This post was first published on my corporate blog
The implementation of the new Volcker Rule has proven to be one of the most controversial and complex regulatory regimes to be introduced in the financial services industry in a long time. Now that the Volcker Rule 2.0 overhaul has received the final approval from the Federal Reserve and other regulatory agencies, financial firms will need to make necessary investments in technology infrastructure to comply with exhaustive reporting and monitoring requirements. Massive infrastructure is a requirement for most firms, and as such, banks have been evaluating how they want to streamline and arrange their trading accounts, trading desks, and hedging activities under the new Volcker rule.
Technology can become the salvo for banks in terms of hosting and building high-frequency algorithms for trading strategies, managing P&L, back-office, and risk functions. Let us first understand the implications of the new Rule and how preparing early can open innovative functions for banks.
Key highlights of the proposal
A centerpiece of the ‘Dodd-Frank Act’ (Dodd-Frank Wall Street Reform and Consumer Protection Act), the Volcker Rule saw amendments proposed in terms of an approved 373-page notice of proposed rulemaking on May 30th, 2018. The FDIC and OCC approved the final Rule on August 20th, 2019.
The proposal is aimed at simplifying and tailoring the compliance requirements of the Rule, which was finalized back in December 2013 to prevent banks from being involved or engaged in prop(rietary) trading and from owning PE or hedge funds. Among other changes, the new Rule:
- Creates categories of financial entities based on the size of their trading assets and liabilities
- Tailors compliance requirements based on the financial firm’s level of trading activity
- Modifies requirements related to metrics of reporting and streamlining of the data collection process
Optimizing your lines of defense
It is no big secret that in the changing regulatory environment, compliance, although necessary for a firm’s reputation, can be difficult to implement. Even then, banking entities must now realize and understand where they stand within the scope of the Rule’s applicability, as well as the needful across the six pillar compliance programs. For example, banking entities with the ‘significant’ or ‘moderate’ trading assets (in addition to the ‘limited’ trading entities), are sure to see some early benefits of an assessment. By identifying IT, complexities such as fragmented security frameworks, inconsistent and duplication of roles end up in slowing the time-to-market, as well as popping compliance and audit issues.
As such, financial and trading entities, big or small, can leverage risk, compliance, and governance solutions. Through this, they can create a perspective and then a plan around their current processes as well as potential modifications of the respective compliance programs. Early assessments tend to increase the risk tolerance of any organization, as they are able to accordingly embed, integrate, standardize, and automate digital infrastructure into their core business framework.
Furthermore, the outlook related to data privacy and cybersecurity continues to indicate strong regulatory developments, as many countries are already enhancing their existing regulatory requirements. They already see benefits of proactive risk mitigation, improved performance, and reduced cost of ownership due to early assessments, also contributing to business outcomes in the end.
Advantage of acting in the face of uncertainty
In the wake of sweeping digitization, regulators across the world are sure to continue to set high expectations intended towards maintaining a strong and resilient financial sector. These financial firms must secure robust operational and financial resilience, supported by strong compliance and risk management capabilities.