In many ways, from a financial services perspective, 2012 was a year that never quite fulfilled its potential for change. Neither the much anticipated implosion of the Eurozone, nor the raft of regulatory initiatives set for completion played out in quite the way that the industry may have expected. As a consequence 2012 often felt like a year when the industry stuttered towards its new future, rather than boldly striding into it. The cynics will of course suggest that this is simply the industry dragging its heels to protect its interests but in reality it has not been helped by the politicians and regulators who are supposed to be defining this new era.
So what then of 2013? Clearly the global economic uncertainty that has characterised the post-crisis era remains a destabilising force for financial institutions, large and small. However, we do expect some significant movement around those items of regulatory uncertainty that somewhat clouded strategic and operational initiatives in 2012, particularly for banking organisations. In Europe CRD IV, EMIR and MiFID II should all see meaningful advances early in 2013, with the first two quickly moving towards finalisation and the last one shifting to focus on Level 2 measures, following EU agreement on Level 1.
The good news is that this clarity should undoubtedly help banks focus on the final delivery requirements for internal programmes that have long since been mobilised. The bad news for 2013 is that the tsunami of regulatory change afflicting the industry has considerable life left in it yet. Indeed, it is the regulatory agenda and the stacked pipeline of change that continues to dominate our thinking in respect of critical focus areas for the banking industry in 2013.
Whilst firms are becoming much more progressive in their thinking around the impact of regulation and the broader strategic benefit that they may derive from it, the major rallying points and headline initiatives continue to be focused around and driven by critical milestones in the regulatory timeline. That said, there are still some striking thematic priorities that will demand attention and investment.
The following represent some of the key items of change that Baringa believe will drive the strategic agenda for banks and buy-side investment managers in 2013.
We are anticipating a 2nd CP in the spring of 2013 that should set out some more definitive proposals, followed in short order by a Quantitative Impact Study (QIS) and then potentially a policy document by the end of the year. These developments should be the catalyst for firms to start mobilising appropriate strategic and operational responses not only in respect of the market risk framework but also existing business models and infrastructure.
However, we also believe that there are major strategic benefits for banks to derive from addressing their intraday liquidity behaviour, not least because of the importance that other regulatory initiatives are placing on the effective management and optimisation of collateral. We therefore expect to see many institutions start working towards effectively aligning their intraday liquidity operations and strategy, with programmes designed to enhance the cohesion of enterprise collateral management.
Banks are slowly beginning to realise the value of an effective regulatory operating model that allows them to align regulatory change with wider strategic goals. To this end, firms will actively review the way in which they manage the end-to-end regulatory lifecycle, including the critical transition from regulatory change to business as usual compliance.
We also anticipate that more firms will seek to enhance the governance that they apply to their regulatory operations. There have been some high profile appointments over the past 12 months that have been driven by the need to develop more effective leadership and definition of regulatory strategy from initiation to delivery. Clearly, not all such appointments will grab the headlines but the significant trend will be for the formalisation of governance roles that encompass the full spectrum of regulatory activity.
On the execution side, finalisation of the boundaries of an OTF and the classification of single-dealer platforms will have a massive impact on e-commerce strategy. In the post-trade environment many smaller firms still have a huge amount of work to do to establish the clearing relationships necessary to comply with requirements set out in EMIR. This could conceivably lead to a major backlog as clearing members seek to get the necessary documentation and connectivity in place to provide clearing services to a range of new customers on both the buy- and sell-side. There also remains a considerable amount of work to be done to establish connectivity to trade repositories and perhaps more critically, to efficiently embed that process into the trade flow.
Up to this point, activity in terms of response mobilisation has been relatively limited, with many smaller investment managers waiting to understand the full spectrum of requirements before making the necessary investments. However, at the start of 2013 many will be forced to undertake formal impact assessments as the legislation deadline looms in order to set out the full extent of the operational change required across the end-to-end investment process. This will also represent a significant opportunity for major sell-side players to leverage the value of an enhanced prime services offering, with smaller buy-side firms reluctant to absorb the cost of the required enhancements to the sophistication of their post-trade operations and risk management.
We believe that firms will begin to ramp up their planning in the second half of 2013 to fully assess the level of operational and strategic impact. This could well lead to some major changes to existing business models, which banks should be keen to initiate as quickly as possible in order to provide clarity of direction to shareholders and clients.
To this end, we anticipate that many firms will engage in a wholesale review of their conduct risk assessment, monitoring and management. As yet, very few firms have taken the necessary steps to properly integrate the broad spectrum of conduct regulation under one framework – meaning that compliance risk has been accentuated. With conduct failure so closely linked to reputational value and more frequent thematic regulatory reviews, firms will be forced to tighten their overall approach to operational conduct.
However, from a business perspective, we are also seeing recognition from many firms that the increased complexity of the post-crisis operating environment has led to heightened levels of operational risk. To this end, we anticipate considerably more focus from banks on operational risk management infrastructure and processes as a matter of strategic importance and differentiation.
Anyone hoping that 2013 will be the year in which the ‘to do’ list for financial institutions starts to shrink is certainly going to be left sorely disappointed. But what we do expect to see in the coming 12 months are clear signs of progress – both in terms of advancing the regulatory agenda and in the way in which firms manage the burden of change that it prescribes.
We have already seen a growing acceptance of the fact that delivering best practice starts at the point of compliance and in 2013 we fully expect more firms to begin expanding their horizons as critical regulatory initiatives become cemented. This is not to say that discretionary spend will run wild – far from it. Rather firms will become smarter about their regulatory spend and how they pull together disparate regulatory programmes. Indeed, the ability to think more cohesively about the desired outcomes of such programmes will in itself become a sign of best practice.
In our experience, despite wider cynicism, financial institutions are very obviously aware of the fact that they are now held to account against much more severe and appropriate (in most instances) standards. They are less concerned about railing against these new standards than implementing them effectively to ensure that they can operate a profitable business moving forwards. After 3½ years of reacting to events, there is now a sense that if implemented properly and aligned with clear strategic thinking, these new standards can serve as the foundation for developing new products and services that will drive competitive differentiation. Those firms that can bring such thinking to bear in 2013 across the critical priorities that we have identified, will start to regard the degree of change instigated in the post-crisis era as less of a burden and more of an opportunity.
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