7 January 2014

Take five: finance sector themes for 2014

The holidays are over and it’s time to get back to work. 2013 has been filled with regulatory changes that have kept many busy with the sheer effort of trying to keep up. The pace won’t be slowing down in 2014 – but regulation is far from the only issue on the agenda of firms across the finance sector. With holiday mode well behind now – and delivering greater value to clients an imperative – here are five things to look out for this year.

This news was first published on Dialogue Online.

Financial crime

Cyber crime has been the hot topic lately. To the dismay of the industry it will continue to be in the year ahead, as cyber attacks – which range from politically motivated to targeted attempts to crack banks’ systems – continue to gain pace. In 2013, for example, it was discovered a global cyber crime ring stole US$45 million from two banks by hacking into credit card processing firms. Banks and other financial services firms have been ramping up their defences, but as Fredrik Hult, an independent cyber resilience advisor, recently told Dialogue, institutions need to work together to be most effective. In New York and London, coordinated simulations were conducted in 2013, but cyber crime is a fast-moving target, so we can expect these exercises to be increased in frequency and scope in the coming years.

Unifying utilities

The old days of ‘everyone for themselves’ seem to be gone the way of dinosaurs and compact discs. As banks are looking to reduce costs, outsourcing and working together on non-competitive operations is becoming more of an attractive – and in some cases essential – option. This is particularly the case when it comes to dealing with know your customer legislation (KYC), for example, and other monitoring activities such as market surveillance. Banks are required to get relevant customer information during onboarding. The concept of a shared KYC utility has been making gradual progress and is starting to take shape: SWIFT recently announced the creation of a global, centralised utility for the collection and distribution of standard information required by banks as part of their due diligence processes. But KYC isn’t the only way banks are joining forces, however. According to a report by consultancy Aite, financial institutions are also showing a greater willingness to collaborate in shared cloud-based services.

Understanding data

Big data isn’t a new concept, but the industry has yet to completely unlock its potential, and as delegates heard in last year’s Sibos conference, banks are keen for work around this to continue. The prospect of being able to mine the transaction data that the digital world puts at our fingertips is both tantalising and bewildering. Financial institutions are looking at figuring out how to leverage big data to become more effective in serving clients, providing new levels of transparency and visibility that should enhance efficiency. The SWIFT Institute is conducting a study looking at the role of standards as a tool to help banks tackle big data. The study would research whether or not regulators could use standards to structure the overload of data set to come from trade repositories as a result of new global derivatives regulation.

Collateral and liquidity

Speaking of which, the tide of OTC derivatives regulation now engulfing market participants in G-20 countries not only requires trades to be reported, but also cleared through a central counterparty. This means, for the first time, buy-side market participants (corporates, asset managers, insurance firms, hedge funds etc) will have to post initial and variation margin for trades. This has led to widespread concerns of a collateral shortage, or at least a scarcity of the sort of high-grade collateral that clearing houses currently accept. New clearing requirements have already hit the US last year, but are set to kick-in in Europe later this year. Add Basel III rules to the mix, which require banks to hold a percentage of equity against risk-weighted assets, and it becomes an even steeper challenge, especially as central banks roll back their funding support activities. As a result, optimising collateral has become critical. Financial institutions will need to manage and move collateral more efficiently – potentially on a centralised and real-time basis – if they are not doing so already.

… and finally: Don’t forget SEPA

The deadline to be ready for the Single Euro Payments Area – the initiative aimed at simplifying euro-denominated bank transfers in the European Union – is less than a month away. And as European Payments Council chairman Javier Santamaría told Dialogue last year, there is “no excuse” if banks, corporates or payment system providers are not ready in time. However, payment processes have expressed concerns about potential glitches during the migration period. According to Michael Steinbach, CEO of Equens, it’s likely for all participants to experience some challenges after the 1 February deadline.