Risk Management

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Allan Grody
Allan Grody
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Where are the Technologists’ Voices in Global Financial Reform?

In an attempt to fix the plumbing of the global financial markets under Dodd Frank with a unique identification code for swaps and counterparties, technology has been an afterthought, writes Allan Grody, President of Financial InterGroup Holdings LLC.

Financial reform is being driven by new regulations. Granting them foresight, regulators have started on this global enterprise by taking the right first step … fixing the plumbing of the financial system on a global scale. This activity, primarily a data and technology initiative, starts with a globally unique identification code for financial market participants and the products they trade, own and process. The system is to be initiated first for use in electronically identifying, trading and clearing swaps. It is intended for regulators to be able to observe the risk exposures associated with these transactions.

Allan Grody, Financial InterGroup
Allan Grody, Financial InterGroup

The process starts at multiple websites, disbursed globally, where each counterparty is to be uniquely identified and labeled with a code. Later this code will become associated with its parent or controlling entity. It is hoped that this coding convention, referred to as the legal entity identifier (LEI) can be extended to all financial market participants involved in the supply chain of all financial transactions. Its ultimate goal is to allow for computerized data aggregation for any specific firm, counterparty or market and, ultimately for all markets for global systemic risk analysis.

However, this part of financial reform, like health care reform, needs to be held to the standard of science not to the boast of politicians or regulators. Like the Affordable Health Care Act, the political class is famous for producing legislation that is dysfunctional, the regulators likewise. Individual members of each industry in similar fashion can also make judgments of the moment that may result in unintended consequences.

Technology, of course, takes precision and near zero tolerance for unintended consequences. Also, getting a website to work is worthless if the back-end cannot process data timely nor get instructions to the right exchange or payment system, whether it is an order for health insurance or an order for a financial instrument or swaps contract.

When I roamed the halls of congress with our “Fix the Plumbing” amendment, the Dodd-Frank Act (DFA) was then known in conference as the Wall Street Reform and Consumer Protection Act. The clarion call of the reformers then was ‘Just let’s pass the damn thing – we’ll fix it later!’ Well now is later and at the detail level, especially where the rubber hits the technology road, things are failing. Regulators around the globe are backtracking on implementation time tables and, in the US regulators are issuing no action letters and exemptive relief orders. In health care it is not as finely tuned…it’s all about denials and broken promises and half-truths.

We all give up our personal views to the best interests of the community and company we live within. However, decisions in large organizations and in government are mostly arbitrated to win consensus or driven by hard charging opinionated individuals. In this environment, especially under the pressures of a financial crisis or a revolutionary change in health care, the results of unintended consequences are not seen clearly.…there are lots of dots to connect let alone to project into the future.

In financial reform we might have moved too fast when prudence suggested we not be led by regulators on such a granular technology driven mission. The consequences are being felt in the US’s own attempts to regulate the swaps markets … to create new facilities to aggregate swaps data, to organize exchange-based swaps market, to create central counterparties to clear and guarantee swaps. Somehow this all was to be integrated into a world order as more governments try to establish their own regulatory reforms.

Allan is President and founder of financial industry joint venture development company Financial InterGroup Holdings Ltd; and strategy & acquisition consultancy Financial InterGroup Advisors. The companies are engaged in the capital, contract, currency, cash and investment ... View Full Bio
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pudnhead
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pudnhead,
User Rank: Apprentice
12/10/2013 | 5:14:35 PM
re: Where are the Technologists’ Voices in Global Financial Reform?
Technologists rarely chime in during the comment period of proposed regulations. If they want to have a say, they should start participating earlier in the process. Anyone can comment.
IvySchmerken
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IvySchmerken,
User Rank: Author
12/10/2013 | 4:31:37 PM
re: Where are the Technologists’ Voices in Global Financial Reform?
Where are the voices of technologists in reshaping the Volcker Rule? Today 5 regulatory agencies are due to vote on a stronger version of the rule. Banks are going to need to make programming changes to their systems by the July 2014 compliance date. I wonder if technologists were consulted about the implementation of the final rule.
gogreen-traders
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gogreen-traders,
User Rank: Apprentice
12/9/2013 | 9:27:10 PM
re: Where are the Technologists’ Voices in Global Financial Reform?
Technology is often an afterthought with regulatory response, or for any new project in the business, for that matter. It has been getting better in recent years, as IT leaders have been brought in earlier in the process, but often techies are brought in after the fact.
Becca L
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Becca L,
User Rank: Author
12/9/2013 | 4:39:04 PM
re: Where are the Technologists’ Voices in Global Financial Reform?
The ObamaCare site, if anything else, highlighted how attention to detail - technology detail - drop off once it is passed/approved. As Allan says, the mindset in Washington was "let's just pass this thing, we'll figure out details later." I've rarely heard that mumbled by any person or corporate body that followed through properly. There's a wide gulf between the intent and follow through, Technologists are swimming in between, from party to party with questions for clarification, and pleas for structure. I highly doubt any technologist is happy building a non-functioning solution, but without the necessary guidance we can't exactly blame them for getting through the day with a "checking off" system. Allan is right, we need to get technologists in the conversation from the start.
JaCa
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JaCa,
User Rank: Apprentice
12/9/2013 | 11:42:23 AM
re: Where are the Technologists’ Voices in Global Financial Reform?
Great article, technology can indeed help credit unions and other financial institutions provide better services to their customers. I work for McGladrey and there's a newsletter on our site that discusses a few points here that may interest readers, " it offers great advice on retaining and building customer relationships the use of technology and other valuable insights into boosting overall performance.
Eight ways for your financial institution to boost performance now
IvySchmerken
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IvySchmerken,
User Rank: Author
12/5/2013 | 11:59:04 PM
re: Where are the Technologists’ Voices in Global Financial Reform?
Regulators want to aggregate data across the various markets and counterparties, starting with swaps, to prevent systemic risk. But as you say, the CFTC was not prepared for the deluge that hit its systems. Now the task for taking a coordinated approach to legal entity identification (LEI) falls under the FSB. Why didn't regulators consult with technologists upfront? Because regulators and politicians didn't want to get mired in the details of IT. It sounds a lot like Obama Care's web site.
Byurcan
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Byurcan,
User Rank: Author
12/5/2013 | 1:51:34 PM
re: Where are the Technologists’ Voices in Global Financial Reform?
Unfortunately, I think the voice of technologists is often overlooked, and many firms are simply "checking off," as you say, boxes to say they complied with such-and-such regulation.
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