01:06 PM
Daniel Parker, SunGard's Capital Markets Business
Daniel Parker, SunGard's Capital Markets Business

Enhanced Automation is Key for Banks Under the Final Volcker Rule

Adherence to a well-aligned exposure analysis system that continuously monitors residual positions (and portfolios) is necessary to remain compliant with the Volcker rule, writes Daniel Parker of SunGard's capital markets business.

The Volcker rule, codified as part of the Dodd-Frank Act, pertains to all depository institutions and those affiliated with or regulated as banks (“banking entities”). The rule, now finalized by all five applicable federal agencies, prohibits banking entities from engaging in proprietary or own-account trading of certain securities, derivatives and options, among other restrictions.

Daniel Parker, SunGard
Daniel Parker, SunGard

Specifically, the Volcker rule provisions apply to banking entities of all shapes and sizes, although some smaller banks may be relieved of certain compliance program and reporting obligations. Therefore, community and regional banks, in addition to the obviously covered banking entities, have the arduous task of determining how to adequately monitor and manage covered activities.

It would be a mistake for smaller and less complex banking entities to immediately, and without additional review, conclude that their activities are not covered, nor can any reclassification of coverage occur as a result of agency-related activities, and therefore that the Volcker rule would not apply.

This is true because the final rule expands the definition of trading activities that are captured under the rule. For example, the rule articulates a broader scope of what constitutes “market-making” activities, which is expressly excluded from the rule’s prohibitions. However, it is necessary to also consider any residual positions or portfolios that may result from agency-transacted or seemingly market-making activities that may fall into the lens of proprietary prohibition through reclassification or residual activities.

In other words, to the extent an agency transaction does not exactly match any close-out, hedge or cover, a residual position may become a regulatory-covered position under the rule. This is a genuine example of the narrow distinction between market-making activities and proprietary trading that will likely cause significant confusion, and will require in-depth analysis.

Initial analysis by banking entities will need to consider any inadvertent or intended overage that would result from any agency transaction.

For instance, the final rule expressly states that banks can build up positions to meet “the reasonably expected near-term demands of clients, customers or counterparties.” A conflict may occur upon the condition that an intended transaction, on behalf of a given customer, may in positional terms fall outside of the exact or even estimated “near term” demands. In this instance, the position, or portfolio may be construed as proprietary based on the difference between the anticipated demands and the actual demands.

Simply put, any market making inspired transaction must be accompanied by the requisite automation to accurately predict demand scenarios. As a result, any residual extraneous position can then be calibrated and closely aligned with the regulatory mandate of “reasonable expectation of clients, customers and counterparties.” This process enhancement is consistent with the joint regulatory guidance which suggests that banking entities may rely on their own independent analysis of reasonable expectation concerning positional demands.

Therefore, adherence to a well-aligned exposure analysis system that continuously monitors residual positions (and portfolios) is necessary to remain compliant with the Volcker rule. Residual monitoring of agency transactions are crucial because the hedging activities of any banking entity’s portfolio as well as calibrated market-making activities and purported extendable agency activities will likely be strictly scrutinized on a continual basis. Automation will certainly lead the way as banks develop risk sensitivities that articulate a qualitative mitigation standard that will reduce the burden of the Volcker rule.

—Daniel Parker, VP, Solutions Consulting, SunGard’s capital markets business

Comment  | 
Print  | 
More Insights
More Commentary
The Frontline Value of ERP security
The critical nature of the business process systems means that when it comes to safeguarding, ERP often merits a bit more care.
Regulation Is 'New Normal,' Industry Shifts Focus Back to Growth
Linedata surveys suggest the financial industry's future challenges are less focused on regulation and more on improving client relationship and developing products.
Moving Beyond Buy-Side Cloud Computing Myths
Security and compliance are certainly concerns for buy-side firms looking to use the cloud, but it shouldn't hold everyone back from cloud-based technology.
Should I Hire a Data Scientist?
Before spending big bucks on data scientists, understand the depths of the big data problem. Identifying the issues can help extract maximum value from the coveted skill sets.
New York Tech Scene is Optimistic, Finds NYTECH Survey
17% of surveyed New York-based organizations grew more than 50% last year. 26% predict more jobs will be added over the next year.
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - July 2014
In addition to regular audits, the SEC will start to scrutinize the cyber-security preparedness of market participants.
Stressed Out by Compliance, Reputational Damage & Fines?
Stressed Out by Compliance, Reputational Damage & Fines?
Financial services executives are living in a "regulatory pressure cooker." Here's how executives are preparing for the new compliance requirements.