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Volcker Compliance: The Ultimate Big Data Challenge Has Begun

Dec 20 2013, 8:56am CST | by

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Volcker Compliance: The Ultimate Big Data Challenge Has Begun
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Volcker Compliance: The Ultimate Big Data Challenge Has Begun

US banks are scrambling to meet a high demand on big data management, data de-duplication and business intelligence analysis, under the stringent regulatory reporting requirements of the new Volcker rule, industry experts have told Forbes.

Short deadlines of only six months for full system integration have left many firms ready to risk a rushed, ‘Band-Aid’ approach to big data, in order to meet minimum requirements. But analysts say it is possible to rise to the challenge and do the job properly.

The new rule, issued last week, is part of the Dodd-Frank Reform ordered by President Barack Obama.  It has been over three years in the making and is aimed at stopping commercial banks from proprietary trading (or high risk betting from their own accounts).

Many of the country’s largest banks have only a quarter of the time they said they needed to get data analysis systems ready, to report on seven detailed metrics. Reporting requirements for those banks come into play within six months, on June 30, 2014, rather than the two years a number had insisted they needed. (See which banks said what here )

Banks have fought against cost of new IT

During the preparation for the Volcker report, a number of US banks questioned whether the costs “exceeded the benefits” and required the “construction and programming of highly sophisticated systems that are not currently employed”, adding that they would also likely “generate an unmanageable amount of data”. Other commenters said their organisation already had some of the technology.

Within a new 964-page document outlining the changes, the regulatory bodies insist on such factors as the “development and implementation of a compliance program at each banking entity engaged in trading activities… the collection and evaluation of data regarding these activities… [and] appropriate limits on trading, hedging, investment and other activities”.

Banks must “regularlycapture and report “meaningful quantitative data” that will assist regulators in identifying breaches. The seven metrics that they must measure are: risk and position limits and usage, risk factor sensitivities, value at risk, comprehensive profit and loss attribution, inventory turnover, inventory ageing, and customer facing trade ratios.

‘Why weren’t they doing this anyway?’

Ralph Silva, an independent and seasoned financial analyst, tells Forbes that banks should have been ready, and need to step up their IT to match reporting needs: “Banks, quite simply, need to record and collect everything. They need to report on the data, from more sources, and keep it longer than before.”

While banks previously had to track data, they must now organize and analyze this information better, he notes. “Around 80 per cent of bank data is collected but not commonly understood – only a fifth is actually analyzed.”

The technology they need for the analysis is limited, Silva says, and the costs of implementing it may be high. “But these costs are by no means out of reach for banks. They’ll find any excuse to fight the changes, but given the problems we have all had it still begs the question: why weren’t they doing this stuff anyway?”

Chris Skinner, chairman at networking group the Financial Services Club, argues that the steps are achievable and are “not as radical” as in the UK, where banks have had to completely separate investment and retail activities and systems.

Band-Aid approach

Peter Roe, research director at analyst firm TechMarketView, says that for banks to start reporting within six months, many “will be using ‘Band-Aid’ approaches” while they develop a more advanced solution “to deal with the tsunami of regulatory requirements”.

Banks, he says, will need “strategic governance, good housekeeping rules and corporate discipline”. A comprehensive approach would include deduplicating the data, ahead of significant business intelligence analysis.

Tim Herbert, VP research at IT industry association CompTIA, agrees, adding that eight in 10 businesses commonly have data ‘silos’ across different areas, which are not integrated. “It can be assumed that many banks experience data silos as well, making holistic analysis difficult,” he explains, adding that banks will already be evaluating some big data tools.

Time for the CIO and CEO to talk

Under the new rules, chief executives of large banks will need to personally guarantee to the regulator that their bank is compliant. “From a CIO’s perspective, this may entail a need to proactively engage with the CEO and other business unit executives,” Herbert explains, “to ensure they better understand the technology behind compliance processes.”

Any systems would need to balance carefully, he says, between the user experience and compliance requirements.

Like this story? Follow me for more breaking news and in-depth analysis, affecting CIOs and business decision makers. Please do share your thoughts on the topic below.

Source: Forbes


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