Risk & Compliance trends, May 2015

The outlook is FINE ..... but a deep depression looms across the Atlantic 

The global Regulatory weather forecast has often been turbulent. However the banks in the US, the UK and Europe have battened down the hatches and are bracing themselves for significant scrutiny regarding the Forex rigging scandal.

First up however was an old friend from the past - LIBOR. Deutsche Bank was fined a record $2.2bn, fired seven senior executives and perhaps more tellingly admitted to criminal, yes criminal, charges!!!. The fine was imposed by regulators in the US and the UK as it was revealed the extent of the market manipulation in London, Europe and Tokyo. The FCA in the UK and in the US The Department of Justice, Commodity Futures Trading Commission and New York's Department of Financial Services imposed the fines. Of particular note is Benjamin Lawsky of NY's DFS - they fined Deutsche $600m but more telling forced the German Bank to implement an independent monitoring system.

And all this on the back of Deutsche Bank's operation in the US failing the recent CCAR program. The cold snaps to hit Boston and NY this winter have abated and the green shoots of Spring are appearing - one thing for sure is that it is going to be a long hot, sticky and sweaty summer for the Risk & Compliance teams at the German Bank.

20 years ago (virtually to the day) saw one of the biggest Risk & Compliance failures in our lifetime - the collapse of Barings bank due to a lack of Governance and Control. This was to change (well supposedly) the way the Financial services industry was regulated and also ensure that a catastrophe like that could not occur again. Well we know that they did and we know that they will keep coming.

That was the Nineties and we have had the Noughties (I prefer the Naughties) and we are now in the Teenies. We all know that teenagers need limits and boundaries or they will mis-behave. Banks face a number of regulatory compliance challenges these days and the list keeps growing. The vast number of requirements, the time it takes to fully implement some of the rules and the regulators' expectations regarding increased data access are placing unprecedented demands on the compliance functions.

As a result of these issues there is a real trend in the industry to establish a central regulatory management office. We have seen large Finance transformation programs, then Finance & Risk transformation programs, then Risk transformation programs and now ….. Compliance transformation programs. The role of a central RMO would drive consistency and identify common regulatory requirements across the organisation. The ultimate dream to stop those nightmares keeping the CRO and CCO awake at night - A continuous regulatory compliance and control service.

We talk about Black Sawn events in Risk Management (events you can never predict). In Compliance though the industry cannot afford a Black Ostrich event - burying the head in the sand. We are at the crossroads of Economic uncertainty globally, particularly in Europe. God help us if the Federal Reserve ever considered raising interest rates …..

The Return of the King - A New Framework for Market Risk

New regulation is slowly emerging from the sleepy slopes of Basel which will have the largest impact on market risk calculations since the mid 1990's.

The Fundamental Review of the Trading Book outlines a revised framework and proposes a number of specific measures to calculate Market risk. The scope is wide and covers:

• Reclassification of the definition of the boundaries between the Trading and Banking Book
• Introduction of a mandatory Standardised model
• Improvement in Capital Measures for Internal models approach using Expected Shortfall instead of VaR
• Incremental Default Risk
• Capital add-on related to stress testing and scenario analysis
• Significant increase in the number of simulation runs for Internal Model approval

The full regulations are expected to be implemented in 2017 but there are major implementation issues for Banks with current Internal model Approval. It appears that the rumours of the death of the Finance Quants are very much exaggerated!!!