Published on February 3, 2014
www.niit-tech.com Regulatory Reporting NIIT Technologies White Paper
CONTENTS Executive Summary 3 Key Regulations and Trends 3 FATCA 3 Dodd Frank Act 4 BASEL III 5 FINRA 6 AML 6 KYC 7 Markets in Financial Instruments Directive (MiFID) 7 Emergency Economic Stabilization ACT (EESA) 8 Challenges & Implications of Regulations on the Capital Markets 8 Technology and Regulatory Reporting Compliance 9 Conclusion 9
INVESTMENT FINANCE CAPITAL BANKING INVESTMENT WEALTH FINAANCE MARKET INVESTMENT FINANCE CARGO CAPITAL ECONOMICS FINANCE REVENUE REVENUE MATKET INVESTMENT CAPITAL CAPITAL ECONOMICS MARKET FINANCE Executive Summary Key Regulations and Trends Regulators face extreme challenges of collecting, processing After the financial catastrophe in 2007-08, there was a need to and accurately. bring changes in the regulatory system. Some of the key Ever-expanding regulatory initiatives such as Dodd Frank Wall regulations that brought sweeping changes in the regulatory Street Reform and Consumer Protection Act, BASEL III, AML system are: reporting information efficiently and etc. and increased demands to report more at a time exacerbate these challenges. These regulatory initiatives, thus, FATCA makes it imperative for the firms to improve the value of Foreign Account Tax Compliance Act (FATCA) is not just a information collected and reported and manage change regulation or a compliance requirement; rather it is a compliance effectively with the changing economic environment. that covers the entire banking value chain. It was enacted in March 2010 and is intended to prevent tax evasion by U.S. taxpayers, through the use of offshore accounts. This compliance from the U.S. requires U.S. clients to report their financial Repor Preparationt Analytics and Review accounts held overseas and foreign financial institutions to the Internal Revenue Service (IRS) about their American clients. FATCA taxes U.S. citizens and residents on the worldwide income. However, if a person is working in a foreign country then FATCA gives a flexibility to exclude a limited amount of foreign Figure 1: Data based on Federal Reserve Suggestion income from the total income. Over the past several years, external reporting requirements All non-financial intermediaries and agents owning or holding U.S. continue to evolve with numerous new laws, regulations and investments will have to fulfill information reporting and disclosure regulatory expectations. In order to provide transparency within requirements of FATCA from January 2014. This U.S. legislation the financial system banks and financial institutions must will impact tax functions, technology systems, operations, and automate regulatory reporting process to deliver data quality and business strategy of an organization. accuracy. According to a survey in 2012, 25% banks have automated regulatory reporting process while 75% still have Key Highlights manual or partially automated regulatory environment. • Harmonize with inter-governmental agreements • Relax documentation and due diligence requirements This paper elucidates key regulations and trends and how technology can help financial institutions in complying with • Liberalization of requirements for retirement funds and savings accounts regulatory reporting. • Limited relief for FFIs. 3
Technology and Compliance Financial institutions must make significant changes in technology to consolidate and automate processes and procedures before implementing and complying with FATCA. They must reassess the As of July 1 2013 Missed Deadline: Proposed, 111 Future Deadline: Not Proposed, 63 Future Deadline: Proposed, 5 current state of the systems and operations, conduct gap analysis, develop action plans and evaluate the legal entities to determine whether they have been covered by FATCA or not. Data mining data help minimize the number of time information is needed from the client for data analysis. Many technology companies use business intelligence tools to customize Missed Deadline: Not Proposed, 64 Finalized, 155 different types of data analysis. An important type of data analysis for FATCA is link analysis. Link analysis enables clients to bring together disparate data. Technology can be used to find out common elements from the disparate data available; Figure 2: DFA Rulemaking progress as on July 1, 2013 allowing financial institutions to connect and group data to a centralized place. Technology also helps in data sharing and automating data masking. Dodd Frank Act The Dodd–Frank Wall Street Reform and Consumer Protection Act brought significant changes to financial regulation in the United States. In order to protect unsuspecting borrowers against abusive lending and mortgage practices, Dodd Frank Act established federal financial regulatory agencies and financial services industry to monitor banking practices and troubled financial institutions. It contains roughly 1,500 provisions, including about 398 rule-making requirements. Key Highlights • Protect U.S. citizens from abusive financial service practices • Finish the “too-big-too-fail” concept to ensure that the taxpayers don’t have to bear the consequences of the failure of financial institutions • Ensure advanced warning systems are created in order to deal with future economic crisis • Bring transparency in derivatives and instruments market and don’t create havoc in the future • Increase accountability of credit rating agencies for debt instruments • Ensure top executives decisions are aligned with interest of the Regulatory activity on Dodd Frank in 2013 will include: financial institution. • Financial Stability Reform • Resolution Planning • Securitization Reforms • Derivates Regulation • Investor Protection Reform • Credit Rating Agency Reform • Volcker Rule • Compensation, Corporate Governance and Disclosure • Capital Requirements • Foreign Bank Regulation • Consumer Protection Reform Technology and Compliance Dodd Frank Act impacts different lines of business in the financial services industry. To comply with Dodd Frank’s rules efficiently and effectively, technology firms must assess the new rules and regulations, tools and processes it currently has and build new IT systems integrating old processes within the existing platforms. New IT systems will contain measurable, transparent and predictable processes that reduce costs across the different business lines. • Origin of Mortgage and its Servicing • Specialized Corporate Disclosures. 4
Technology firms must • implement pre-trade compliance checks enforcing system restrictions • rationalize and consolidate to achieve true copy of the data and support regulatory reporting. Financial institutions must place special emphasis on data management, business intelligence, risk analytics and knowledge management. Figure 3: Basel III Phase in Arrangements BASEL III Key Highlights Basel III builds on Basel I and Basel II documents by the Basel • Improve the financial institutions ability to deal with issues Committee on Banking Supervision. Basel III enhanced the banking regulatory framework and dealt with financial and economic stress, risk management, liquidity in the market and arising from financial and economic stress • Improve risk management and governance • Strengthen banks transparency and disclosures banks transparency. The two liquidity ratios – the short-term Liquidity Coverage Ratio (LCR) and the longer-term Net Stable Funding Ratio (NSFR) increases the high-quality liquid assets of banks and obtains stable sources of funding. These liquidity ratios ensures adherence to sound principles of liquidity risk management. Technology and Compliance All technology firms must focus on improving data management practices which requires financial institutions to aggregate, standardize and analyze data to derive high quality information. When the data management levels as required by Basel III are LCR will incorporate amendments in expansion of the assets considered as High Quality Liquid Assets (HQLA) and net cash achieved, technology firms need to deploy advanced analytics to achieve process efficiency. outflows to reflect experience in times of stress. The new LCR will be implemented in a phased manner starting January, 2015. Implementing LCR on an ongoing basis help monitor and manage liquidity risk. An LCR of 60% should be maintained in the first year of its implementation; gradually climbing by 10% each year until it is implemented at 100% in January, 2019. In the past, data was managed in silos. To comply with Basel III, financial institutions need to manage the quality of the data extracted from the aging infrastructures. There is a need for IT systems to be developed that produce and manage consistent, accurate and true copy of the data from disparate systems. The IT infrastructure should be flexible and robust enough to quickly integrate data from disparate systems and build quick interfaces. 5
FINRA AML came into effect after the formation of Financial Action Task The Financial Industry Regulatory Authority (FINRA) is a self Force (FATF) - an intergovernmental body, and anti-money regulatory organization that oversees financial regulations of laundering standards. Due to new government regulations and member brokerage firms and exchange markets. It offers ever evolving laundering techniques AML compliance departments regulatory services to all security firms that publicly do business, always struggle to stay ahead of the constant change. and organizations that offer professional training, testing, and licensing of registered persons, arbitration and mediation, market New Anti-Money Laundering and Countering of Financing of regulation by contract for the NYSE, the NASDAQ Stock Market, Terrorism (AML/CFT) will undergo a makeover effective from the Inc., the American Stock Exchange LLC, and the International end of June. The following amendments will be made to the AML Securities Exchange, LLC; and industry utilities, such as Trade regulation: Reporting Facilities and other over-the-counter operations. 1) Amendments to the ordinary course of business exemption that currently applies to accountants and others will now include FINRA uses internet, media and public forums to help investors director, employee, agent or other person. build financial knowledge. It also provides essential tools to better understand the market and principles of investing. In 2013, FINRA 2) New Regulation 5A will require enhanced customer due will consider the following products and investments for heightened diligence to be undertaken for transactions requiring suspicious scrutiny: Business Development Corporations, Leveraged Loan transaction report. Products, Commercial Mortgaged-Backed Securities, High Yield Debt, Structured Products, Exchange Trade Notes, Non-Traded REITs and Closed Funds. 3) Changes will be made to the customer due diligence exemption and will be extended to client funds account. Key Highlights Technology and Compliance • Regulates trading in equities, corporate bonds, security futures Financial institutions are reacting to regulatory demands and • Licenses individuals and admits firms to the industry, writes rules to govern their behavior and examines them for regulatory compliance • Sells regulatory products and services to stock markets and exchanges • Provides educational and qualification examinations. investing in automated systems that can monitor every single financial transaction, discover unusual behavior and discover transactions that seem to be a money laundering transaction. Automated systems leverage data from disparate systems and can help verify new customer identities and perform link analysis in order to understand the background of the customer. These systems must learn and adapt to the situations while analyzing client profile and their transactions improving cost and Technology and Compliance operational efficiencies. With FINRA clearly stating its social media guidelines, financial institutions must look out for firms that can help them establish a Financial institutions look for technology firms that can provide strong social media policy that evolves as industry regulations and technology platforms based on the product and risk specific technology changes. The organization before building a social requirements. There is no need to replace existing systems. The media policy must find out the social media platforms aligned with new platforms must integrate tightly with the existing applications the business goals. maximizing previous technology investments. The platform designed must be agile enough to change as risks and rules AML changes. Changes may include product changes, mergers and Anti Money Laundering Laws (AML) is a set of procedures, laws or acquisitions, and financial organization working in a new regulations used in the financial and legal industries to prevent, geography. Maintaining these new systems help in achieving cost detect and report illegal money laundering actions. According to a efficiencies, and customer satisfaction. survey in 2012, 41% organizations have integrated AML in the business strategy of new products/services. 6
KYC financial transparency and protect consumers in the field of KYC regulation is important for both financial institutions and investment services. MiFID covers investment banks, portfolio regulatory companies to ascertain relevant information about the managers, corporate finance firms and some derivatives and customer while doing business with them. These policies help commodities related firms. prevent identity theft, financial fraud, money laundering and terrorist financing. Seven out of 10 Indian financial services firms do not regularly update the know-your-customer (KYC) details of their Basel III Dodd-Frank customers, says a survey on anti-money laundering. The following four key elements are incorporated by financial institutions while framing their KYC policies: • Customer Acceptance Policy MAD MiFID II UCITS • Customer Identification Procedure • Transaction Monitoring • Risk management. Basic identity information helps financial institutions understand the EMIR capacity of the individual in committing money laundering or Local Regulations identity theft. In order to understand the capacity daily transactions of the individual are monitored against their expected behavior and Figure 4: MiFID related regulations recorded profile. Technology and Compliance Key Highlights The global footprints of financial institutions necessitate the need • Authorized firms regulated in their home states can provide for global KYC hubs with data to cater to various regulations. The data in these hubs must be reusable in order to enable better flexibility and scalability. Reusable data reduces the overall cost of the financial institution. Global KYC hubs will help in automating firm’s processes improving efficiency, enabling rapid turnaround and at the same time reducing operational risk. Automated processes ensure all data is captured; reducing the risk of complying with the regulations due to incomplete data. services to customers in other EU member states • Clear procedures are adapted to categorize customers as "eligible counterparties", professional clients or retail clients • While taking client orders detailed information needs to be captured • New post-trade transparency requirements and capital requirements to transactions is extended in financial instruments • Firms need to publish price, volume and time of all trades in listed shares Markets in Financial Instruments Directive (MiFID) MiFID is a European Union Law that aims to increase the cross border investment orders. Its main objective is to increase competition, create harmonization across jurisdictions, enhance • Firms must obtain best possible results in the client order execution • MiFID treats Systematic Internalisers as mini-exchanges for preand post-trade transparency requirements. 7
Technology and Compliance To comply with MiFID, technology firms had to alter marketing practices, rewrite customer contracts and deeply assess client needs. This poses a challenge for the firms to retain and integrate information to plan for and implement technology requirements. Firms must manage information lifecycle to easily access information and include indexing for fast and accurate searching. In order to implement MiFID regulation in a financial institution, technology firms need to upgrade the network infrastructure and communication lines to enable acceptance of data from multiple sources. The upgradation should be flexible enough to handle the new business rules and data elements that may emerge with time. Along with the infrastructure technology firms must also upgrade their storage systems. Storage infrastructure has to ramp up significantly to handle increase in data flow and manage data exchange mechanisms. Challenges & Implications of Regulations on the Capital Markets Managing regulatory reforms is the biggest driver of strategic and operational change in the capital market industry. Financial institutions have to change their working every time a new rule global, national and regional – is reinforced. Few are the challenges that financial institutions face: • Multiple bank regulations at various stages of development and implementation • Diminished returns and rising costs • Aligning business and strategic choices to the new regulatory environment • Ineffective use of big data • Banks have to change their culture and behavior; take difficult decisions, implement them effectively and restore customer Emergency Economic Stabilization ACT (EESA) confidence and trust. The Emergency Economic Stabilization Act of 2008 is a U.S. financial system law enacted for international credit and Leading financial institutions evaluate their current regulatory subprime mortgage crisis. The regulation authorizes United infrastructure and think of refining tools and capabilities to States Secretary of the Treasury to spend more than $700 adjust to the current regulatory landscape. Institutions are billion for the purchase of distress assets and for supplying cash progressing from regulation to transformation in order to directly to banks. It also allows companies to insure their position themselves and achieve success. Control functions troubled assets using EESA regulation. must be used to ensure compliance and support transformation change in key business processes. To support transformational Treasury secretary was authorized to establish Troubled Asset change, it is mandatory to identify and assess interrelationships Relief Program (TARP) by the EESA to protect consumers and between regulatory initiatives, develop business and structural businesses for securing credit. The purchases of illiquid assets by models in compliance with new regulations and change the Treasury secretary under the TARP increase confidence of the customer needs through innovation and investment. banks in the credit market. The pressure on financial institutions is to ensure that they meet Key Highlights regulatory requirements at an appropriate time. In order to meet • Provide authority and facilities to restore liquidity and stability to these requirements they need to do careful planning to improve the financial system • Allow TARP to purchase troubled assets from any financial institution • Imposes limits on executive compensation of participating financial institutions • Monitors the Secretary’s activities • Protect homeowners. economic conditions to generate balance sheet growth and reduce provision of liquidity. Financial institutions also need to invest in technology as a result of regulatory requirements. The existing IT infrastructure reflects what was required to support regulatory requirements in the past. Therefore, there is an urgent need to bring significant architectural changes to adapt radically to the changing regulatory landscape and create control of key individual business functions. 8
Technology and Regulatory Reporting Compliance Conclusion Banks and financial institutions that use technology are real winners in burdens on financial institutions. Financial institutions need to the capital markets as technology helps build tighter relationships with • Automate regulatory reporting processes to minimize the the client. Continued investment in technology, user friendly channels such as mobile and internet, and social media help these institutions in providing excellent customer service. Regulatory compliance programs generate considerable data into disparate silos. In order to properly manage and generate intelligent data, there is a need to have a unified data management system to reduce risk and maintain regulatory compliance, and use appropriate technology and tools for fast access to granular information. Without appropriate technology and tools it is difficult to understand the background of data, measure and monitor compliance programs and generate right kind of reports for the higher management. Technology, thus, implemented appropriately to monitor and manage compliance programs not only drives down cost but also drives up revenues. Three steps that a financial institution must consider in order to overcome the challenges in areas of risk management and regulatory compliance: 1. Unified Data Management Platform Unified Data Management Platform delivers data integrity and quality to support regulatory compliance. With an integrated and unified platform, financial institutions can perform data mining, and data profiling and Rapidly changing regulatory requirements have placed huge manual work involved in the process • Build a team that can handle changing requirements and help train the personnel • Optimize governance structure and control environment within the regulatory function • Enhance and evolve business processes with changing regulatory environment in order to enhance flexibility and effectiveness to keep pace with the regulatory demands. Banks and financial institutions need to invest in the infrastructure and leverage technology to ensure effective, accurate and documented compliance processes. The investment should be timely, aligned with the current regulatory environment and periodically monitored so that the financial institutions are able to keep pace with the changing needs. NIIT Technologies service areas address business processes, data quality and technology architecture to support the regulatory reporting processes. We manage the regulatory reporting requirements and accuracy of numbers quickly and easily. It simplifies the processes required to produce clients financial views and facilitates the production of fully reconciled financial reports at all levels of granularity. monitoring. It also helps in transforming data silos maintained in disparate systems into reliable, accurate and trusted data. References 2. Optimization 1. Dodd-Frank Progress Report, July 2013 Optimizing regulatory structures enables financial institutions to 2. Bank for International Settlements implement changes in the regulatory landscape within a specified http://www.bis.org/bcbs/basel3.htm time frame and aligned with short and long term objectives. This can be achieved through incremental and innovative improvement to the supporting technology. 3. Standardization Regulators everywhere face the challenge of collecting, processing and reporting information accurately and effectively. In order to overcome this challenge, e-filling is a standard tool that regulators must choose to improve the entire end-to-end regulatory reporting process. The financial institutions achieve greater transparency and efficiency while collecting relevant information. This standardized reporting tool can easily support the changing needs of the regulators. 9
About NIIT Technologies NIIT Technologies is a leading IT solutions organization, servicing customers in North America, Europe, Asia and Australia. It offers services in Application Development and Maintenance, Enterprise Solutions including Managed Services and Business Process Outsourcing to organisations in the Financial Services, Travel & Transportation, Manufacturing/Distribution, and Government sectors. With employees over 8,000 professionals, NIIT Technologies follows global standards of software development processes. Over the years the Company has forged extremely rewarding relationships with global majors, a testimony to mutual commitment and its ability to retain marquee clients, drawing repeat business from them. NIIT Technologies has been able to scale its interactions with marquee clients in the BFSI sector, the Travel Transport & Logistics and Manufacturing & Distribution, into extremely meaningful, multi-year "collaborations. NIIT Technologies follows global standards of development, which include ISO 9001:2000 Certification, assessment at Level 5 for SEI-CMMi version 1.2 and ISO 27001 information security management certification. Its data centre operations are assessed at the international India ISO 20000 IT management standards. NIIT Technologies Ltd. Corporate Heights (Tapasya) Plot No. 5, EFGH, Sector 126 Noida-Greater Noida Expressway Noida – 201301, U.P., India Ph: + 91 120 7119100 Fax: + 91 120 7119150 Americas NIIT Technologies Inc., 1050 Crown Pointe Parkway 5th Floor, Atlanta, GA 30338, USA Ph: +1 770 551 9494 Toll Free: +1 888 454 NIIT Fax: +1 770 551 9229 Europe NIIT Technologies Limited 2nd Floor, 47 Mark Lane London - EC3R 7QQ, U.K. Ph: +44 20 70020700 Fax: +44 20 70020701 Singapore NIIT Technologies Pte. Limited 31 Kaki Bukit Road 3 #05-13 Techlink Singapore 417818 Ph: +65 68488300 Fax: +65 68488322 Write to us at firstname.lastname@example.org www.niit-tech.com D_46_151113 A leading IT solutions organization | 21 locations and 16 countries | 8000 professionals | Level 5 of SEI-CMMi, ver1.2 ISO 27001 certified | Level 5 of People CMM Framework
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