Optimizing a Bank’s Prime Brokerage Business to Achieve Cost Savings and Accelerate Services Innovation – Test Strategy

Engagement Summary

As part of a large-scale restructuring in 2020, a market-leading investment bank’s Prime Brokerage division approached Monticello Consulting Group to support the design and implementation of a merger of their two key business entities. The goal of this ambitious effort is to optimize redundant and inefficient processes to achieve significant operational costs savings and accelerate services innovation. The strategic aim of the merged entities is to offer its clients a set of unique and differentiated services that better that of the competition.

Following the development of the target state infrastructure, Monticello Consulting Group was trusted to support integrated testing. To facilitate this effort, the team developed an agile test framework through a comprehensive understanding of test strategy and test schedule, and with guidance from a strong Test Governance Office (TGO). In doing so, MCG was able to de-risk the project at an early stage and allow the client to meet its ambitious testing milestones.

Case Study Detail

TESTING GOVERNANCE OFFICE (TGO)

Prior to test planning, it was important to establish an agile Test Governance Office with clearly defined roles and responsibilities for central coordination of integrated testing, issue resolution, and escalation. An agile framework ensures each deliverable is mapped back to business goals, thus promoting a higher level of visibility into not only testing progress but the incremental business value-add. A set of well-defined test strategies, grounded policies, principles, and controls are integral to the successful operation of any testing governance framework. The TGO established standard project templates, tools, reporting, and terminology to enable effective and consistent insights, and to foster clarity and transparency across integrated testing. Further, this approach allowed the team to better manage critical defects, risks, and dependencies from the outset and more easily respond to change in real-time.

TEST PLANNING

With direction from the Test Governance Office, each sub-project was responsible for developing respective test planning documents. Sub-projects first defined the testing universe by leveraging the business requirements document (BRD) developed during the project’s planning phase. As with most projects, the testing scope should be grounded in a project’s requirements. More specifically, utilizing the templates provided by the TGO, the team identified the scope of systems impacted and considered all the merger’s relevant tech and non-tech activities to aid the development of functional testing scenarios. We further cataloged systems to delineate between functional testing and regression testing to help sequence activities, which would be beneficial when creating the test schedule. For each scenario, we subsequently detailed high-level steps test orchestration steps, expected results, and provided validation criteria. To mitigate the challenges of end-to-end testing in lower-level environments, and to facilitate early integrated testing of critical functionality, each sub-project also identified test neighborhoods. These neighborhoods, or key change areas, along with testing dependencies, including test data needs, test environments, and any sub-project interdependencies, were added to our testing models and ultimately fed back into the Test Governance Office for aggregation.

After the comprehensive testing models were formulated, the sub-projects were then ready to develop robust testing timelines. Through close collaboration with our technology partners, the team began to set build start and end dates for each sub-project deliverable. From there, we extrapolated testing timelines factoring in our testing management office’s four primary testing dependencies:

1. Test Environment availability

2. Test Data needs

3. Sub-project interdependencies

4. Resource Availability

We first had to be cognizant of the various test environments required and when each could be utilized. As it pertains to test data, we needed to understand how the data was being sourced and when the data would be available. To account for resourcing, we developed resource plans, which considered the availability and allocation of different parties in all facets of testing. As the merger was a large-scale project, we also had to factor in cross-workstream dependencies that were prerequisites to testing. Furthermore, the team had to consider how the bank’s competing initiatives impacted the test environment and resource availability and, in turn, our project’s test schedules. Each sub-project submitted its test plans to the test management office, which were reviewed to ensure alignment across the project and aggregated to formulate a comprehensive test plan for the merger.

BUSINESS VALUE

Applying an agile test governance framework can significantly streamline test execution through the deployment of the following:

1. Rapid Decision Making: Swift and decentralized decision making at the sub-project level

2. Adaptive Model: Testing models provide flexibility for continuous improvement and constant adaptability

3. Responsiveness to Change: Since the testing models feed on the BRDs, it is easy for sub-project leads to showcase the deliverables to stakeholders and receive expedited feedback, ensuring continuous improvement

4. “Just enough” Documentation: Straightforward testing documentation, considering full testing universe and key inputs

5. Visibility to the Stakeholders: Close collaboration with technology partners to promote their input into testing models and test schedules

6. Key Metrics and Continuous Improvement: Testing documents have clearly defined metrics and expected results, providing visibility for management about constraints and impediments

Further, the client was able to identify risks as early as feasible and meet its ambitious testing timelines.

SKILLS & KNOWLEDGE (Level of Difficulty)

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Addressing a need for transparency in the security-based swaps (SBS) market

Engagement Summary

The Fall of 2020 saw Monticello called in to support a leading bank’s Regulatory Cross GBAM Initiatives team implement a newly introduced U.S. Securities and Exchange Commission (“SEC”) regulation for Uncleared Security-Based Swaps (“SBS”) and Security-Based Swap Dealers (“SBSDs”) with a Nov ember 1st, 2021 compliance date. As part of G20 reforms to the OTC (over-the-counter) derivatives market, national regulators implemented rules requiring the exchange of margin for all derivatives not cleared through a central counterparty. While the CFTC (Commodity Futures Trading Commission) completed its rulemaking and implementation process a number of years ago, the SEC only recently fully finalized its ruleset. The directive for participants in a previously opaque swap market was to increase transparency, and the various actions to achieve that directive include, but are not limited to, the following client documentation requirements

1) Information Exchange

Security-based swap dealers (SBSDs) can exchange a new ISDA-produced U.S. Self-Disclosure Letter, amongst other related disclosures, with clients in order to understand whether the regulation’s rules apply to their relationship. Furthermore, SBSDs have some disclosing to do on their end. SBSDs, for example, are required to stress their clients’ right to segregate the initial margin for the Uncleared SBS transactions. These are clear examples of the SEC’s efforts to increase transparency in the swap market.

2) ISDA SBS Protocol Adherence

ISDA Protocols have been adding immense value to the industry for decades and the SBS Protocols are the latest installment in their efforts to eliminate the necessity for costly and time-consuming bilateral negotiations. As part of the SEC implementation, ISDA launched the SBS Protocol which is intended to be completed by parties who have not entered into the earlier Dodd-Frank protocols ISDA launched in August 2012 and March 2013. The SBS Protocol enables parties to efficiently amend and/or supplement their trading documentation by incorporating relevant portions of the new SBS rules and regulations

As part of the CFTC implementation, ISDA launched two protocols in August 2012 and March 2013. If a client had adhered to those earlier protocols, their terms were included in their ISDA Master Agreement. The Top-Up Protocol amends the ISDA Master to address regulatory and documentation requirements applicable to SBSDs relating to SBS transactions, allowing terms previously included in the CFTC Protocols for CFTC compliance to be “topped up” for SEC compliance

3) SBS Margin Adherence

These new regulations have their sights set on uncleared SBS trades and ensuring that a mandatory requirement for the exchange of margin is now imposed. In a nutshell, clients must collect IM from an SBS counterparty when breaching the $50 million dollars initial margin threshold and must also exchange VM. As previously mentioned, the CFTC published an analogous regulation many years prior, yet this SEC regulation has a number of nuances that have not only resulted in ISDA providing brand new margin documentation[1] but have market participants exploring the applicability of “substituted compliance.” This mechanism, which became affectionately known as “sub-camp” within the industry is discussed later in this case study and was integral to the evolution of this regulation and how t impacted Day 1 requirements for SBSDs and SBS counterparties.

 Monticello deployed experts from its Change Management and Financial Services practice areas to project manage four of the program’s seven individual workstreams. Monticello’s proven track record in this space resulted in the client equipping Monticello’s team with the authority to centrally manage the governance structure across program workstreams and to effectively hold stakeholders accountable. Given the public nature of SEC Regulations, compounded by the change at the helm of the securities watchdog midway through the program[2], there was heavy scrutiny on program health from senior management up to the Board and C-suite executives. Being in a position to implement a clear communication strategy, which resulted in sound risks and issues management, was intrinsic to maintaining program momentum towards the timely completion of the SEC’s regulatory requirements and satisfying the added senior stakeholder scrutiny.

Case Study Detail

PROJECT BACKGROUND

A brief history on the authority of the CFTC versus the SEC and how that feeds into traditional swaps versus SBS adds some much-needed context to why this regulation has only just been introduced. 2010 saw the declaration of President Obama’s Dodd-Frank Wall Street Reform and Consumer Protection Act, with the CFTC being one of the various regulators tasked with embedding the Act’s rules into the financial services industry. Title VII of the Act focused on swap and derivatives regulation. The CFTC, generally charged with regulating swaps, began to accordingly impose their regulations soon after 2021 but the SEC, generally charged with regulating security-based swaps, have only just begun to impose theirs. The SEC broadly defines “security-based swaps” as swaps based on (1) single security or (2) a loan or (3) a narrow-based group or index of securities or (4) events relating to a single issuer or issuers of securities in a narrow-based security index.[3] Accurately identifying which of our client’s traded products fit these definitions formed the backdrop to the rest of the SEC SBS Program, which was focused on adherence to the rules enabling compliant trading of these products post-November 1st, 2021.

ENGAGEMENT OBJECTIVES

Program Management & Governance

Implemented a project management structure to facilitate effective communication across what were very interdependent program workstreams. Monticello established weekly workstream-specific governance routines within each of its workstreams that seamlessly bubbled up to monthly Executive Council meetings, ensuring senior stakeholders were provided with the most accurate and up-to-date program health updates. The program was educated to consider Executive Council forums as an opportunity to not only keep senior stakeholders engaged but to have decisions and proposals formally approved to remove any obstacles that stood in the way of project momentum. Some more specific examples of workstream program management and governance included:

• Gathering and defining business requirements in bi-weekly sessions, throughout the program's planning phase, that encouraged active stakeholder participation across the Business, Operations, Legal, Compliance, and Technology. These collaborative sessions focused on mapping the requirements of the rule to tangible business outcomes and, in turn, mapping these outcomes to technological enhancement to the client's trading systems that would facilitate the uninterrupted and compliant booking of SBS trades once the rule took effect.

• Supporting release management including end-to-end go-live planning, testing, and execution, with the aid of experts from Monticello's testing governance capability.

However, paramount to the success of all program management and governance is the manner in which one chooses to communicate with stakeholders. The chosen communication methodology can make or break a program’s ability to meet its objectives

Stakeholder Communication & Reporting

Leveraged a strategic communication structure to provide tailored updates to stakeholders at varying levels of seniority and accountability for program deliverables. Material program updates were communicated through a weekly 4-blocker that highlighted program status, key accomplishments, upcoming milestones, the path to green plans, and key risks, issues, and dependencies. As Monticello resources began to build relationships with various stakeholders, communication styles were tailored to ensure both the client and Monticello worked together in the most productive manner.

SUBSTITUTED COMPLIANCE AND NO-ACTION RELIEF

Firms looking to establish substituted compliance were largely successful in their applications to the SEC, with the SEC’s final publications of sub-camp orders slightly moving the goalposts for such firms. Our client was one of those firms. Taking a step back, the SEC defines substituted compliance as a “mechanism that allows the Commission to determine that certain participants in U.S. security-based swap markets may satisfy certain requirements under the Securities Exchange Act of 1934 (“Exchange Act”) and the rules and regulations thereunder by complying with comparable non-U.S. requirements.”[4]Our client’s two European entities benefitted from substituted compliance granted in the spring and summer for the UK[5] and France[6], respectively, in which it was accepted that these entities had complied with foreign requirements that the Commission had found to be comparable. This relieved a significant amount of pressure on margin and capital requirements, particularly in terms of complex and time-consuming margin IM and VM CSA documentation that would otherwise have had to be negotiated with clients by November 1, 2021. Unsurprisingly, there were a number of conditions attached to the 200+ page orders that our Monticello Teams pored through with a fine-tooth comb to understand the margin requirements that endured but the fact remained that the documentation burden was reduced. Furthermore, the SEC granted a request from ISDA and SIFMA to issue no-action relief for SBSDs, articulating the fact that they do not need to collect initial margin from certain counterparties in connection with an uncleared SBS until September 1, 2022. This 11-month relief from the initial compliance date for such margin requirements was a welcome respite for not only our client but the swap market writ large.

BUSINESS VALUE

Monticello Consulting Group provides services across the financial services industry to ensure compliance and reduce regulatory risks. By working with clients to successfully translate complex regulatory requirements into effective business solutions, Monticello enables clients to implement the necessary risk and control framework to ensure industry challenges are turned into opportunities. Our team partners with cross-organizational client teams and oversees the end-to-end execution of regulatory compliance implementation. By leveraging our regulatory knowledge, testing governance methodologies, and end-to-end process understanding, Monticello supported the tangible business outcomes for our client to ensure readiness for this significant shift in the oversight and transparency of SBS trades in the financial services industry.

[1] https://www.isda.org/book/sec-initial-margin-bolt-on-supplements/

[2] https://www.sec.gov/news/press-release/2021-65

[3] https://www.sec.gov/opa/Article/press-release-2012-67---related-materials.html

[4] https://www.sec.gov/page/exchange-act-substituted-compliance-and-listed-jurisdiction-applications-security-based-swap

[5] https://www.sec.gov/news/press-release/2021-57

[6] https://www.sec.gov/news/press-release/2021-138

SKILLS & KNOWLEDGE (Level of Difficulty)

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Driving Effective Program Governance & Management for Uncleared Margin Rules Phase 5 & 6

Engagement Summary

A top global investment bank engaged Monticello Consulting Group in early 2021 to lead the change management program and help implement the Basel Committee of Banking Supervision (BCBS) and International Organization of Securities Commissions (IOSCO) requirements for Uncleared Margin Rules (UMR) Phase 5 and Phase 6. In April 2020, the regulators announced their revised final policy framework that provided a one-year delay for Phase 5 and Phase 6 firms. Phase 5 (>$50B notional) Initial Margin compliance went live on September 1, 2021, and Phase 6 (>$8B notional) compliance will be due on September 1, 2022. Monticello’s client has taken this opportunity to look holistically at their collateral management processes and operational strategies to meet their governance and infrastructure needs.

The last two phases of UMR introduced more buy-side firms to the world of Regulatory Initial Margin (Reg IM). The number of counterparties brought into scope for UMR increased from a few dozen large banks and broker-dealers under Phase 4 to thousands of trading counterparties under Phase 5. International Swaps and Derivatives Association’s (ISDA) estimates in the table below highlight the fact that Phase 6 is expected to phase in almost 2.5x the number of clients currently caught by Phase 5’s Aggregated Annual Notional Amount (AANA) range.

Monticello stood up and led the Program Management Office, managing individual workstream deliverables, tracking key program-level milestones, and identifying and managing risks and issues through sound governance practices. Additionally, Monticello established an effective stakeholder communication and training plan. Thus, by implementing a dedicated Program Management Office to centrally manage the governance structure across program workstreams, Monticello’s client was successfully able to meet Phase 5’s regulatory compliance deadline. Since October 2021, Phase 6 planning has focused on lessons learned and best practices from Phase 5 in order to set the program up for success as the program embarks upon implementing a regime for a set of in-scope clients on a much larger and more diverse scale.

Case Study Detail

PROJECT BACKGROUND

UMR is a set of rules that apply to the exchange of margin (collateral) between counterparties trading over-the-counter (OTC) derivatives. The rules were developed in response to the 2008 financial crisis. OTC derivatives are traded under the legal framework provided by ISDA, with the associated collateral terms defined in that ISDA’s Credit Support Annex (CSA). The Rules apply to variation margin (VM) and initial margin (IM). The VM rules went into effect in 2017, whereas the IM rules have continued to be phased in since 2016. Since the first OTC derivatives margin rules rolled out in 2016, large broker-dealers and global banks have faced increasing compliance costs, all the while competing with central counterparty clearinghouses. To stay relevant in the OTC business, our clients have invested significantly in program governance, legal and client outreach resources along with technology solutions aimed at streamlining client onboarding and enhancing trade monitoring controls for IM utilization.

ENGAGEMENT OBJECTIVES

Program Management & Change Management

Monticello led the Program Management Office (PMO) with the bank’s Markets and Transformation Organization to ensure all transformation and changes related to the client’s systems and processes were delivered in line with business, operations, and regulatory mandates. The PMO’s roles and responsibilities for this program included the following:

• Managing and guiding workstreams project plans, executive management reporting routines, and ongoing program governance based on regulatory requirements and alignment with business needs.

• Identifying and managing program assumptions, key issues/risks, and internal/external critical dependencies.

• Managing adherence to overall enterprise project management standards.

• Leading daily stand-ups with the Client Outreach Team and Workstream Project Managers to successfully meet critical milestones in a timely manner.

Training & Resource Allocation

• Coordinating efforts to create a training manual and Phase 5 lessons learned in preparation for Phase 6.

• Creating a template and building metrics for client outreach resource allocation between Phase 5 and Phase 6.

BUSINESS VALUE

With UMR’s six-year extensive implementation journey approaching its last leg, Monticello continued to leverage its project management toolkit and effective stakeholder communication practices to help our client successfully navigate the complex regulatory directives and turn challenges into opportunities to build effective business solutions. Our consultants partnered with cross-organizational client teams and governed the end-to-end execution for the UMR Phase 5 regulatory rules. With deep regulatory knowledge, change management expertise, and proven governance standards, Monticello successfully ensured our client could maintain competitive advantage over industry peers while exhibiting sound market conduct and compliance within the regulatory landscape.

SKILLS & KNOWLEDGE (Level of Difficulty)

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Deploying Program Governance & Issue Management for a Large-Scale Regulatory Program Reset and Review

Engagement Summary

In mid-2021, Monticello Consulting Group (Monticello) partnered with the Global Markets Transformation team at a leading financial institution to support the delivery reset and replanning of a large-scale regulatory program. This reset was initiated by the client in response to an internal review that found the original delivery timeline at risk of missing the key regulatory implementation dates and minimal internal processes around change management and issue remediation. Monticello’s Financial Services Advisory and Change Management Practice Areas were brought in to help lead the program and provide additional support in preparation for an upcoming Office of the Comptroller of the Currency (OCC) regulatory audit focusing on these key areas.

Monticello deployed resources across numerous program work streams to support the Transformation Program Management Office (PMO) to track project plans, key milestones, risks, issues, and dependencies. The Monticello team combined their proven program governance toolkit and effective stakeholder communication to ensure key program risks and issues were successfully mitigated and resolved through sound governance. Additionally, Monticello managed all program reporting obligations and supported senior leadership and program sponsors through bi-weekly program status updates to the program’s working groups and Steering Committee to present progress made against the firm’s regulatory commitments.

Monticello’s Approach:

Case Study Detail

PROJECT BACKGROUND

The Global Markets Transformation executive team initiated a program reset on the key FRTB regulatory initiative that required a dedicated team of resources to assist with a cross-domain, business, and technology replanning effort to ensure successful delivery and completion by the required regulatory dates.  Additional emphasis to improve change management and issue remediation practices in preparation for an external OCC examination was also required.

ENGAGEMENT OBJECTIVES

Program Management & Governance

Managed program governance under the change management function for the Global Markets business. Monticello supported the FRTB Program Management Office to drive the replanning effort and delivery of the regulatory program through stringent execution of project plans, timely risk, and issue management, and robust governance standards. The PMO function included the following Monticello team responsibilities:

• Drove FRTB program re-planning efforts and built go-to-green plans for cross-program and workstream-specific deliverables and dependencies.

• Integrated with existing governance routines and recommended the creation of new forums to ensure executive-level visibility of critical deliverables and effective monitoring of cross-program dependencies.

• Coordinated workstream-level planning and agreement on FRTB scope, the timeline for delivery, RACI matrix, and key RAID items.

• Created and managed a central repository to track all FRTB requirements. Created requirements governance standards and ran gap analysis process to identify missing requirements or insufficient level of required detail.

• Ensured adherence to enterprise-wide program management standards.

Stakeholder Communication & Reporting

• Leveraged a strategic communication structure to provide tailored updates to stakeholders at varying levels of seniority and accountability for program deliverables.

• Chaired program-wide meetings to liaise with workstream PMOs on project statuses.

• Led individual workstreams and project working groups from identifying requirements through production release and signoff.

• Defined reporting routines and effective program governance processes to satisfy requirements and align with business needs. Critical program information was communicated through a dashboard that highlighted program status, path to green plans, and key risks, issues, and dependencies.

• Formalized agile framework methodology and introduced new reporting metrics based on utilization of new fields for reporting purposes.

Change Management

• Reviewed current project documentation and provided recommendations for enhancements; especially around test strategy documentation.

• Initiated the creation of a Data Dictionary for the FRTB Program to be presented as part of the OCC Review.

Issue Management

• Raised and tracked JIRA tickets for Front Office Technology teams to investigate and resolve gaps around identified differences between sensitivities generated for Basel 2.5 requirements vs. FRTB.

Data Management

• Advised client on the best path forward given current state infrastructure & hardware challenges to support all data requirements needed for full-reval HVaR and FRTB.

• Facilitated meetings between Front Office Technology, Risk Technology, and the Business to understand reference data systems and identify trade flows with capital charge spikes requiring remediation.

• Developed roadmap for building formal FRTB data governance across the organization including defining critical data elements, along with mapping existing and new architecture and data flows.

• Identified existing and new reconciliations and controls.

FRTB Standardized Approach (SA)

• Maintained and adjusted where needed the global plan for EMEA CCR2 to respond to UK and US regulations.

• Incorporated regulatory interpretations and documented business requirements for the design, build, and release of risk technology to collect Front Office trade data, calculate risk sensitivities, enrich data, and where required calculate capital charges.

BUSINESS VALUE

Monticello Consulting Group provides services across the financial services industry to establish compliance and reduce regulatory risks. By leveraging our program governance toolkit and strong stakeholder communication, Monticello enables clients to successfully navigate complex regulatory directives and turn challenges into opportunities to build effective business solutions. Our team partners with cross-organizational client teams and oversees the end-to-end execution for Consent Order remediation. With deep regulatory knowledge, change management expertise, and proven governance standards, Monticello successfully ensures global financial institutions can maintain a competitive advantage over industry peers while exhibiting sound market conduct and compliance within the regulatory landscape

SKILLS & KNOWLEDGE (Level of Difficulty)

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Enterprise Change Standards Implementation for IBOR Transition

Engagement Summary

In mid-2019, Monticello Consulting Group (Monticello) partnered with the Global Markets Technology team at a leading financial institution to support the delivery of a large-scale transition from IBOR-based interest rates to Alternative Reference Rates (ARRs) as mandated by the British Banking Authority. This program was initiated by the client in response to the need to change the core technology for Global Markets that supported pricing, trading, and risk management of products that utilized the IBOR interest rates. The goal of the program was to transform and enhance frameworks and capabilities through:

• Development and update of core technology changes for analytics, pricing, trading, and risk platforms to use the new ARRs

• The transition of the discounting methodology to ARRs for the transactions that have been cleared at the Central Clearing Counterparties

• Creation of an end-to-end testing framework for financial products that use the new ARRs

• Remediation efforts for ISDA client agreements that reference IBOR as the interest rate noted to govern those documents.  The agreements were updated with language to stipulate the fallback protocol to use ARRs when IBOR is no longer in use.

Monticello deployed resources across the program workstreams to support the delivery of technology solutions, as well as the Program Management Office (PMO), to track project plans, key milestones, risks, issues, and dependencies. The Monticello team combined their proven program governance toolkit and effective stakeholder communication to ensure key program risks and issues were successfully mitigated and resolved through sound governance.  The transition away from IBOR interest rates is a high-profile change for the industry and this changeover needed to be executed flawlessly in order for the client to demonstrate to their customers they were well equipped to provide the necessary support during this period of significant transformation. Deploying a dedicated Program Management Office to centrally manage program governance enabled Monticello to effectively execute on deliverables, utilize a clear communication strategy and maintain project momentum towards meeting major milestones in a timely manner.

Case Study Detail

PROJECT BACKGROUND

IBOR reference rates have been an integral part of the financial markets for decades and were used in a variety of financial contracts including mortgages, interest rate derivatives, and floating rate securities. After IBOR had been mired in scandal, oversight of the rate was taken over by the Financial Services Authority in 2012. By 2014, the Financial Stability Board recommended developing ARRs to replace IBOR as the core rate in financial contracts. At the time, the London Interbank Offered Rate was the benchmark for over US$350 trillion in financial contracts worldwide and the transition to a new reference rate would certainly be an arduous undertaking for any financial institution. Monticello’s client initiated the IBOR Transition Program to support the Global Markets Technology teams in their preparation for the transition to ARRs across front office and enterprise technology teams.  Monticello was engaged in 2019 to initiate the project and support the Global Markets Technology senior leadership team to drive this complex global transformation towards success.  

ENGAGEMENT OBJECTIVES

Program Management & Governance

The Monticello team provided program governance in support of the Global Markets Technology teams. Monticello also supported the PMO to drive the timely delivery of the key components of the program, inclusive of the foundational technology changes to support these changes, transition of discounting methodology at the central clearing counterparties, and new product enablement.  This was achieved through stringent execution of project plans, timely risk and issue management, and robust governance standards. The PMO function included the following responsibilities:

• Manage and report program deliverables leveraging the JIRA platform.

• Partner with workstream leads to identify and manage key issues, risks, and internal/external dependencies.

• Support testing efforts to ensure completeness of test plans, track progress and ensure stakeholder sign-off.

• Create and maintain the key artifacts for the program and store them in the central tracking repository tool for stakeholder visibility.

Enterprise Change Standards Implementation

The bank implemented a series of change standards to be fully implemented in 2021.  The goal of these standards was to ensure that organizational change would be subject to more robust oversight and supported through enhanced documentation. The Monticello team successfully embedded these enhanced standards across the bank, through the IBOR Transition program.  Major components of these change standards included:

• The requirement for all program details, as well as any technology change, to be entered and maintained in the enterprise change management tool.

• An enhanced permit to operate process for significant changes. This permit process included review with all directly and indirectly impacted stakeholders to ensure there were no adverse effect on the wider technology space.  Reviews included information and system architecture, business continuity, and information security.

• The need for all documentation to support the technology change to be completed in a time manner and stored, in a central repository for added review by enterprise PMO and audit teams.

BUSINESS VALUE

Monticello recognizes that there is no single approach to address the complex issues facing business leaders today and we worked closely with our client to implement solutions that were optimal for their business and to their stakeholders. By leveraging our governance toolkit, and strong stakeholder communication, Monticello helped our client successfully navigate complex regulatory directives and turn challenges into opportunities by building effective business solutions. Our team partnered with cross-functional teams to oversee the end-to-end execution for the IBOR transition. With deep regulatory knowledge, change management expertise, and proven governance standards, Monticello successfully ensured that our client was in a position to maintain their competitive advantage over industry peers while exhibiting sound market conduct and compliance within the regulatory landscape.

SKILLS & KNOWLEDGE (Level of Difficulty)

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Regulatory Reporting Compliance & Data Transformation Program

Engagement Summary

In 2021 Monticello Consulting Group (Monticello) partnered with the Data Management & Technology team at a leading financial institution to support the delivery of a large-scale regulatory risk remediation program to resolve shortcomings identified in a Matter Requiring Attention (MRA) notice raised by the Federal Reserve Bank (FRB). This multi-year program was initiated by our client in response to bank’s deficient firm-wide governance, systems, internal controls, and data quality measures that hindered its ability to submit accurate quarterly regulatory reports. The objective of this program was to automate key processes and improve data analysis standards in support of the operational and risk management functions tasked with producing the monthly reports. By successfully implementing these requirements, the Monticello team greatly contributed towards our client’s resolution of a pending MRA while minimizing a range of related regulatory risks.

• Regulatory Compliance Reporting

• Data Remediation

• Data Management

• Centralized Data Platform Build-out  

• Change Enablement

• Enhanced Validation of Internal Controls

• Risk Management

The Monticello team was responsible for designing, building, and operating the client’s Program Management Office (PMO), and facilitating integrated delivery across four program workstreams and several external service providers. By setting up a PMO to centrally manage the governance structure across program workstreams, the Monticello team effectively held stakeholders accountable to program deliverables and timelines and facilitated transparent program communications. Close tracking of milestones and prompt escalation procedures allowed the project to maintain strong momentum throughout the engagement.

Additionally, the Monticello team supported senior leadership teams and program sponsors with regular program updates including identification of key risks and issues. The Monticello team also developed and managed budgets and funding updates discussed in the monthly Steering Committee meetings.

Case Study Detail

PROJECT BACKGROUND

Financial institutions are frequently under regulatory scrutiny and remaining compliant with regulations is paramount always a top priority for C-suite executives and their Board. The Federal Reserve Bank issued an MRA and found our client lacks adequate firm-wide governance, systems, internal controls, and data quality measures to produce the necessary regulatory reports. Failure to resolve the MRA in a timely fashion could result in a public legal violation, enforcement action, fines, and damage to a bank’s reputation. To remediate the MRA risk and improve the bank’s data quality, regulatory reporting, internal controls, and technology systems, a multiple-year program was set up to plan and execute the action plan and roadmap.

ENGAGEMENT OBJECTIVES

Program Management & Governance:  Set up a program management structure and provided oversight to program stakeholders.  Facilitated decision-making and resolution of escalated risks and issues.

• Designed, built, and operated a Program Management Office (PMO)

• Drove ownership, stakeholder commitment, and adherence to deliverable dates on the plan

• Managed program issues, risks, and internal/external dependencies

Stakeholder Communication & Reporting:  Engaged internal and external stakeholders and informed of the program progress through formal and informal conversations that build mutual trust.  Assisted the stakeholders to tackle both expected and unexpected challenges of the program.

• Identified program stakeholders and engagement plan through a weekly and monthly program meeting cadence

• Facilitated program and deep-dive meetings to drive stakeholder engagement and decision-making

• Provided regular and proactive program update in program meetings, SteerCo, and Town Hall meetings

Financial Management: Managed the program’s multi-million budget to ensure program financial health was monitored and actions are taken promptly to address variances.

• Provided a monthly program financial update to program sponsors

• Monitored financials of the 3rd party internal and external service providers to the program

• Assisted Finance to re-balance program financials by adjusting resource allocation and using other measures

BUSINESS VALUE

Given the potential impact of an MRA to the bank, our client’s senior management, including C-suite executives, placed heavy scrutiny and oversight on this program to ensure a successful outcome. By leveraging Monticello’s extensive program management experience and strong stakeholder communication practices our team enabled our client to successfully deliver against a complex set of regulatory directives and internal obstacles. Our deep regulatory knowledge, change management expertise, and proven program management skills, allowed the Monticello team to provide seamless integration into our clients’ efforts to mitigate risks from MRAs and other adverse regulatory findings.

SKILLS & KNOWLEDGE (Level of Difficulty)

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Optimizing a Bank’s Prime Brokerage Business to Achieve Cost Savings and Accelerate Services Innovation

Project Background

As part of an ambitious restructuring in 2020, a market leading investment bank’s Prime Brokerage division approached Monticello Consulting Group to support the design and build of a merger of their two key business entities.  The goal of this ambitious effort is to optimize redundant and inefficient processes to achieve significant operational costs savings and accelerate services innovation. Strategically, the merged entities aim to offer new, differentiated, and competitive services to their clients. The target state infrastructure is being developed and implemented by the Monticello team across the next two years.

A Closer Look

Operationally, Monticello’s client recognized the need for a simplified structure to better monitor business growth susceptible to market volatility and to eliminate costly and redundant processes. The client envisioned a unified entity structure with best-in-class applications, streamlined business processes and increased automation across several international business locations. These strategic investments would accelerate time to market for client services and introduce cost optimization through application landscape unification, achieving a competitive edge over other large Prime Brokers.

Culturally, the client also realized how such a change could invigorate their organization and help them to connect more closely with their clients and ultimately attract new business. From an internal operations standpoint, the client also sought to improve employee engagement by challenging the team to deliver the highest level of quality to both internal and external stakeholders throughout the process.

How We Did It

By leveraging the Monticello Strategic Planning Playbook, the team guided the client through the initiation phase of the Prime Brokerage Simplification Initiative. Through research and analysis, the team began by evaluating all business areas impacted by the merger. Impacted business areas were then organized into sub-projects, which worked with business, operations and technology partners to define current state operating models, identify potential merger-induced risks, dependencies, and process changes.

Subsequently, as part of the planning phase, the Monticello team led stakeholder interviews and deep dive workshops to develop a two-year roadmap to roll out a new and transformed operating model for the merged entities.  The Monticello team developed the communications plan and articulating business requirements, ensuring that the target state operating model complemented the business with standardized applications and processes, and assuring that the merged entities did no harm to existing processes.  

Working in close partnership with the client, the team from Monticello: 

• Provided differentiated capabilities and best-in-class services for the client

• Adopted a standardized approach to the application landscape, eliminating redundancy as part of the new independent global structure and minimizing development and integration costs

• Leveraged existing technological solutions and enhanced capabilities that were tailored to the individual processes applicable to the business

• Introduced a high degree of standardized and automated business processes

Stakeholder Management

Effective stakeholder management is critical to the success or failure of a project. Impacted functions included multiple teams across the front and back office and key resources from each were engaged for their knowledge of the workflow and kept involved and informed as processes were documented and milestones were achieved. Successful stakeholder management also helped to reduce risk. The more we engaged key stakeholders, the better our ability to identify potential risks and issues that would stand in the way of success.

Staying Agile

With a project of this size and complexity, our client and Monticello agreed on the importance of adopting an agile methodology in order to guarantee effective project execution and delivery.

What does that mean for the client?

• Expertise with Agile Tools and JIRA to centralize and manage key project artifacts

• Close partnerships with Technology to ensure that critical success factors are clearly articulated and business value is realized.

• A deep understanding of sub-project and external dependencies, respectively

• Neat and standardized 5 blocker status reports with a clearly articulated “path to green”

• Rapid response to project or scope changes and practice of continuous improvement  

What’s Next?

Once the new structure is finalized, the client plans on evaluating the component processes within the new structure, with the goal being to standardize and harmonize the prime brokerage business’ end-to-end delivery chain throughout its multi-year transition/implementation. Business units are expected to realize significant cost savings through the elimination of redundancies and from the introduction of new functionality spawned by the synergies of this integrated structure. Monticello continues to provide its expertise and knowledge as it partners with the client on its journey to a successful rollout of this truly collaborative project.

About Monticello

Monticello Consulting Group is a management consulting firm supporting the financial services industry through deep knowledge and expertise in digital transformation, change management, and financial services advisory. Our understanding of the competitive forces reshaping business models in capital markets and digital banking are proven enablers that help our clients remain in compliance with regulations, innovate to be more competitive, and gain market share in new and existing businesses. By leveraging our Digital Transformation and Change Management services, Monticello will help transform your business operations and cultural mindset to one where excellence takes center stage.

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Ensuring Client Protection for Broker Dealers in Latin America

Engagement Summary

In late-2020, Monticello Consulting Group (Monticello) patent with the Business Control team at a leading U.S. financial institution to conduct an end2end assessment of the Latin America (LATAM) business to ensure operational compliance with relevant jurisdictional client protection rules. This program was initiated by the client to determine whether their affiliate LATAM entities should be onboarded into the greater global client protection program which would bring forth additional governance and standardization of practices across all regions involved. The goal was to perform a deep-dive analysis to identify areas of non-compliance and/or weakness in controls, propose solutions to address gaps, and determine whether the risk and impacts identified warrant the respective LATAM entities to be included in the Global Client Protection Program.

The Monticello team was brought in to establish and lead a program structure to ensure alignment with global compliance. The Monticello team introduced a three-pronged approach to drive success:

• Definition and Planning - Reviewed the scope of applicable entities in LATAM to assess risk. Additionally, the team identified key processes and associated stakeholders from applicable process owners.

• Review and Assessment - Partnered cross-functionally with the regional regulatory, compliance, and legal team to identify all relevant client protection regulations. Using the in-scope regulations as the foundation for our end-to-end review, the team held deep-dive review sessions with process stakeholders to align processes against regulatory requirements.

• Proposed Solutions - The team presented their key findings back out to the greater global client protection program which outlined the areas of weakness or non-compliance, categorized them into the process or tech-aligned enhancements, and established a remediation plan to address and mitigate these gaps.

The region proved challenging due to incongruent procedures and data gaps. Monticello’s Financial Services Advisory team brought the requisite industry expertise, frameworks, stakeholder management, and leadership skills to achieve the client’s ambitious timeline.

Case Study Detail

PROJECT BACKGROUND

Client protection rules are a top priority for any broker entity and require a registered broker to protect and maintain custody of client assets and safeguard client money. In addition, the rules require the broker to segregate the firm’s proprietary assets from client assets to prevent improper use. Although regulations vary across regions, there are benefits through the standardization of common practices and alignment to a global approach in the handling of certain processes such as onboarding, treatment of segregated accounts, and client assets/money protection. For these reasons, the Global Client Protection Program extended its scope into LATAM to determine whether there is a business need to incorporate these entities based on their overall risk and impact.  

ENGAGEMENT OBJECTIVES

Program Management

Implemented a program governance structure for a large global bank and managed the overall program plan, deliverables, and timeline. Coordinated with key stakeholders across finance and operations to align and reconcile their process, risks, and controls with jurisdictional regulatory requirements.

1. Created program management templates used to monitor the progression and status of each key-process throughout the various phases within the program

2. Identified key risk areas where there were insufficient client asset controls in place and created high-level process flows to pinpoint areas of weakness or non-compliance

3. Ensured stakeholder engagement and buy-in for proposed recommendations and downstream changes to their underlying operational model

Financial Risk and Control

Reviewed jurisdictional regulatory requirements and implement business controls. Analyzed existing business model, identified opportunities for improvements, and proposed solutions to address key risks.

1. Partnered with the legal and regulatory team to conduct a full assessment of how the regulation governs the opening of segregated accounts, client asset segregation, and client money calculation processes

2. Created a standardized process inventory tool to reconcile the regulatory requirements with the individual process currently in place to achieve compliance

BUSINESS VALUE

Monticello Consulting Group is a trusted partner serving the financial services industry with a consistent track record of helping clients reduce their regulatory risks while improving operational efficiencies. By working with our client to successfully translate complex global regulatory requirements into effective business solutions, Monticello implemented the necessary risk and control framework to ensure compliance in LATAM. Monticello brought to this complex initiative by providing the client with the necessary leadership in both stakeholder and program management to lead this program to completion. Our team conveyed strong governance standards, regulatory knowledge, and end-to-end process understanding to ensure effective change management while meeting the client’s strategic objectives.

SKILLS & KNOWLEDGE (Level of Difficulty)

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Raising the Bar for Broker-Dealer Standards of Conduct Through Regulation Best Interest

Engagement Summary

In early 2020, Monticello Consulting Group partnered with the regulatory compliance function within the capital markets unit at a leading bank on their Regulation Best Interest (Reg BI) program. The goal of the engagement was to enhance the standard of conduct for investment recommendations to retail customers by broker-dealers and their registered representatives ensuring that broker dealers act in the “best interest” of their retail customers.  Monticello were tasked with demonstrating to the regulator that the bank’s broker-dealer function has a reasonable basis to believe that recommendations are made in the retail customer’s best interest. In order to satisfy this regulator’s request, the broker-dealer was to comply with this overarching obligation and its four component parts:

Disclosure Obligation - Prior to or at the time of a recommendation, the broker-dealer must provide the retail customer, in writing, with a full and fair disclosure of the scope and terms of the relationship, the capacity in which the broker dealer is acting, the fees and costs associated with the services provided, as well as all material facts relating to conflicts of interest associated with the recommendation.

Duty of Care Obligation - The broker-dealer must understand the risks, rewards, and costs associated with the recommendation and exercise reasonable diligence, care, and skill when making the recommendation. In an enhancement to FINRA’s Suitability Rule, which only considers the ‘suitability’ of a given recommendation, the care obligation goes further and ensures that the recommendation is made in the customer’s best interest and the broker-dealer does not place their own interests ahead of the retail investor. If the implementation of this obligation proves successful, FINRA’s Suitability Rule may soon become redundant.

Conflict of Interest Obligation - A conflict of interest is defined as an interest that might incline a broker-dealer, consciously or unconsciously, to make a recommendation that is not disinterested. The Conflict of Interest Obligation requires the establishment of policies and procedures designed to mitigate, prevent, or eliminate conflicts of interest that may create an incentive for a broker-dealer to place their interest above that of the retail customer.

Compliance Obligation - Tackling Reg BI as a whole, the broker-dealer has an obligation to establish, maintain, and enforce policies and procedures that address all components of the regulation and aid compliance with the rule.

Case Study Detail

PROJECT BACKGROUND

The establishment of Regulation Best Interest marked a major milestone for the SEC in their efforts to raise the standard of conduct for broker-dealers. Reg BI was adopted by the SEC on June 5, 2019 (and went into effect starting on June 30, 2020) and will significantly enhance protection for U.S. retail customers, or “two-legged individuals”, who receive recommendations from broker-dealers for the purposes of managing personal, family, or household wealth. Reg BI was designed to place investor interests ahead of the profit motivation of broker-dealers and registered investment advisers. As simple as that principle may sound, there is ample evidence to suggest that broker-dealers and those in investment advisory roles are not fully aware of the obligations they owe retail investors. At the same time, many retail investors are not sufficiently familiar with the standards, conduct, and fiduciary responsibilities their investment advisors are required to follow to protect their interests. Reg BI is centered on fairness and transparency for individual investors, which continues to be an ongoing priority for the SEC.

ENGAGEMENT OBJECTIVES

Change Management

In preparation for a go-live just five months after Monticello started on the engagement, the Monticello team created and managed the overall implementation plan, scope, deliverables, and timeline for the Reg BI program. Partnering cross-functionally with business and technology groups to create a set of new and revised policies and procedures that met the four component obligations of the rule, Monticello ensured the client successfully met its compliance requirements.

Financial Services Advisory

Monticello’s wealth of regulatory and compliance experience combined with its deep technical expertise facilitated the fast-paced development of reports to systematically capture in-scope clients and target counterparty remediation in line with guidance from the SEC. In parallel, the team worked closely with the bank’s FICC and Equities Client Onboarding function to develop a brand new Customer Relationship Summary (CRS) that the SEC required each broker dealer to deliver to retail customers, disclosing summary information about the firm: a “Form CRS”. 

BUSINESS VALUE

Monticello Consulting Group provides services across the financial services industry to ensure compliance and reduce regulatory risks. By working with clients to successfully translate complex regulatory requirements into effective business solutions, Monticello enables clients to implement the necessary risk and control framework to ensure industry challenges are turned into opportunities. Our team partnered with Business, Legal, Technology, and Sales & Trading to develop business requirements and oversee the end-to-end execution of a policy and procedure revision and a client onboarding enhancement for the Reg BI program. By leveraging our regulatory knowledge, project management expertise, and proven governance standards, Monticello successfully ensured global trading activity was undisrupted while undergoing a business-critical regulatory initiative.

SKILLS & KNOWLEDGE (Level of Difficulty)

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And Then There Was One: Consolidating Trade Booking and Lifecycle Management Systems for a Global Bank

Engagement Summary

Banks with high volumes of capital markets transactions maintain a wide range of product-specific trade booking and life-cycle management systems. For example, equity trading divisions will typically have separate systems for their cash equities, equity derivatives and stock lending/borrowing activities. Similarly, fixed income, FX and commodity trading divisions will have their own asset class and instrument-specific systems. This results in an unwieldy and highly complex IT infrastructure that requires vast quantities of human and financial resources to maintain. It also creates significant dependency and reliance on vendors for any major system changes, upgrades and ongoing product support. In 2018, the capital markets technology division of a global US banking institution retained Monticello Consulting Group (MCG) to assist with a large-scale transformation program to address these challenges.

Monticello’s client embarked on a multi-year initiative to build a centralized platform to accommodate a wide range of capital markets asset classes and instruments. The ultimate goal was to migrate all of the bank’s financial instruments onto this single system, yielding significant cost savings through the elimination of vendor fees and a reduction in overhead costs. In addition, a single centralized data model will reduce the efforts to meet regulatory reporting requirements and fulfill the reporting needs of internal stakeholders. The centralized platform has the added benefit of adhering to the ISDA Common Domain Model for derivatives products, which facilitates automation of back-office and reconciliation processes by using a standard representation of derivatives trade life-cycle events.

The implementation of a universal transaction platform is an ambitious undertaking that requires close collaboration between multiple technology groups, front office users, operational groups, risk management and finance partners. MCG consultants support our client’s executive leadership team with key program management and application integration expertise.

Project Background

Maintaining a large number of front-end trade booking and life-cycle management systems is both costly and inefficient. Consolidating disparate systems into a single platform will enable our client to stay competitive and to reduce inflated capital markets transaction processing costs. This program was initiated as a result of a cost analysis exercise which identified that our client’s per-transaction costs were significantly above those of peer institutions. In response, the bank developed a compelling business case which demonstrated the direct savings and operational efficiencies that could be gained through system integration and consolidation. Given the scale and complexity of the program, the client requested expertise from MCG to support several key efforts.

Engagement Objectives

Program Management:

MCG revised and streamlined the program governance structure for the client’s technology organization. We implemented an automated project management and reporting framework based on the bank’s existing Program Management Office (PMO) infrastructure. In addition, MCG developed the materials and framework used to communicate to the governance groups and the technology initiative oversight teams.

Testing Governance:

MCG partnered with the client to manage the development and implementation of the testing and reconciliation framework required to validate pre-production releases vs. conditions in legacy environments. The team created a streamlined and coordinated release playbook to manage activities across a large group of stakeholders within the various lines of business. MCG consultants obtained stakeholder sign-offs, oversaw software releases and maintained a documentation archive to capture all relevant supporting artifacts.

Client Value

MCG is a specialized service provider with knowledge and expertise delivering large-scale transformation programs. Our deep 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 competitive and gain market share in new and existing businesses. By leveraging our core practice areas covering Agile transformation, program management, and integration governance for complex change, MCG positioned its client for success by delivering the initial build-out of its proprietary booking and life-cycle technology solution. Our innovative program management approach allowed client stakeholders to drastically reduce the time spent updating multiple project plans and coordinating status updates. Instead, the client focused its time on meeting the milestones required to achieve the program’s rigorous schedule.

Leading Change for a Global Bank: Consolidated Audit Trail (CAT)

Engagement Summary

Monticello Consulting Group (MCG) partnered with the Non-Financial Regulatory Reporting (NFRR) team at a tier 1 global bank to help lead the transition of Order Audit Trail System (OATS) reporting to a new technology platform while also leading the planning and implementation of upcoming CAT reporting requirements. MCG’s rigorous program management and testing governance methodologies, prior experience in the OATS space, end-to-end process understanding, and timely execution helped achieve the business objectives for our client and prepared them for CAT reporting obligations.    

Specifically, MCG was brought on-board to manage the following:

Successful implementation was critical for the bank to fulfill a regulatory commitment and launch the new reporting engine which will also support CAT. MCG continues to support the operations team for the upcoming CAT requirements through planning, stakeholder management and program leadership. The MCG team recently developed an operations stability plan establishing end-to-end controls from data sourcing and aggregation, transmission and post submission to better manage increased CAT reporting requirements and stabilize BAU. MCG has partnered with the client from the start by planning and structuring the program, setting up testing best practices and ensuring the build per CAT regulatory requirements.

CAT Reporting Timeline (as of June 2019):

Project Background

The SEC rule 613, CAT, aims to track lifecycle activity throughout the U.S. markets in National Market System securities and identify the broker-dealers handling them, thus “creating a comprehensive consolidated audit trail.” CAT’s primary objective is to enhance the ability of the SEC and Self-Regulatory Organizations (SROs) to oversee trading in the US equity and listed options markets. CAT greatly expands on the requirements of the Order Audit Trail System (OATS) regulation, which was adopted in 1998. Firms who have processes and controls in place for OATS will need to conduct gap analysis and extensive planning in order to ensure a smooth transition to CAT, which requires significantly increased data reporting requirements.

Engagement Objectives

Program Management:

The MCG team planned and managed execution of OATS UAT involving various Order Management Systems (OMS) and a reporting system while partnering with IT for defect resolution and production roll-out. Authored CAT BRD ensuring each OMS complies with the latest data dictionary requirements and planned for CAT testing. Established controls and escalation points for the various systems and support teams listing out the processes as part of the operations stability plan.

Testing Governance:

Created a detailed UAT plan highlighting scope, approach, and execution strategy of OATS and CAT UAT. Created UAT test scripts ensuring full scenario coverage for each order management system. Validate testing results, identify defects, perform root cause analysis and coordinate with IT to manage defect resolution. Managed all UAT cycles, engaging the OMS responsible for OATS generation and obtaining signoffs for production release.

Business Value

MCG assists clients across the financial services industry in implementing the necessary infrastructure to ensure compliance and reduce regulatory risks. The MCG team through its planning and approach formed a strong partnership with the OATS operations, technology and change management teams, and gained the trust of the stakeholders early on to ensure that the new platform is fully verified and tested before accepting it as the BAU reporting engine. MCG’s comprehensive testing techniques and governance, strong project management practices and expertise in this area helped the client achieve regulatory commitments, compliance and business objectives.

Leading Change for a Global Bank: IBOR Replacement for Wholesale Banking

Engagement Summary

The wholesale banking technology organization of a top 10 global commercial bank engaged Monticello Consulting Group (MCG) in late 2018 to help lead and manage the program to transition off Interbank Offered Rates (IBOR).  The business outcome being sought was a transition of the bank’s wholesale loans business from IBORs to new alternate reference rates, such as the Secured Overnight Financing Rate (SOFR) in the US and Canada and the Sterling Overnight Index Average (SONIA) in the UK.  MCG was brought in to advise on the program structure, define the target outcomes, and provide ongoing governance for the multi-year IBOR replacement program to prepare the bank to offer alternate reference rates to its wholesale lending customers in the US and European markets by the end of 2019, with other geographies to follow in 2020.

The MCG team designed a program governance structure to support multiple workstreams comprised of wholesale credit product owners, agile scrum delivery teams, developers and testing teams, as well as operational and business process owners. In addition, MCG supported senior leadership teams and program sponsors by providing ongoing management communications including the technology application roadmap, product and release management reporting, along with key risks and issues and overall program updates for steering committee decision-makers. The structure below summarizes the program governance implemented by MCG:

Project Background

Global regulatory standards published in 2018 require all financial institutions to discontinue issuing IBOR-based loans and derivative contracts by 2021 and replace these products with alternative reference rates based on regional requirements. To stay competitive in the wholesale lending market and maintain market share, our client is making significant technology and operational investments to be prepared to support SOFR and SONIA rates in lending contracts as early as Q2 of 2019. This program was initiated as a result of a combination of pending regulatory requirements and business efforts to remain competitive.

Engagement Objectives

Program Management:

Designed and stood up the IBOR replacement program governance structure for the wholesale banking technology organization. MCG advised on the design of an independent PMO to ensure all changes to the client’s systems and processes were delivered as required by the business, operations, and regulatory mandates for the IBOR replacement program. 

Testing Governance:

Developed testing plans with technology and business teams to track the effectiveness of technology enhancements being introduced as a result of this program. Conducted multiple end-to-end testing cycles engaging application owners and project working groups within the wholesale credit line of business. Obtained stakeholders signoffs to allow software releases and new operational processes enablement.

Business Value

Monticello’s team, through a continuous partnership with wholesale banking technology and operations teams, positioned our client for success in developing the capability to offer alternative reference rates in wholesale lending contracts. Our rigorous program management and testing governance methodologies, end-to-end process understanding, aptitude for risk-sharing, and timely execution supported the tangible business outcomes for our client to be ready for this monumental shift in interest rate benchmark reform for global debt instruments.

Uncleared Margin Rules: Managing a Highly Visible Global Regulatory Mandate for Readiness and Go-Live

Engagement Summary

Since the first over-the-counter (OTC) derivatives margin rules rolled out in 2016, large broker-dealers and global banks have faced increasing compliance costs, all the while competing with central counterparty clearing houses. To stay relevant in the OTC business, our clients have invested significantly in technology solutions aimed at streamlining operations and client onboarding processes. With deep experience managing regulatory compliance programs, Monticello has been selected as the choice partner to maximize return on investment for upgrading collateral platforms to keep our clients in compliance with Unclear Margin Rules (UMR).

In 2020, buy-side firms such as asset managers, institutional investors, private equity firms, and hedge funds will become subject to UMR Initial Margin (IM) regulatory requirements. The number of counterparties coming into scope for Phase 5 of UMR will increase from the current count of a few dozen large banks and broker-dealers to thousands of trading counterparties by September 2020. To support this significant increase in counterparty inclusion in the regulation, global banks are upgrading their technology platforms and processes to support a monumental transition for their buy-side clients. Third-party solutions, aimed at streamlining the legal document negotiation process, are attempting to use UMR as an opportunity to digitize a historically manual negotiation process. Monticello has helped our clients identify viable third-party solutions, assess the technical and operational challenges associated with each solution, and facilitate a smooth integration with the selected vendor solution.

The table below shows threshold amounts that are gradually lowered, falling to $8 billion in notional amount in Phase 5 by September 2020. As the IM threshold is lowered, the number of counterparties that will be subject to UMR dramatically increases.

*Amounts reflect an aggregate average notional amount (AANA) for March, April and May of each phase-in year

Project Background

Since 2015, Monticello has partnered with large banks, broker-dealers, and asset managers subject to UMR for OTC derivatives.  Monticello continues to support clients with program management and testing governance services while also leading operational improvements and enhancements to trading processes. Our expertise in testing governance includes client onboarding, legal documentation negotiation leveraging new cloud-based platforms, collateral processing for prime brokerage clients, portal-based integration with buy-side clients thus offering margin pricing tools, and access to a large network of third-party custodians.

Engagement Objectives

Program Management:

Raise program awareness across OTC derivatives sales and trading desks.  Manage the execution of go-live activities detailed in a “runbook” that engages legal, operations, technology, and change teams.  A runbook contains the go-live tasks and coordinates their execution across the many departments involved in the event over a defined time period.  Typically, the time period begins several days or weeks prior to the go-live event and stretches past go-live to ensure the production environment is stable and clients are not negatively impacted by the large changes being introduced to the business processes and technology platforms.

Testing Governance:

Conduct multiple end-to-end trade and margin processing testing cycles, engage application owners within the UMR ecosystem.  Obtain stakeholders’ signoffs to allow software releases to production and enable new operational processes.

Perform reference and trade data quality checks and track the collateral processing of initial margin calls within service level agreements.  Operate a “control room” to gather critical issues and report service status to program stakeholders during the go-live period.

Service Introduction:

Business Value

Through a continuous partnership with our clients’ technology and operations teams, Monticello has been able to support the tangible business outcomes sought by our clients to achieve compliance within the new UMR regulations. Monticello’s rigorous program management and testing governance methodologies, understanding of end-to-end business processes, willingness to shoulder delivery risk, and timely execution has supported our clients’ strategic objectives.  This partnership has enabled our clients to retain market share in the competitive landscape of OTC uncleared swaps trading.