One of the legacies of 2012—a tumultuous year by anyone’s standards—is that financial product innovation has been put on the shelf by the constant flow of new regulations (with more to come) and a weak recovery that has squeezed profit margins. Most firms have been quickly shifting their energies and budgets to compliance.
In fact, as I am working on the Winter/Spring edition of an online magazine for FTF News (due later this month), it is becoming clear to me that much of the activity for the coming year will be for efforts that do not traditionally differentiate a firm.
Yet I wonder if firms can use the push of regulation to their advantage? Is it possible that the dominance of regulators could yield some creative responses? Are some of the regulatory reforms also serving as catalysts for much-needed changes such as tearing down data silo barriers and automating reconciliation processes? Could this rush to compliance be used to institute greater operational efficiency?
As we look ahead for 2013, there are some very encouraging trends such as a major embrace of technology to automate the traditionally manual processes used for reconciliation. It looks as if there is an expiration date for costly reconciliations that were manual trips down a rabbit hole of mind-numbing complexity. Eric Werab, the director of product portfolio management overseeing the financial control solutions at Fiserv, put it best recently when I interviewed him recently.
“It’s the last thing people have thought about,” Werab says. “It’s not inherent to the products you sell, the money you make. It’s a necessary function that a lot of times gets looked over because many people don’t want to go to that detail. Honestly, it can get pretty confusing when you get down to that detail and look at what you have to do to make sure you’re reconciling your various accounts effectively.”
Automating reconciliation has become “a have-to-have” because IT can save firms money if they achieve greater operational efficiency as a result, Werab adds.
Another of our key findings is that by revamping data management strategies firms can get around the barriers of internal silos. The challenge in 2013 (and probably beyond) for many firms is how to better use data across their enterprises and still meet the demands of regulatory requirements such as cleared and executed over-the-counter (OTC) derivatives. New data links can also pave the way for innovative connections between order, execution and portfolio management systems and middle- and back-office systems.
As noted, the New Year is also bringing home the reforms of OTC derivatives trading. The new demands of executing and clearing OTC instruments will forever change the way industry players work with clearing firms and handle collateral, and will likely increase the number and kind of custodians and counterparties they work with. These pressures are likely to spawn creative (but legal) solutions.
Many firms in 2013 will have to develop a surveillance strategy for social media interactions that allows them to use social media sites without harming themselves or clients. If that isn’t enough, they will also have to comply with the requirements of the Foreign Account Tax Compliance Act (FATCA), a major reworking of the relationship between firms and their far-flung clients.
If the aforementioned trends weren’t enough, firms will also have to come up to speed on the usage of standardized coding for Legal Entity Identifiers (LEIs), new cost basis reporting (CBR) rules, and the possibility that cloud computing might be useful for corporate actions processing. (We will be covering all of these developments and more in the online issue.)
While all of this will undoubtedly help firms come closer to operational efficiency, many will ask when they will be able to get back to creating financial products that set them apart from the competition.
It’s nearly impossible to predict when our current tsunami of new regulations will ease up, but it can’t last forever. Once the flow ends and if all goes well, there will be new efficiencies that are likely to free up monies that can be applied elsewhere such as developing new financial products. That is the Promised Land to come after the industry endures the chill that regulators have put upon creativity.
In the meantime, we wish you a Happy New Year and safe passage to the Promised Land.
Need a Reprint?
Leave a Reply