Volcker Rule Compliance Program 2.0: achieving sustainability. Six things to consider

Transcription

1 Volcker Rule Compliance Program 2.0: achieving sustainability Six things to consider

2 Adopted as part of the Dodd-Frank Act, the Volcker Rule (the Rule) restricts many traditional banking activities with respect to trading and funds and has required extensive and costly changes to business and compliance processes. While some banks with smaller trading footprints have had to comply with lesser compliance program requirements or have been allowed additional time to comply with certain parts of the Rule s requirements (e.g., the CEO attestation), most banks have, for the most part, met requirements through the creation of new Volcker Rule-specific governance structures, supported by amendments to existing business, compliance and risk programs. As these structures and programs are largely manual and fragmented in nature, the challenge that banks now face is how best to transform them into mature, sustainable processes that are fully integrated into the bank s business-as-usual course of operations. While many banks are awaiting regulatory feedback before making further investments in and amendments to their Volcker Rule programs, much still could be done to leave the banks in a better position to maintain compliance over the long term as a matter of sustainable business practices. In the absence of sustainability across all aspects of the Rule from metrics and funds to technology to governance to CEO attestation banks may find themselves constantly scrambling to meet regulatory expectations. Full integration and the creation of a unified model for compliance that is consistent and repeatable across the organization are therefore crucial for achieving sustainability. Beyond mere compliance, Volcker Rule program sustainability has the potential to provide multiple benefits, stemming from the process and governance enhancements required by the Rule, which can be leveraged to improve risk-based decision-making, reduce compliance costs through more efficient use of resources and increased use of technology, and potentially reduce operational losses as a result of additional or enhanced controls. 1 Volcker Rule Compliance Program 2.0: achieving sustainability

3 1. G overnance and C EO attestation V olcker Rule compliance has been, and must continue to be, a true enterprise-wide program one that is supported by a robust and integrated governance structure that not only maintains regulatory compliance, but also facilitates the timely flow of relevant management information within and across the bank. Such a framework serves as both a control function and a means of providing clear, consistent and timely communication with key internal and external stakeholders ( e.g., regulators). 2. S urveillance and monitoring Few robust surveillance and monitoring solutions have, to date, been developed to support compliance with the V olcker Rule. Those solutions currently in place were established primarily with the goal of getting to the finish line. Banks are now contemplating using technology to convert these tactical, and largely manual, solutions into more repeatable, and potentially automated, processes in order to enhance their capabilities to identify potential impermissible trading and funds activities. A robust governance program should, for instance, specify the processes, criteria and information upon which the CEO will rely for attestation purposes. At the time of this writing, the CEO attestation process is in its infancy, with banks actively contemplating the questions of who, what, when and how in the short term before turning their attention to building a long-term process. Because the CEO attestation process operates on an annual cycle, banks will need to move quickly to a business-asusual process that relies upon shared responsibility and facilitates a shared viewpoint regarding the effective operation of the V olcker Rule compliance program. Important lessons, experience and the answers to outstanding questions will undoubtedly be gained ahead of the next attestation cycle. Q uestions of particular importance include: Are relevant stakeholders and decision-makers receiving the appropriate level of information on a timely basis? What enhancements need to be made to state of compliance reports and to reporting capabilities in general? H ow can steady-state reporting be achieved in order to understand compliance over time using consistent data? Additionally, how well has V olcker Rule oversight been integrated into the remits of standing governance forums and committees? Do the committee members fully understand V olcker Rule issues and requirements? And finally, with five regulators jointly owning the Rule, which agency should banks deal with on various issues? The understanding gained from these questions will help inform the plan to enhance and integrate the V olcker Rule attestation process as banks work to move away from the annual nature of the current process to an ongoing, collaborative approach. This shift in timing will, in turn, place less burden on the leadership responsible for the CEO attestation process and allow longer lead times to follow up on challenges arising from such process, as well as to remediate issues. Identifying existing routines that can mitigate gaps identified in the Rule attestation process will further support the decisions to integrate with existing programs. Technology, in the form of trade capture systems, data warehousing and aggregation tools, already plays a key role in the reporting of trading metrics. Beyond mere reporting, it is imperative for banks to consider how to leverage existing technology for a broader operational purpose arguably for enhancement of risk management and control. While interim processes and models certainly helped get banks over the finish line, they have not yet succeeded in implementing automated and repeatable solutions to better organize surveillance and monitoring of their funds activities. For instance, currently available vendor solutions used to identify whether a security is issued by a covered fund are not comprehensive enough to be used as a single source of data. Additional tools and processes, often manual in nature, are still required to provide appropriate surveillance and monitoring. This patchwork of tools often results in a suboptimal process that is time-consuming and overly burdensome. With respect to trading, banks likely have a number of monitoring procedures that are performed manually, with limited coverage of trading data through the use of sampling techniques. Technologyenabled surveillance could provide expansion in data coverage and the ability to implement more robust detection mechanisms to identify potentially impermissible proprietary trading. An important step toward sustainability is for banks, vendors, service providers and other affected institutions to work together to develop new and innovative ways of using existing technology to enhance the industry s capability for systemic self-monitoring and surveillance. While banks can work toward a sustainable solution internally, a truly robust solution would involve working cooperatively. V olcker R ule C ompliance P rogram 2.0 : achieving sustainability 2

4 3. M etrics The implementation of metrics reporting kicked off a large and far-reaching effort across the industry involving the identification of data sources, consolidation of large amounts of data spread across multiple databases and the development of new calculation and reporting capabilities. Though much of the data was already in place, new data elements, such as customer-facing trade ratios, were created, requiring new calculation methods and new ways of handling existing data. While first-wave metrics reporters have made substantial progress in automation, they have also made strides in achieving consistency, which is important for establishing baseline activity thresholds, identifying outliers and monitoring trends in metrics over time. Production of V olcker Rule metrics data over longer time horizons creates an opportunity for enhanced analytics, such as understanding the interrelation across different metric types. Further, overlaying additional non-metric information, such as volatility or other market data, may aid in substantiating potential anomalous behavior. Beyond the identification of impermissible activities, metrics reporting and the associated processes could be further used as new or more granular sources of business intelligence. For example, can new client data analysis capabilities enhance the ability to identify the bank s most (or least) profitable customers or transactions? H ow has the process of metrics implementation enhanced the bank s capability for timely management reporting? 4. T esting Given the brief time periods between the V olcker Rule implementation deadline, fiscal year-end and the CEO attestation requirement, most banks employed limited, stand-alone testing strategies for their Rule programs. As banks begin to develop Rule testing plans in addition to existing testing responsibilities, strong consideration should be given to an integrated approach across the bank. Merging the stand-alone approach from year one will reduce the overall strain on resources and time, as well as provide the additional benefit of reinforcing the new Volcker Rule risk culture. Full integration and development of a sustainable model will take time, and the path to achieve it will see varied tactical strategies, spanning from in-house solutions to assistance from third-party providers. Resourcing constraints and the shortage of knowledgeable personnel will undoubtedly be a driving factor. Despite the diversity of approaches, banks must consider the development of repeatable programs, ranging from adapting existing testing and risk assessment methodologies to creating new tools with a broader fit for purpose. Integrating resources to perform V olcker Rule testing and finding a standardized testing approach and methodology will help support sustainability. Without this type of integration, achieving a robust, repeatable and risk-based approach to Rulerelated testing will be difficult and may result in regulatory and compliance issues in the future. A push toward a fully integrated and dynamic data collection, analysis and reporting model is a daunting task given the complexity of today s banking organizations, as well as a strain on existing resources. Banks will need to identify and evaluate the benefits to revenue generating and control functions against the added cost of the technology enhancements in order to decide how to move forward. With wide support, the right level of focus and funding can be secured to start planning and implementing a sustainable target operating model at a broad level. 3 Volcker Rule Compliance Program 2.0: achieving sustainability

5 5. F unds With a longer lead time on compliance for legacy and illiquid funds, and many regulatory questions yet to be answered, the implementation of the funds-related portion of banks Rulecompliance programs remains a work in progress. The process has proven quite time-consuming, with many sticky issues to be examined and decided upon. Banks are actively weighing the costs and benefits for certain asset and wealth management activities, which may no longer be viable in a post-v olcker Rule environment. These traditional lines of business may now carry an onerous operational burden or the cost of compliance may be too great. For example, banks have traditionally acted as trustees and advisors to family trusts. Should such vehicles be regarded as covered funds, the cost of Rule compliance could render this line of business unprofitable or otherwise operationally infeasible. More importantly, one of the largest issues with respect to the Rule s covered funds provisions is that the funds world has traditionally been characterized by organic growth, high fragmentation and limited regulation. As a result, the development of comprehensive and automated solutions, whether industry-wide or bank-specific, allowing for systematic identification and categorization of covered funds and excluded funds has proven quite difficult. The fragmented and disparate nature of the funds, in the context of V olcker Rule compliance, together with those issues discussed above, will make the achievement of full sustainability extremely difficult and may even lead to further significant delays in achieving sustainability for this section of the V olcker Rule. Nevertheless, in order to avoid another rush to the finish line, banks should consider continuing to work with industry groups, such as the Securities Industry and Financial Markets Association ( SIFMA), and third-party vendors to develop flexible and workable solutions that are directionally in line with regulatory guidance. 6. Enterprise- w ide organiz ational changes As roles and responsibilities were already evolving in the post- Dodd-Frank regulatory environment, banks will continue to face cultural challenges in pushing the risk and control agenda and in becoming more proactive in their efforts to establish and sustain a robust risk culture. V olcker Rule compliance stretches beyond the Compliance Department, and responsibilities within other areas of the organization have been expanding. Certain groups, particularly Risk and controllers, have been asked to take on additional responsibilities that are outside their traditional remits and skill sets. In some cases, Market and Enterprise Risk groups have become involved in independent testing activities. Front-office responsibilities are shifting as well, with the Rule s explicit requirement that first-line personnel own the compliance program. As additional regulations affect banks, the current approach to assigning responsibilities will not be sustainable and could result in potentially over-burdening the responsible functions. In order for banks to start embracing the inevitably changing roles and responsibilities in the current regulatory environment, senior leadership will need to set the tone at the top. Clearly defining the necessity and value achieved from the changes in roles and responsibilities, as well as effectively communicating the changes around the enhanced risk culture, will filter through the organization over time. Senior leaders should show increased focus and support of these changes, with a clear value statement to the functions most affected, to help banks understand, accept and embrace these changes as they move toward an overall sustainable compliance model. V olcker R ule C ompliance P rogram 2.0 : achieving sustainability 4

6 Conclusion At the time of this publication, most banks are undergoing or awaiting regulatory examination. Many unanswered questions remain. Indeed, the safest course of action would seem to be wait and see. But considering that the underlying substance of the Rule is unlikely to change, any efforts necessary to address regulatory feedback would be well-supported by a sustainable underlying framework. Enhancement and integration across the key elements of the compliance program should provide the organization the agility to understand, plan and implement new requirements, while having the capability to continuously monitor, evidence, test and report compliance, both internally and externally. While the challenges to achieving sustainability in the context of Volcker Rule compliance are vast, banks that are fully committed to moving beyond mere compliance should ultimately be able to achieve competitive advantage in responding and adapting to regulatory and environmental change. 5 Volcker Rule Compliance Program 2.0: achieving sustainability

7 EY contacts Michael Barnes Principal michael.barnes@ ey.com Randy Gonseth Partner richard.gonseth@ ey.com Michael Patterson Principal michael.patterson1@ ey.com Leonard Chernow Manager leonard.chernow@ ey.com Abhishek Chaki Manager abhishek.chaki@ ey.com David Contompasis Executive Director david.contompasis@ ey.com Caroline Denis Senior Manager caroline.denis@ ey.com Desiree O Niell Executive Director desiree.oniell@ ey.com Nancy Reich Executive Director nancy.reich@ ey.com Nandini Roy Manager nandini.roy@ ey.com Nimna Varghese Senior Manager nimna.varghese@ ey.com V olcker R ule C ompliance P rogram 2.0 : achieving sustainability 6

8 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. is a client-serving member firm of Ernst & Young Global Limited operating in the US. EY is a leader in serving the global financial services marketplace Nearly 43,000 EY financial services professionals around the world provide integrated assurance, tax, transaction and advisory services to our asset management, banking, capital markets and insurance clients. In the Americas, EY is the only public accounting organization with a separate business unit dedicated to the financial services marketplace. Created in 2000, the Americas Financial Services Organization today includes more than 6,900 professionals at member firms in over 50 locations throughout the US, the Caribbean and Latin America. EY professionals in our financial services practices worldwide align with key global industry groups, including EY s Global Wealth & Asset Management Center, Global Banking & Capital Markets Center, Global Insurance Center and Global Private Equity Center, which act as hubs for sharing industry-focused knowledge on current and emerging trends and regulations in order to help our clients address key issues. Our practitioners span many disciplines and provide a well-rounded understanding of business issues and challenges, as well as integrated services to our clients. With a global presence and industry-focused advice, EY s financial services professionals provide high-quality assurance, tax, transaction and advisory services, including operations, process improvement, risk and technology, to financial services companies worldwide All Rights Reserved. SCORE no. BT NY ED none This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com