Today, banking industry regulation is tighter than ever—and is being strictly enforced. This puts investment professionals in a precarious position. You must keep focused on revenue generation, all the while investing increased time and money in meeting ever evolving regulatory requirements.
Or do you?
For some banks, retaining regulatory compliance and reporting functions in-house is not in their best interest. Producing regulatory reports alone demands a lot of effort, including significant amounts of data, analytics and human capital to arrive at the final product. Staff dedicated to reporting must also be well versed in data management, complex analytics and all of the regulatory details.
Add this all together and it depletes a bank of considerable time and budget—resources that could have been better spent driving the bottom line. Thus, many firms are electing to outsource regulatory functions in order to reduce operational and staffing costs, as well as maintain focus on core business goals.
There has been some debate in the media over whether outsourcing is risky. But evidence of firms that are actually engaging in regulatory outsourcing is to the contrary. According to an article featured on International Banker:
“There have been skeptics in the industry who believe back-office outsourcing teams can create worsened regulatory risk factors for banks—placing exposure to information, technology or security breaches into the banking-process pipeline. However, as more and more banks have taken on outsourced business services over the past five years, the reality has been found to be more the opposite. We have seen that back-office outsourcing has enhanced regulatory compliance and has in fact become more of a driving reason for adopting outsourced services, rather than the contrary.” 1
Choosing to Outsource
At FINCAD, we’ve worked with numerous firms that have chosen to outsource regulatory tasks and reporting to us—with the results being reduced costs, improved productivity and better resource utilization. Below are some areas that we are assisting banks and other companies with today:
- Independent Price Verification (IPV) – For IPV, consider this example. Say you have a limited number of instruments in your portfolio that require more complex valuations (which is often the case). If you were to build or buy software for this, the cost per trade would be very expensive. Also, is it worth hiring or training someone with the expertise to handle those instruments, especially when it is likely that resource or skill set would have limited use elsewhere in the organisation? I’d say not. As such, outsourcing of IPV is popular with clients that wish to keep regulatory cost at a minimum.
- Prudent Valuation (PV)- This is another key area that firms may struggle to get right. But when handled optimally, it can have a profound effect on reducing your capital charge either in percentages or in dollar terms. Our Prudent Valuation Optimisation Service has helped firms realize considerable cost savings. In fact, one of our clients, a multinational investment bank, has been able to reduce up to 80% of capital allocated to specific additional valuation adjustments (AVA) by employing our Prudent Valuation Optimisation approach. This approach focuses on Market Price Uncertainty and Close out Costs – which are typically a significant part of a firm’s total in terms of AVA.
- XVA – Similar to IPV, you might only be required to perform XVA on a limited number of trades, which makes it beneficial to consider outsourcing. It’s worth noting that XVA is one of the more complex calculations for the market in general and one that relates directly to regulatory reporting. So even if you can handle valuations and risk in general, it might still make sense to seek out expertise on XVA. Below is a case study on FINCAD client, Mitsubishi UFJ Financial Group, Inc. (MUFG). They came to us for assistance with XVA— specifically credit value adjustments (CVA).
MUFG Case Study Example:
Headquartered in Tokyo, MUFG is Japan's largest financial group and the world's second largest bank holding company.
The bank needed to calculate credit valuation adjustments (CVA) for their various trading counterparties in order to meet Basel III requirements. Therefore they sought a solution for CVA reporting. Already a satisfied FINCAD client, the natural choice was to go with FINCAD’s F3 CVA service offering.
“We find FINCAD solutions to be easy-to-use and extremely reliable. Additionally, the support team provides knowledgeable answers and quick service which makes a big difference to us. These factors had a large impact on our decision to go ahead with FINCAD’s CVA service offering.”
- Ronald Hart, Associate Director, Treasury Division, MUFG Bank (Europe) N.V.
MUFG now relies on FINCAD for accurate and efficient CVA calculation and reporting on a book of interest rate swaps, basis swaps, and cross currency swaps, in addition to approximately 2200 FX forward contracts across 55 counterparties.
Read the full-length case study to learn more about MUFG’s story.
1 The Future of Banking – Can Outsourcing Improve Regulatory Compliance? International Banker: https://internationalbanker.com/banking/future-banking-can-back-office-o...
