The document discusses a risk management forum that examined challenges for Japanese financial institutions operating in the UK. It summarizes key challenges as the rapid pace of regulatory change, requirements to change operating models, and increased reporting needs. Speakers at the event emphasized the importance of high quality data and flexible risk management systems to address these challenges, enable regulatory compliance, and provide business insights.

1. Is risk becoming too complex to manage?
Examining the risk management challenges
facing Japanese financial institutions
A summary of the July 2nd Hitachi Consulting Risk Management Forum July 2014
Supported by

2. Risk management is becoming more demanding
for all financial institutions. On top of this, being a
Japanese financial services provider, doing business
in the UK brings another set of challenges.
The July Risk Management Forum,
sponsored and hosted by Hitachi
Consulting, and supported by Hitachi
Europe and Oracle examined the latest
thinking in risk management as well as
the unique challenges facing Japanese
businesses in the UK.
The Forum was held on 2nd July 2014 in a
chic and tranquil private studio in the Andaz
Hotel, adjacent to Liverpool Street station in
central London. It was the first event of its
kind to exclusively focus on Japanese
financial institutions in UK – and attracted
more than 40 people representing over 20
Japanese companies.
The event’s expert speakers included:
■■ Isabel Viegas, Director – Financial
Services EMEA, Hitachi Consulting
■■ Paul Newman-Horne, Vice President
– Strategic Development and
Regulatory Reporting, Barclays Bank
■■ Stephen Skrobala, Senior Director
– Financial Services EMEA, Oracle
Following the presentations guests were
able to enjoy some delicious traditional
Japanese dishes prepared by the Miyako
restaurant and a Sake Tasting Experience
hosted by Ms Natsuki Kikuya from the
Museum of Sake.
Regulatory
landscape
continues to
become even
more complex

3. The new era of
risk management
and regulatory
reporting
Isabel Viegas, Director Financial –
Services EMEA, Hitachi Consulting
The credit crisis undoubtedly rocked the UK
economy and has left a legacy of volatility
and uncertainty in the financial markets and
the wider business community. In an
attempt to stabilize the situation and
prevent it from happening again, the
regulatory landscape continues to become
ever more complex, stringent – and
intrusive. Risk management simply cannot
be ignored and is now a central board-level
issue in every financial organization.
So what are the key risk
management challenges for
businesses operating in the UK?
■■ The speed of regulatory change
New legislation and regulatory
requirements are arriving at a pace that
makes them difficult to manage. Major
changes are occurring simultaneously
in Liquidity, Supervision, Capital,
Governance and Conduct. This is
putting a lot of pressure on companies,
mainly in the areas of Regulatory
Affairs, Senior Management, IT and
Infrastructure and other key functions,
like Risk, Finance and Treasury.
■■ Changes in operating model
Businesses are being driven to make
organizational changes to cope with
the demands of multiple local and
international regulators. Assets are
being split, with a significant focus
on separating Retail and Investment
banking activities, with the clear goal of
reducing the size of the balance sheet to
avoid institutions “too big to fail”. New
Capital requirements and new Liquidity
Ratios are re-shaping key areas, such
as strategy, products development
and pricing. These changes create new
challenges for the Financial Institutions:
–– Which businesses should be divested?
–– How to return to acceptable
levels of RoE?
–– How to make these results consistent?
These are the questions that all the
Financial Institutions are trying to answer
on a daily basis as risk management will
be the centre piece while running a
Financial services business.
■■ Reporting requirements have increased
exponentially in line with new regulatory
requirements. Risk Units require timely
and comprehensive data and it is
essential that they have the ability to
query and do ad-hoc analysis. It is the
time to see the regulatory requirements
not only as a mandatory request that
Financial Institutions must comply
with, but also as an opportunity
to embed these on the day-to-day
management and take advantage of
all the information and data available.
The revolution in risk management is here
to stay. The Financial Institutions that can
successfully cope with all of these
challenges will be the ones that are agile
and can quickly adapt to any new
requirements. And that means having good
quality data built on a comprehensive and
flexible data platform, so that it is auditable
and accessible and capable of feeding
analytics, control and reporting, but still
gives you the “big picture” to help drive
business strategy and enable increased
competitiveness. “Over the last couple of
years, risk managers have
been spending up to 70% of
their time on regulations.”
UK subsidiary of a Japanese Bank
Evolution of profitability in Banks Data
framework
Recent example of
regulatory demands
(data source: ECB Consolidated Banking data 2013)

4. The challenges of
compliance with
different
regulatory
demands
Paul Newman-Horne, Vice President –
Strategic Development and Regulatory
Reporting, Barclays Bank
The onslaught of regulatory change is
never ending – the number of applicable
laws and regulations is in the tens of
thousands. And things will only get
worse. Especially as regulators now
perform regular stress-test activities and
are also demanding propriety,
transparency, better risk management
and, perhaps most important of all,
accountable governance.
So it is clear that the situation for many
compliance functions is extremely serious.
More DATA is required, more standardized
and detailed CALCULATIONS are needed,
more REPORTS will be generated and
electronic SUBMISSIONS via XBRL will be
required. Reporting is also becoming more
granular, there is more emphasis on
benchmarking and industry initiatives such
as the EDTF (Enhanced Disclosure Task
Force) are aimed at creating a more
standardized way of reporting.
At the heart of all of this lies the need for
high-quality data. For example, in Barclays’
recent COREP submission there were 29,000
data points identified. So unless your data is
accurate you simply cannot be sure that the
proper controls are being applied to the
right pieces of data to comply with the
appropriate regulations. Poor data could
also result in PRA Section 166 reviews being
required – with an estimated cost to the firm
of up to £1 million or more.
Building constraints into the database can
improve overall data quality, as well as
defining referential integrity in the
database. Data profiling technology can
also be deployed to discover the quality
and characteristics of information, and
dramatically reduce the time and resources
required to find problematic data.
However, good data governance is about
more than just regulatory compliance. If
managed correctly, taking into account
processes, policies, reports and
organizational structure, it can bring other
benefits, such as greater efficiency,
visibility, cost savings and a wealth of
customer insights that can drive improved
service delivery and competitiveness.
Creating a robust yet adaptable data
management structure is essential for the
effective data governance and
consolidation needed to ensure regulatory
compliance. But it is also vital that you have
“Golden Sources” of information – or a
“Single Source of Truth” (SSOT).
“Regulators have no
intention of trying to make
it easy for us to understand
how various regulations
relate to one another.”
UK subsidiary of a Japanese Bank
A good Enterprise Data Management (EDM)
model allows you to collect, standardize,
consolidate and manage information about
securities, products, customers,
transactions, and other operations, so it can
be used by different business applications.
Of course, the reality is that many
organizations have multiple information
systems, each of which needs access to data
relating to the same entities e.g. customers,
so other technologies are commonly used
to create a SSOT.
However, it’s not just about having a strong,
state of the art data structure. You will also
need to ensure that there is a general
business appreciation of the need for data
quality, effective and transparent business
processes, and senior management
accountability for data quality and
governance.
The need
for high-quality
data

5. The business
benefits of a
comprehensive
risk architecture
Stephen Skrobala, Senior Director –
Financial Services EMEA, Oracle
When it comes to creating a risk
management architecture one of the most
important things is how you bring risk
together, so that it’s managed institutionally
rather than discretely, with pockets of risk
across the organization. There are many
different types of risk. For example, risk for
trading transactions is different to credit
risk, market risk, and interest rate risk. Some
will build up over time, while others are
more immediate. You can never fully
eliminate those risks, but if you understand
them you can mitigate them.
Ideally banks would have a “dashboard” to
monitor all types of risks. While that is a
nirvana state, it’s a model and a vision that
you can work towards. You can have
different risk models and different
measurements of risk, and you can try to put
those into an architecture that builds up to
create a way that enables you to look at the
overall structure of risk from an enterprise-wide
perspective.
A key area is data quality. When BASEL II
came out many banks invested in very
sophisticated risk management systems,
but they never made the investment in
data quality, so they were only able to get
to the wrong answer quicker! For effective
risk management you need to break the
data down, so each transaction has its
own specific information and values
associated with it.
Internal Business Regulatory Agencies Market
Enhance (process)
If you don’t get it right at the start and
create a “Single Source of Truth” then you
end up reconciling data and that’s much
more time-consuming, costly and resource
intensive. You also need ways of
aggregating and checking all of your data,
so that you can do proper reporting on it
for any requirements. This isn’t a strictly
technology process – there are other
business rules needed to validate the
quality of the data. You have to take into
account certain risk management
parameters, such as credit, market,
liquidity, operational and model risk, and
also factor in the need for regulatory
compliance. There may be additional
information to be captured that goes
beyond pure risk management.
Reporting Architecture
Using the capture (staging), enhance
(processing) and reassemble (reporting)
approach will enable you to use data in
various ways for different audiences, such
COREP and FINREP reporting or statutory
reporting locally or back to the parent
company. You should also be able to take
those reports and drill down into the
appropriate levels, so that management
can share that information with the
relevant business units. Because it’s only
when that information can be acted upon
that it becomes useful. In other words you
need to be able to intelligently identify the
problem, understand it and put in place
the corrective action.
“The key is to achieve the right balance between covering
a wider set of risks and getting the right amount of detail…
to make sure nothing slips between the gaps and also that
enough depth is understood at a senior level.”
UK subsidiary of a Japanese Bank
Reassemble (report)
Capture (stage)
Single Source of Truth
Dashboard
Data
Repositories
Credit Rating
Systems
Quality check
Operational
Systems
Reconciliation
Market Data
Sources
Adjustment
General
Ledger
Risk Modeling
Regulatory
Reporting
Risk & Performance
Measurement
Dynamic Analytics
Advanced Risk
Solutions
Data Architecture
Risk Architecture

6. The unique
challenges facing
Japanese financial
institutions
Shinji Kamata, Senior Manager – Social
Innovation – Nikkei Business Service,
Hitachi Consulting
The risk management challenges for
financial organizations are substantial
and constantly shifting. For Japanese
businesses operating in the UK the
challenge is even more extreme. Not only
are UK regulations the most stringent in
the world, and far more demanding than
what parent companies are normally
used to, but the UK subsidiaries also face
significant operational, cultural and
management issues.
On the operational side of things, the
legal structure has a significant effect,
because being classified as a Subsidiary
or Branch does affect exactly how much
you are governed by local regulations.
The degree of dependence on HQ
systems can also determine how much
autonomy you have to act or whether
you are directly governed from Japan, as
you may not even have sufficient data
granularity to operate effectively.
If the business was acquired, rather than
set up directly by the parent company
then the people, processes and systems
that were inherited will tend to give you
more autonomy, but this may also lead to
incompatibilities that cause problems
reporting back and ensuring compliance
to regulations.
It is also important to understand exactly
what the role and expectations of the HQ
are. Do they want to have a strong input
into the governance of the business? Or is
there much scope to interpret and apply
HQ policy locally? The nature of the UK
business will probably also dictate what
risks the operation need to manage, based
on the types of customer e.g. whether
they are retail or corporate, local or
Japanese, the types of products e.g.
derivatives or project finance, and also
where the deals are booked e.g. locally or
in Japan, and whether you need to worry
about possible system errors.
Culturally there are some important
considerations. In particular, expectations
on what is “good enough” may vary, which
can create internal conflict. While
regulations in Japan are not as stringent as
the UK, any non–compliance is perceived as
having a heavy reputational risk, so the
parent company may exert pressure to
strive for perfection, but this obviously
entails a cost that the UK operation may not
be prepared to pay. It’s also worth noting
that the remuneration systems in each
country will drive different behaviors, so
western traders have a different risk
appetite to those in Japan.
Finally, there is likely to be a need to conduct
dual reporting for regulatory compliance.
So as well as meeting the needs of local
authorities, the UK business will have to
provide what the HQ needs to satisfy the
Japanese financial authorities e.g. stress
testing in Japan may require different data
sets to the UK.
In all of these areas effective governance of
data is crucial, because whether the UK
business operates autonomously or if more
closely governed at a global level by the HQ,
the same data pool will be used to meet the
requirements of both parts of the
organization.
However, because the UK is operating under
the most stringent regulatory conditions,
the good news is that this also means that
there is an opportunity to set the best
practice standard within the organization.
So the UK operation can become the
“knowledge centre” for regulatory
compliance within the group – and can help
create a real competitive advantage for the
entire business.
“Risk management is no
longer seen as an extension
of internal audit, but as an
educational role within the
organization to establish
competitive advantage for
the business”
Bridging
Japanese
business with
the UK market

7. Summary
Hitachi Consulting’s Risk Management
Forum examined the key risk management
challenges relating to financial regulatory
reporting in the UK. The discussion was
brought to life when the audience were able
to hear about the practical challenges faced
by Barclays and its approach to meeting the
company’s reporting requirements. This
highlighted that the key factor in
overcoming many challenges of risk
management is the quality of data, in terms
of its architecture, accuracy and granularity.
However, while most companies can realise
immediate benefits by putting in place the
right data architecture, having the right
ethos for risk management is also very
important – and can be the driver for overall
business improvement and growth. Each
business needs to be clear about the scope
of the different risks it aims to cover and
how proactive and holistic it wants to be in
the way it manages risk.
Of course, the question then is how
should Japanese financial institutions in
the UK go about achieving their vision of
risk management, given the unique set of
challenges they must address, which go
above and beyond those faced by
western institutions?
As a global Japanese company, Hitachi is
very familiar with challenges of achieving
results in a local market, especially in the
face of rigorous European regulations,
while also satisfying the needs of the
parent company. Hitachi Consulting also
has considerable expertise and capabilities
in the management of risk and can provide
help in the areas of regularity reporting
process and applications, system
architecture and data modeling, system
and data security and the use of Big Data.
Finally, from the perspective of wider
spectrum of risk management, the forum
did not cover topics related to operational
risks, including systems risks and emerging
risks. Hitachi Consulting will provide further
insights into these and other areas in future
Forum events.
To discover how we can assist your organization or to receive
information about forthcoming events please contact
financialservicesEMEA@hitachiconsulting.com

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