Boiled frogs and spaghetti – are Capital Markets making a meal of risk and finance?

Tangled systems and growing regulatory heat make an unappetizing combination. How do financial institutions respond?

You probably know the myth that a frog will jump out of a pot of boiling water, but if the heat increases gradually it will stay in the pot and be boiled to death.

Since 2008, regulatory bodies have been turning up the heat under the Capital Markets industry. Initially, many organizations were able to “muddle through” by working harder and putting more manpower into their existing finance, risk and regulatory reporting operations. However, this approach is expensive and proving unsustainable.

McKinsey has estimated that compliance with Basel III will reduce the ROE of banks in Europe by 4% and by 3% in the US – bringing into sharp relief the need to optimize capital management across the diverse and often sprawling legal entities of large capital markets firms, while continuing to ensure regulatory compliance.

Strategic considerations

The way most large capital markets firms have grown, through both acquisitions and organic growth of trading businesses – and the silo-ed legacy not only of these businesses, but unfortunately of middle office functions like finance, operations, and enterprise risk – has resulted in a “spaghetti” architecture of legacy systems. Rather than single “golden” sources of trade and position data across all asset classes, data is spread across multiple stores, with inefficient and error-prone reconciliations. As real-time becomes the new standard, legacy “batch” processes have to be replaced.

When it comes to tasks such as the annual stress testing required by Dodd-Frank, large amounts of technical and human resources are diverted to secure the required data. This makes for a difficult, inefficient and uncertain process.

The solution involves planning, investing and executing to simplify and rationalize the current “spaghetti” architecture and factors in the need for architecture, data and processes that can truly facilitate capital optimization, and meet finance, risk and regulatory requirements as they evolve and become more complex.

Unravelling the spaghetti

A critical objective of this strategic target is the creation of an integrated, real-time enterprise view of finance and risk. Integrating the finance and risk functions facilitates holistic knowledge of positions, business performance, balance sheet, market, credit, and operational exposures across the enterprise, and helps ensure regulatory compliance.

The “push” towards this target state is regulatory compliance. The “pull” is new technology, and the new possibilities it generates for market competitiveness and growth.

Up until now, system scalability and latency has been a constraint to risk and finance consolidation. However, the SAP HANA in-memory platform overcomes the compromises of the past with unprecedented ability to manage and analyse the high velocity, variety, and volumes of trade, reference, risk, and finance data.

Another powerful enabling technology for financial services firms is the cloud. Wall Street and the industry as a whole are increasingly adopting cloud solutions for mission critical data and applications, with demanding levels of service and data security built into their agreements. The cloud’s more efficient and variable cost structure is an added benefit.

For example, SAP’s HANA Enterprise Cloud (HEC) is a private, managed, cloud deployment option that enables customers to stand-up their projects faster, and cut time to market and time to value.

With all this, SAP has fundamentally simplified data architecture, reducing latency, complexity, and cost. For more on how SAP HANA’s in-memory computing and cloud options can turn down the regulatory heat, visit our Solution Explorer for Capital Markets.

 – Sougata Datta, Capital Markets Industry Principal at SAP

Post a comment