Dodd Frank
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Dodd Frank

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This paper discusses why Dodd-Frank may be the

This paper discusses why Dodd-Frank may be the
impetus for companies to reassess their existing
technology to become more competitive.

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Dodd Frank Dodd Frank Document Transcript

  • The Dodd-Frank Act –WHITEPAPER A Catalyst for Change BY GARY CABLE This paper discusses why Dodd-Frank may be the impetus for companies to reassess their existing technology to become more competitive. 1
  • Executive Summary On July 21, 2010, President Obama signed into law the Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173), the most significant piece of financial services legislation since the Great Depression. This legislation places a number of stringent requirements on financial companies to increase transparency, clear more products on exchanges, establish appropriate liquidity and hedging mechanisms, and improve risk reporting and compliance management. It may present an excellent opportunity to reduce redundancy of siloed systems, increase straight through processing and help institutions be more responsive in introducing new products and President Obama signed into law the Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173), services to emerging market opportunities. As the implementation of Dodd-Frank is being determined by organizations such as the SEC and CFTC, many CIOs are struggling to figure out how they will consolidate the data and operations between disparate systems to support the emerging requirements. These changes both pose challenges and offer opportunity for IT organizations. They could actually be the impetus to transform IT. This research note first reviews the major provisions of the Dodd-Frank Act and then considers how these new compliance requirements will affect financial services organizations. Next, it considers the relative changes required for technology organizations and concludes with some suggestions for positioning technology to support Dodd-Frank.THE DODD-FRANK ACT – A CATALYST FOR CHANGE / EXECUTIVE SUMMARY 2
  • The Business Objective of Dodd-Frank Prior to the recent global crisis, departments within financial services companies had autonomy in creating their own platforms – without coordinated ability to assess overall system functionality and information Systems were built to address the needs of a specific asset class or legal entity and had regional variations. Dodd-Frank will require them to look beyond their previous siloed implementations and address risk and liquidity much more holistically. Dodd-Frank will require them to look beyond their previous siloed implementations and address risk and liquidity much more holistically • Transparency & Accountability for Exotic Instruments, including the Exchange Trading, Payment, Central Clearing, and Settlement of standard OTC products • Making Risks Transparent, requiring hedge funds and private equity advisors to provide information about their trades and portfolios necessary to assess systemic risk. • Disclosure of information about underlying assets, along with data collection and publication through clearing houses or swap repositories – with those trading mortgage-backed securities to retain at least 5% of the credit risk. • Unwinding of internal assignment of swaps and generation of back-to-backs between various legal booking entities within a bank holding company to quickly sort out which entity controls and which party has what rights in those assets • Volcker Rule – risk-mitigating hedging activities and the determination of documented correlation between the asset and the hedging instrument • Credit Exposure from derivative transactions added to banks’ lending limits and a 15:1 leverage requirement ensuring dealers and major swap participants have adequate financial resourcesTHE DODD-FRANK ACT – A CATALYST FOR CHANGE / THE BUSINESS OBJECTIVE OF DODD-FRANK 3
  • The Impact to Information Technology Organizations CIOs will need to look at the integration and consolidation of functions and data between disparate systems. They will need to collate data to build an organization-wide and integrated view on risk and provide flexible reporting so data can be shared with external regulatory bodies. 0010101010 0010101010 1010100100101101 1010100100101101 0101011101001001010 0101011101001001010 101000101001001 101000101001001 100101001 100101001 CIOs will need to look 0010101010 at the integration and 1010100100101101 0010101010 1010100100101101 0101011101001001010 101000101001001 consolidation of functions 0101011101001001010 100101001 101000101001001 100101001 and data between disparate 0010101010 systems 1010100100101101 0101011101001001010 101000101001001 100101001 • Overcoming siloed implementation of Regional-, Business Unit-, Asset Class- or Legal Entity-based trading systems and migration to a centralized risk management environment • Global visibility into Positions and Trades, Valuation Models, Risk Characteristics, Liquidity and Capital Reserve information • Migration of OTC instruments into the exchange-traded books of business for Credit Swaps Fixed Income-based derivatives and off balance sheet instruments, derivatives which trade fuel, power, emissions or other commodities, Currency Forwards, Spot and Options, Exotics and Strategies to name a few • Increased Straight-Though-Processing (STP) and reduced inter-entity transfer to reduce cost & complexity, to reduce or eliminate back-to-backs and better track assignment of Swaps • Global availability and validation of data of analytical models for consistent valuation, risk identification and disturbance testing • Evolution from the traditional Front-, Middle- and Back-office model to an environment that supports global views of positions and trades and use of specialized business functions based on events within the trade lifecycleTHE DODD-FRANK ACT – A CATALYST FOR CHANGE / THE IMPACT TO INFORMATION TECHNOLOGY ORGANIZATIONS 4
  • Leveraging Dodd-Frank – An Opportunity for Change Over the last decade most companies have sought out ways to improve their enterprise IT systems – with the expectation that these enhancements would reduce costs by improving business processes. Unfortunately, far too many of these IT initiatives have been shelved before they could yield the desired outcome. Financial organizations are beginning to see that Dodd-Frank will require IT organizations to implement some of these projects that have taken a back-seat to other priorities over the past several years. Finally, enterprise projects should get a priority. • Leveraging Service Oriented Architecture (SOA) to support reuse, improve data provisioning, expand STP, better support business process changes and reduce or eliminate costly and time consuming batch processing and error prone manual intervention • Implementing long needed data rationalization, consolidation and provisioning to improve accuracy, reduce cost, better centralize and evaluate risk, support regulatory reporting and business decision support processing • Addressing legacy platform migration and consolidation, based on decades of tactical siloed development to reduce operational costs and risk Figure 1 — Redundant Silos of Business FRONT OFFICE MIDDLE OFFICE BACK OFFICE Functionality Order Pricing/ Risk Collateral Clearing Settlement Mgmt Rates Equities Mgmt Order Pricing/ Risk Fixed Income Collateral Clearing Settlement Mgmt Rates Rates Mgmt US Order Pricing/ Risk Collateral Clearing Settlement Mgmt Rates FX Mgmt Order Pricing/ Risk Collateral Mgmt Rates Commodities Mgmt Clearing Settlement Order Pricing/ Risk Collateral Clearing Settlement Mgmt Rates Equities Mgmt Order Pricing/ Risk Fixed Income Collateral Clearing Settlement EMEA Mgmt Rates Rates Mgmt Order Pricing/ Risk Collateral Clearing Settlement Mgmt Rates FX Mgmt Order Pricing/ Risk Collateral Mgmt Rates Commodities Mgmt Clearing Settlement Order Pricing/ Risk Collateral Clearing Settlement Mgmt Rates Equities Mgmt ASIA-PACIFIC Order Pricing/ Risk Fixed Income Collateral Clearing Settlement Mgmt Rates Rates Mgmt Order Pricing/ Risk Collateral Clearing Settlement Mgmt Rates FX Mgmt Order Pricing/ Risk Collateral Mgmt Rates Commodities Mgmt Clearing SettlementTHE DODD-FRANK ACT – A CATALYST FOR CHANGE / LEVERAGING DODD-FRANK – AN OPPORTUNITY 5
  • Enterprise Architecture Updates SERVICES Services Architectures can be used to decouple positions and trades from previously siloed implementations and can be accessed via the Enterprise Service Bus (ESB). SOA-based security and entitlements implementation can be used to allow controlled sharing of positions and trade information without exposing restricted (e.g. client) information to implement centralized risk management. VaR and Market Risk can be based more on actual positions rather than requiring simulations and multi-business unit, legal entity or regionally-based roll-up of reporting Controlled sharing of information. positions and trade Events and underlying information about trade information without pricing, tranches, securities availability, index exposing restricted and basket composition changes, changes to path-dependent derivatives, implied leverage (e.g. client) information on the book of business, etc. can be better to implement centralized integrated, monitored and captured throughout the trade lifecycle through SOA orchestration risk management and event management. SOA also provides mechanisms that will support ring-fencing of legacy systems, provide an abstraction layer between them and the user and allow for incremental migration rather than using a ‘big bang’ approach. DATA Updated Data Architecture and Governance will better identify, rationalize, consolidate, manage, secure and provision data from multiple sources. This will be critical for both centralized risk management and for regulatory reporting. Identifying redundancy and ‘gold’ sources of data will provide immediate value through consolidation of costs, ease of access and increased data quality. Implementing data provisioning will in turn help support the analysis of the systems that produce and consume data.THE DODD-FRANK ACT – A CATALYST FOR CHANGE / ENTERPRISE ARCHITECTURE UPDATES 6
  • Figure 2 — SOA diagram Figure 2 – SOA diagram CHANNELS PORTALS SALES AND TRADING OPERATIONS COMPLIANCE RISK CLIENT MANAGEMENT FINANCE CHANNEL SERVICES Single Sign-on, Session Mgmt, Context (State) Management, Cache Management, Personalization/Customization APPLICATION SERVICES SECURITY SERVICES ENTERPRISE SERVICE BUS BUSINESS SERVICES GLOBAL POSITIONS AND TRADES Liquidity Order Pos Price/ Compliance Capital Collateral Mgmt Billing Equities Fixed Income FX Commodities Mgmt Mgmt Mgmt Rates Monitoring Controls & Rates Earnings Mgmt Reconciliations Stocks Fwd/Future Energy Liquidity Market Risk Queue Legal Controls Loan Processing Static Data Mgmt CDO/CDS Monitoring Agreements Converts Spot Metals Credit Risk Product Trade Enrichment Settlement Cap/Collar Tax Controls Deriv Deriv Agri Operational Risk Collateral Reinv. Service Mgmt, Message Brokering, Content Based Routing, Service Switching, Dynamic Transformation, Error Handling, Orchestration, Security Management DATA MANAGEMENT AND PROVISIONING SERVICES INTEGRATION SERVICES Structured Data Persistance Documents and Contracts Protocols Data Movement External Data Provisioning LEGACY SYSTEMS Access Services Monitoring Data Stores (Regional and Global)THE DODD-FRANK ACT – A CATALYST FOR CHANGE / ENTERPRISE ARCHITECTURE UPDATES 7
  • Accelerated Implementation Freeborders has considerable expertise working with IT organizations in all areas where Dodd-Frank will have an impact. Our solution accelerators and services will provide companies with a “jump-start” on their implementation of Dodd-Frank. SERVICES • IT Portfolio Inventory, Current State Solution accelerators Assessment and SOA Maturity and services will provide Benchmarking in preparation for legacy modernization and platform migration to companies with a “jump-start” meet regulatory requirements on their implementation of • Business and Workflow Analysis, Business Dodd-Frank Functional Decomposition and Capabilities Mapping – to analyze and optimize operations and develop Service Level Agreements (SLA) and Service Level Descriptions (SLD) • Future State Visioning, Initiative Roadmaps and Architecture Blueprints – to prepare for a successful migration • Data Content, Source and Flow Analysis, Data Governance Models and Provisioning Use-case Analysis – to establish a foundation for centralized risk reporting • Program Development, Program and Project Management using our PMO in a Box tool kit for rapid set-up and reporting to support large-scale, global programs • Offshore Component-based Development to lower cost and accelerate development of interfaces, reports and data solutions SOLUTION ACCELERATORS These are the tools and services that help your planning, deployment and operational challenges related to Dodd-Frank and enterprise changes. • LEAF™ — Business functions will need to be analyzed and documented to show a linkage between those business functions and the IT capabilities required to support them. Service Level Descriptions (SLD) will also need to be defined. Data consumption and production will also need to be traced back to business and IT functions. The effort for this should not be underestimated and portfolio analysis and capabilities mapping tools will help reduce the complexity. LEAF™, Freeborders’ Lightweight Enterprise Architecture Framework, is an accelerator for IT Portfolio and Business Capabilities Mapping can be used support the kinds of analysis to document and structure the information that define “Where should or could I make change?” • PMO in a Box — This accelerator provides you with structure, template and approach for consistently managing your IT projects – planning, implementing, measuring and reporting. It provides the ability to structure complex, global initiatives that are required to address the sweeping changes required by Dodd-Frank.THE DODD-FRANK ACT – A CATALYST FOR CHANGE / ACCELERATED IMPLEMENTATION 8
  • GARY CABLE ABOUT FREEBORDERSGary Cable is Freeborders’ Vice President Freeborders is a new generation Consultingof Financial Services Business Consulting. and IT services company that enables IT andHe leads the IT Strategy and Enterprise Business leaders to leverage the power ofArchitecture practice and is the creator technology to boost business results.of Freeborders’ Lightweight EnterpriseArchitecture Framework (LEAF). Privately held and based in San Francisco, CA, Freeborders is recognized for offeringGary holds a Masters Degree in Computer best practices in outsourcing by combiningScience from the Illinois Institute of its award-winning global delivery model,Technology and has previously worked work CHINDUSSM, with its governance modelpremier institutions such as R.R. Donnelley, ATLASSM. Freeborders provides a full suiteAT&T Bell Laboratories, WPP Group, O’Connor of services that encompass all phases of aand Associates, Swiss Bank Corporation and project lifecycle including strategy, design,UBS AG. development, testing, implementation integration, and extended support.Over the past decade, Gary has focusedon management consulting, strategy and Freeborders is rated at Level 5 of the SEI’stechnology delivery to organizations such as CMMI, and is ISO 27001certified.SBC, General Motors, Swiss Re, ProgressiveInsurance, BB&T, TD Bank North, JP MorganChase, State Street Corporation, Credit Suisse CORPORATE HEADQUARTERSand Deutsche Bank. 150 Spear Street Suite 850 San Francisco, CA 94105 USA Tel: +001-800-889-3567 Fax: +001-415-433-9300 LEARN MORE ONLINE AT www.freeborders.com 9