Financial institutions continue to face multiple hurdles in the seemingly endless quest for efficient and effective regulatory compliance. Large scale, globally impactful regulations such as U.S. QFC Resolution Stay, LIBOR Transition, Uncleared Margin Rules (UMR), and Consolidated Audit Trail (CAT) will continue to significantly constrain the human and monetary resources of financial institutions as they race to keep up with the evolving demands of regulators. Diverse system architectures lead to issues with data collection and quality, detailed reporting requirements demand the processing of large volumes of data, and transaction monitoring often needs to occur under a challenging time constraint. While taking the full load of compliance completely out of human hands is unlikely, automation can provide some significant relief.
With so many potential automation solutions in the market, it is important for firms to develop strong decision-making abilities for how and when to invest in automation. By focusing on a specific set of criteria, firms can cut through the buzzwords and pie-in-the-sky promises to identify and prioritize regulatory compliance tasks and processes that can provide the greatest ROI for automation. Major considerations include processes that meet some, if not all, of the following criteria:
Simple – processes that are straightforward and have little to no exceptions (e.g. Excel data manipulation, cut and paste from the same sources over and over, etc.)
Rule-based – processes following an uncomplicated if/then decision tree with no human judgment required
Error-prone – processes that are prone to simple human error and can require frequent (and costly) rework
High volume – processes with a significant volume and workload can provide “quick wins” for automation
High frequency – the more repetitive and common the processes, the stronger the business case and potential ROI for automation
The criteria listed above are a good starting point for thinking about automation. The specific needs and capabilities of the organization should also be taken into account when deciding where to invest in automation.
Applying Automation to a Regulatory Mandate
In 2017, federal regulators implemented new rules as part of ongoing efforts to address the “too big to fail” problem affecting the global financial system. Shortly thereafter, Monticello was brought in to implement a U.S. Stay program for a major financial institution. While the overall goal of the engagement was not focused on automation, Monticello was able to quickly identify several automated solutions that reduced man-hours, time, and cost while improving data quality by leveraging our basic checklist.
Ensuring accurate client contract terms and reference data (i.e. client profiling) presented the first obstacle for the client. As the bank’s customers remediated their contracts, client profiling entailed a significant manual effort to process the contract amendments, upload the contract data into the bank systems, and update the client’s profile to reflect their compliance with the U.S. QFC Resolution Stay regulation. This was a highly repetitive and error-prone process which previously required employees to manually review legal documents and make subsequent changes to their client profiling system. Monticello identified this hurdle and proposed to digitize these contracts and implement optical character recognition (OCR) software. The OCR program would work in tandem with a machine learning application to process the legal terms within the contract and automatically feed the changes into the bank’s systems.
Clients who had not remediated their contracts but continued to trade on them presented another challenge. It was critical to remediate these trades quickly to be in compliance. Manually identifying these issues was an extremely time-consuming process due to the high volume of data and the high frequency of trading that these counterparties performed. In order to track and remediate these trades, Monticello recognized that the simple and rule-based nature of this process could lead to a fully automated post-trade monitoring process. By leveraging a machine learning system that was already integrated with the bank’s system architecture, it was possible to proactively review trades coming in from all trade source systems and cross-reference them against the bank’s client profiling systems to identify issues. Following this trade and contract analysis, the system would automatically send out notifications to the salespeople with the steps required to ensure compliance with the U.S. QFC Resolution Stay requirements.
The challenges faced on this U.S. QFC Resolution Stay engagement occur on many, if not all, regulatory projects. While automation may not be the perfect solution for all processes, companies that apply structured frameworks to their decision-making process can increase their automation ROI and ease the burden of regulatory compliance. By applying this basic checklist to complex problems, financial institutions can create much needed solutions that will save countless hours in human processing time and enable staff to focus their time on higher value initiatives.
Why Monticello?
Monticello Consulting Group is a specialized service provider with deep knowledge and expertise in regulatory reform along with business and digital transformation. Our understanding of the competitive forces reshaping business models in capital markets, lending, payments, and digital banking are proven enablers that support our clients to remain in compliance with regulations, innovate to be more competitive, and gain market share in new and existing businesses. By leveraging our core practice areas covering advisory, portfolio optimization & program management, Agile transformation, digital & advanced analytics, and testing governance for complex enterprise-level change, our firm continues to guide our clients in the deployment of the latest technologies while managing some of the most transformational programs of change.
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