Putting strategy back into regulatory responses…

Topics of regulation and its effects are all the rage in the financial sector news nowadays. Banking, investment and securities activities are facing the weight of multiple ‘structural’ regulations, compounded by the threat of an impending sovereign debt crisis and economic downturn. Cases in point: Basel regulations on capital and liquidity, OTC derivatives trading and clearing infrastructure reforms (Dodd-Frank, EMIR), Durbin debit card interchange rules are all not ordinary "adhere and comply" regulations. These produce second and third order "ecosystem effects" that will force fundamental shifts in the value chain of the financial industry and its clients. Whilst uncertainties remain, one thing is clear. Firms and vendors’ planning responses to regulation and its ripple effects will need to change substantially. As financial firms chart strategies to navigate the deluge of regulations, they need to explicitly think about what paradigm and mode of operation to adopt, rather than merely reacting. Specifically, in an uncertain environment where cross-sector regulatory effects are likely to play out, firms need to:

1. Establish the appropriate regulatory response paradigm beyond the conventional reactive, bottom-up approach. Structural regulations cannot be treated the same as ‘point’ regulations.
2. Plan and anticipate for different outcomes using a regulatory scenario approach for regulations that are ambiguous and entail multiple cause and effects
3. Converge fragmented risk and compliance operations to optimize and achieve cost synergies
4. Ensure that IT stakeholders and technology strategies need to be formulated in tandem with business planning, not as a "leave that for later" afterthought.
5. IT should maintain strategic flexibility in times of uncertainty. Identify potential “drag areas” and as much as possible, plan for multiple business / regulatory scenarios in order to future-proof emerging requirements.

Indeed, we live in interesting times. Things are likely to get worse before they get better. We will be following regulatory developments, business dynamics, and technology trends closely in the coming months. In the meantime, here are recent analyses that highlight further perspectives on regulatory impact, scenarios and strategic implications: Getting Smart about RegulationDodd-Frank and EMIR Derivatives Reforms: Future Scenarios and the Impact on Derivatives TechnologyOTC Derivatives Clearing and the Buy-side in the US: Rough Ride AheadDurbin Second Order Effects