects should get a priority.

• Leveraging Service Oriented Architecture (SOA) to support reuse, improve data provisioning, expand STP, better support business process changes and reduce or eliminate costly and time consuming batch processing and error prone manual intervention

• 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

• Addressing legacy platform migration and consolidation, based on decades of tactical siloed development to reduce operational costs and risk

Leveraging Dodd-Frank – An Opportunity for Change

FRONT OFFICEFRONT OFFICE BACK OFFICEBACK OFFICEMIDDLE OFFICEMIDDLE OFFICE

US

Fixed IncomeRates

Fixed IncomeRates

EquitiesEquities

FXFX

CommoditiesCommodities

Risk CollateralMgmt

Risk CollateralMgmt

Risk CollateralMgmt

Risk CollateralMgmt

EMEA

Fixed IncomeRates

Fixed IncomeRates

EquitiesEquities

FXFX

CommoditiesCommodities

Risk CollateralMgmt

Risk CollateralMgmt

Risk CollateralMgmt

Risk CollateralMgmt

ASI

A-P

ACIF

IC

Fixed IncomeRates

Fixed IncomeRates

EquitiesEquities

FXFX

CommoditiesCommodities

Risk CollateralMgmt

Risk CollateralMgmt

Risk CollateralMgmt

Pricing/Rates

Pricing/Rates

Pricing/Rates

Pricing/Rates

Pricing/Rates

Pricing/Rates

Pricing/Rates

Pricing/Rates

Pricing/Rates

Pricing/Rates

Pricing/Rates

Pricing/Rates

OrderMgmt

OrderMgmt

OrderMgmt

OrderMgmt

OrderMgmt

OrderMgmt

OrderMgmt

OrderMgmt

OrderMgmt

OrderMgmt

OrderMgmt

OrderMgmt

Risk

Settlement

Settlement

Settlement

Settlement

Settlement

Settlement

Settlement

Settlement

Settlement

Settlement

Settlement

Settlement

Clearing

Clearing

Clearing

Clearing

Clearing

Clearing

Clearing

Clearing

Clearing

Clearing

Clearing

ClearingCollateralMgmt

THE DODD-FRANK ACT – A CATALYST FOR CHANGE / LEVERAGING DODD-FRANK – AN OPPORTUNITY

Figure 1 — Redundant Silos of Business Functionality

Page 6: Dodd Frank

6

Enterprise Architecture Updates

SERVICESServices Architectures can be used to decouple positions and trades from previously siloed implementations and can be accessed via the Enterprise Service Bus (ESB). SOA-based security and entitlements implementation can be used to allow controlled sharing of positions and trade information without exposing restricted (e.g. client) information to implement centralized risk management.

VaR and Market Risk can be based more on actual positions rather than requiring simulations and multi-business unit, legal entity or regionally-based roll-up of reporting information.

Events and underlying information about trade pricing, tranches, securities availability, index and basket composition changes, changes to path-dependent derivatives, implied leverage on the book of business, etc. can be better integrated, monitored and captured throughout the trade lifecycle through SOA orchestration and event management.

SOA also provides mechanisms that will support ring-fencing of legacy systems, provide an abstraction layer between them and the user and allow for incremental migration rather than using a ‘big bang’ approach.

DATAUpdated Data Architecture and Governance will better identify, rationalize, consolidate, manage, secure and provision data from multiple sources. This will be critical for both centralized risk management and for regulatory reporting.

Identifying redundancy and ‘gold’ sources of data will provide immediate value through consolidation of costs, ease of access and increased data quality. Implementing data provisioning will in turn help support the analysis of the systems that produce and consume data.

THE DODD-FRANK ACT – A CATALYST FOR CHANGE / ENTERPRISE ARCHITECTURE UPDATES

Controlled sharing of positions and trade information without exposing restricted (e.g. client) information to implement centralized risk management

Page 7: Dodd Frank

7

CHANNELS

PORTALS

SALES AND TRADING OPERATIONS COMPLIANCE RISK CLIENT MANAGEMENT FINANCE

CHANNEL SERVICES

SECU

RITY

SER

VICE

S

APPL

ICAT

ION

SER

VICE

SLEGACY SYSTEMS

INTEGRATIONSERVICES

DATA MANAGEMENT AND PROVISIONING SERVICES

Data Movement

Documents and Contracts

Structured Data

Access Services

Data Stores(Regional and Global)

Protocols

External Data Provisioning

Monitoring

Persistance

LiquidityMgmt

Market Risk QueueMonitoring

LegalAgreements

TaxCredit Risk

OperationalRisk

OrderMgmt

PosMgmt

Price/Rates

ComplianceMonitoring

CapitalControls

LiquidityControls

Collateral Mgmt

Earnings Mgmt

Loan Processing

Trade Enrichment

Collateral Reinv.

Billing

Stocks

Deriv

Converts

Fwd/Future

Deriv

SpotCDO/CDS

Cap/Collar

Reconciliations

Static Data Mgmt

SettlementProductControls

ENTERPRISE SERVICE BUS

BUSINESS SERVICES GLOBAL POSITIONS AND TRADES

Equities Fixed Income& Rates

FX

Energy

Agri

Metals

Commodities

Service Mgmt, Message Brokering, Content Based Routing, Service Switching, Dynamic Transformation, Error Handling, Orchestration, Security Management

Single Sign-on, Session Mgmt, Context (State) Management, Cache Management, Personalization/Customization

THE DODD-FRANK ACT – A CATALYST FOR CHANGE / ENTERPRISE ARCHITECTURE UPDATES

Figure 2 — SOA diagramFigure 2 – SOA diagram

Page 8: Dodd Frank

8

Accelerated Implementation

Freeborders has considerable expertise working with IT organizations in all areas where Dodd-Frank will have an impact. Our solution accelerators and services will provide companies with a “jump-start” on their implementation of Dodd-Frank.

SERVICES• IT Portfolio Inventory, Current State

Assessment and SOA Maturity Benchmarking in preparation for legacy modernization and platform migration to meet regulatory requirements

• Business and Workflow Analysis, Business Functional Decomposition and Capabilities Mapping – to analyze and optimize operations and develop Service Level Agreements (SLA) and Service Level Descriptions (SLD)

• Future State Visioning, Initiative Roadmaps and Architecture Blueprints – to prepare for a successful migration

• Data Content, Source and Flow Analysis, Data Governance Models and Provisioning Use-case Analysis – to establish a foundation for centralized risk reporting

• Program Development, Program and Project Management using our PMO in a Box tool kit for rapid set-up and reporting to support large-scale, global programs

• Offshore Component-based Development to lower cost and accelerate development of interfaces, reports and data solutions

SOLUTION ACCELERATORSThese are the tools and services that help your planning, deployment and operational challenges related to Dodd-Frank and enterprise changes.

• LEAF™ — Business functions will need to be analyzed and documented to show a linkage between those business functions and the IT capabilities required to support them. Service Level Descriptions (SLD) will also need to be defined. Data consumption and production will also need to be traced back to business and IT functions. The effort for this should not be underestimated and portfolio analysis and capabilities mapping tools will help reduce the complexity. LEAF™, Freeborders’ Lightweight Enterprise Architecture Framework, is an accelerator for IT Portfolio and Business Capabilities Mapping can be used support the kinds of analysis to document and structure the information that define “Where should or could I make change?”

• PMO in a Box — This accelerator provides you with structure, template and approach for consistently managing your IT projects – planning, implementing, measuring and reporting. It provides the ability to structure complex, global initiatives that are required to address the sweeping changes required by Dodd-Frank.

THE DODD-FRANK ACT – A CATALYST FOR CHANGE / ACCELERATED IMPLEMENTATION

Solution accelerators and services will provide companies with a “jump-start” on their implementation of Dodd-Frank

Page 9: Dodd Frank

9

GARY CABLEGary Cable is Freeborders’ Vice President of Financial Services Business Consulting. He leads the IT Strategy and Enterprise Architecture practice and is the creator of Freeborders’ Lightweight Enterprise Architecture Framework (LEAF).

Gary holds a Masters Degree in Computer Science from the Illinois Institute of Technology and has previously worked work premier institutions such as R.R. Donnelley, AT&T Bell Laboratories, WPP Group, O’Connor and Associates, Swiss Bank Corporation and UBS AG.

Over the past decade, Gary has focused on management consulting, strategy and technology delivery to organizations such as SBC, General Motors, Swiss Re, Progressive Insurance, BB&T, TD Bank North, JP Morgan Chase, State Street Corporation, Credit Suisse and Deutsche Bank.

ABOUT FREEBORDERSFreeborders is a new generation Consulting and IT services company that enables IT and Business leaders to leverage the power of technology to boost business results.

Privately held and based in San Francisco, CA, Freeborders is recognized for offering best practices in outsourcing by combining its award-winning global delivery model, CHINDUSSM, with its governance model ATLASSM. Freeborders provides a full suite of services that encompass all phases of a project lifecycle including strategy, design, development, testing, implementation integration, and extended support.

Freeborders is rated at Level 5 of the SEI’s CMMI, and is ISO 27001certified.

CORPORATE HEADQUARTERS150 Spear Street Suite 850 San Francisco, CA 94105 USA Tel: +001-800-889-3567 Fax: +001-415-433-9300

LEARN MORE ONLINE AT

www.freeborders.com