Be More SwanImplementing Regulatory Change More

Effectively to Drive Competitive Advantage

01 | Be More Swan

The increasing pace and breadth of regulation, combined with its relentless and unpredictable nature, have made implementing regulatory changes extremely challenging. The result has often been reactive and frenetic responses which can be costly and frustrating for all parties involved.

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Contents

This paper explores innovations in delivering regulatory change that have helped some organisations deliver in a more controlled, compliant and cost effective manner.

Introduction 03

Regulatory Change: an enduring industry wide challenge 04

Implementation: a formidable task 05

Be More Swan 06

Manage 07

Deliver 09

Control 11

Conclusion 13

Introduction

In the wake of the largest financial crisis in a century, the global financial services industry has faced an avalanche of new regulation. In addition to changes of strategic direction that this necessitates, the actual implementation of regulatory requirements has become a strategic issue in its own right, and will remain so for some time to come.

The increasing pace and breadth of regulation,

combined with its relentless and unpredictable

nature and a litany of complicating factors, mean that

identifying and making the necessary changes in an

orderly manner has become an almost impossible

undertaking.

Despite best intentions, regulatory implementation

initiatives can often end up as a reactive and internally

focused mad dash simply to ‘get over the line’ and

achieve minimum compliance. This can have important

long term side effects. It can drive high costs,

place great strain on the business and risks leaving

organisations with a multitude of uncoordinated

tactical compliance solutions and frustrated internal

stakeholders and clients.

The complex, compound challenges mean that

perfection, or anything close to it, is unattainable.

However, we have seen some organisations

develop innovative approaches to help navigate the

complexities.

We have found that those that have coped best have:

• put in place the strategic management and governance arrangements to allow rapid joined-up decision making;

• invested in strategic flexible delivery capabilities to manage unpredictable workloads and changes in direction whilst driving cost efficiencies; and

• taken proactive steps to drive a long term sustainable approach to compliance.

These techniques have helped them make major strides

to ‘Be More Swan’: outwardly appearing to serenely

glide through new regulation despite paddling furiously

‘under the surface’, by delivering in a more controlled,

compliant and cost effective manner.

As well as leaving operations and technology in better

shape and reducing short and longer term costs, they

have been able to provide a smoother experience for

their clients.

“ Identifying and making the necessary changes in an orderly manner has become an almost impossible undertaking.”

03 | Be More Swan

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Regulatory change: an enduring industry wide challengeThe recent financial crisis has led to the intense focus of regulators on the financial services industry. The regulatory landscape has undergone major changes and regulatory commitments still continue to take effect across financial markets on a global basis. The scale, scope and pace of reform across all asset classes are far reaching and continual.

This has driven some fundamental and wide-ranging

structural changes to the marketplace. Market

participants have been forced to manage down non-

core assets and reassess their product offerings,

market strategies and customer bases. Much thought,

commentary and debate has been devoted to these

strategic impacts and the optimal corresponding

responses different organisations should take.

This paper focuses on the task of actually making the

changes needed to become compliant: it has become

clear that implementing regulatory change is a strategic

issue in its own right.

Two wide-ranging regulatory requirements – Dodd

Frank in the US and EMIR in Europe – are now both well

into implementation. However, a significant set of new

regulations are lining up over the next 3 years. These

stem both from new jurisdictions (primarily across

G20 members, including Russia, Australia and Japan)

and due to further legislation in the US and Europe,

including MiFID2, Basel III, FATCA, and margin collateral

requirements.

Much of the plans are yet to be finalised and the exact

timelines are uncertain. However, it is certain that

the compound effect of these regulations will be a

substantial set of implementation initiatives. Based

on the lessons from implementation efforts to date,

the scale and complexity of this implementation

challenge cannot be overestimated. It is clear that the

implementation issue is likely only to get harder and

more complex.

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Implementation: a formidable taskAs those who have tried it know all too well, delivering transformational change in financial organisations is hard at the best of times. As well as all the usual challenges that such endeavours entail, regulatory-driven change comes packed with a raft of constraining factors that greatly complicate its implementation.

THE ISSUES• The relentless volume, pace and reach of often piecemeal requirements can overwhelm organisations’

ability to plan and control change, and to see the big picture.

• Short notice, aggressive compliance deadlines, accompanied by escalating financial penalties.

• Sketchy and ambiguous regulations, with clarifications and internal policy decisions made late in the day.

• Cross-cutting regulations overlap and impact numerous processes, systems, departments, geographies and clients in a way that organisations are not used to managing.

• Regulation can contradict business goals, particularly if seen as driven by Legal and Compliance.

• International inconsistency in rules across US, UK and Eurozone (and beyond).

• Skills gaps: departments that are not used to or skilled at managing change (such as Legal and Compliance) find themselves front and centre of major delivery activity.

THE IMPLEMENTATION CHALLENGES• A rapidly moving target: the implementation approach, priorities and work volumes change at short

notice, making resource planning, IT build and communication hugely challenging.

• Uncoordinated action by different parts of the organisation, and different banks and counterparties, wasting time and effort and leading to conflicting approaches.

• Businessconflict:implementation teams can feel in direct conflict with the business, but still need to find a way to implement.

• Rework of solutions that have to be repeatedly changed, magnified by multiple departments and potentially countries involved.

• Client impacts: clients are hit with numerous, uncoordinated demands for information and changing and conflicting instructions at short notice.

THE END RESULTS• Frustrated clients: increasingly looking to financial institutions for clarity and support, clients can end up

very frustrated by their experience.

• Implementation cost: compliance takes far more effort and costs far more than it should.

• Business impacts: solutions which overly compromise the business hit the bottom line.

• Cost to maintain: the aggregation of tactical solutions incurs a substantial and escalating cost to maintain and adds significant complexity to the business.

• Strategic distraction: the effort expended and lost focus impair the organisation’s ability to progress with other strategically important change agendas.

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Be More SwanThe very nature of regulatory change means that delivering in a straightforward manner is never going to be possible. However, this does not mean that the issues we have seen, and their end results, cannot be mitigated.

Our vantage point supporting major clients grapple with their regulatory change implementation challenges

has given us the opportunity to observe numerous different approaches. There is no panacea or ‘silver bullet’

solution. However, we have seen a series of innovations and refinements to the traditional ways financial

institutions have delivered change. Some of these have proved effective in helping the organisations that

have developed them to deliver more sustainable solutions in a more controlled and cost effective way, to the

benefit of all involved.

We have distilled our experience of what has, and what has not, worked well and the themes emerging from recent

regulation, to define nine practical steps to complement existing implementation and IT delivery approaches.

CONTROL

CLIENT

MANAGE D

ELIVER

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Actively manage cross-department stakeholders

Buildaflexibleregulatoryresource pool

Coordinate & plan client engagement

Create a regulatory processing ‘factory’

Control, monitor and assure compliance

Think BAU from the start

Master your data

Proactively manage regulatory ambiguity

Understand your global regulation

roadmap

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Understand your global regulation roadmap

Regulation is global, with global impacts. The

approach to regulatory change thus needs to be

managed globally yet still have the flexibility to

change direction quickly.

This requires an empowered global, joined-up

decision making structure, supported by a roadmap

that provides the very latest view of a joined-up plan

as a basis for decision making. Constantly changing

scope and timelines mean the roadmap needs to be

actively managed.

This single view will allow synergies to be identified

and a strategic view of where re-usable strategic

solutions are best and where tactical solutions are

most appropriate, particularly for technology.

Global regulation roadmap checklist

A single, actively managed, roadmap of in-flight and future planned and potential regulatory projects.

Regulatory initiatives aligned with the organisation’s wider strategic objectives.

A single global implementation governance regime which drives senior management decision making and controls a single regulatory change budget.

A global organisation structure for delivery of regulatory projects.

A standard regulatory project method to allow consistency and comparability of projects, and provide a basis for continuous improvement.

An IT planning methodology that is flexible enough to manage the frequent changes in direction.

Key interdependencies between regulatory initiatives and other portfolios (e.g. IT) understood and proactively managed.

MANAGEPut in place the strategic management and governance arrangements to allow rapid joined-up decision making.

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2

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Understand your global regulation roadmap

Proactively manage regulatory ambiguity

Actively manage cross-department stakeholders

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Proactively manage regulatory ambiguity

Regulatory projects are usually dealing with a

moving target and it is important to ‘get ahead of

the game’ to drive out areas of ambiguity early and

then close them out.

Defining scope – including which asset classes,

products, trades and clients – can otherwise come

too late as the devil is frequently in the detail, there

are typically a large number of decision makers and

time is required to get hold of the data needed to

drive decisions.

Managing ambiguity checklist

Effective representation on industry bodies to drive the agenda, understand the nuances, pick up early warning signs and help seek clarifications.

A working group with all scope decision makers established at the start to drive decision making at pace.

An early working definition of scope inclusions and exclusions that is challenged by Operations and refined as policy is clarified.

Subject matter experts, with a good working knowledge of the organisation’s data infrastructure, used to help define scope.

Use of parallel alternative solutions, Agile build methods and the 80:20 rule to focus on likely or known elements.

A business case behind each project assessing alternative approaches to drive realisation of any potential benefits. (Regulators are increasingly interested in this area).

Regular communication of the latest approach, including what is fixed and what is uncertain.

Actively manage cross-department stakeholdersA sophisticated focused approach to stakeholder

management is a critical activity. Regulatory change

initiatives often have impacts right across the

organisation, typically involving Legal, Compliance,

the Business, Client On-Boarding, Credit, Operations,

IT and Reference Data Management. These business

units are typically used to running operations in silos

rather than coordinating management of complex

tasks at low levels of detail.

We find this topic is best addressed strategically and

not left to individual projects to lead as a ‘tick-box’

project management activity.

Stakeholder management checklist

Clear understanding of all internal and external regulatory change stakeholders and their goals, (including ISDA, regulators and competent authorities, industry group discussions, trade repositories and industry platforms).

A clear stakeholder and communications strategy and plan for the overall regulatory change agenda and for each individual initiative.

Senior stakeholders from impacted areas included in implementation governance and accountable for overall delivery in their business area.

Formalised delivery roles assigned to key delivery stakeholders, including regulation subject matter experts.

A transparent and flexible management information regime that provides tailored and frequent implementation information to each group.

09 | Be More Swan

Build a flexible regulatory resource pool

We have found that a formalised flexible regulatory

resourcing model, with three tiers of resources,

provides the ability to switch resources ‘on’ and

‘off’ at short notice. This is important to provide the

ability to reliably hit short-notice deadlines, avoid

burn-out of staff and avoid unnecessary costs of

unproductive resources.

This requires proactive investment to set it up, a

dedicated talent strategy and effective ongoing

management.

DELIVERInvest in strategic flexible delivery capabilities to manage unpredictable workloads and changes in direction, whilst driving cost efficiencies.

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5

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Build a flexible regulatory resource pool

Coordinate and plan client engagement

Create a regulatory processing factory

Figure 1: a flexible, tiered regulatory change resourcing model

Tier 1: Dedicated departmental SMEs• Subject matter experts from each key

department involved in regulatory change implementation.

• Formally dedicated (at least in part) to the programme.

• Responsible for day-to-day representation and management of their area.

Tier 2: Transferable internal programme resources• Internal pool of expert project and

programme managers, business analysts, data analysts and IT resources.

• Fully understand the organisation’s method for delivering regulatory change.

• Specific regulation expertise not necessary.

• Ability to be swiftly deployed onto new and varied regulatory change initiatives.

Tier 3: Scalable external resources• Flexible capacity and capability with

external consultants and contractors.

• Used for specific discrete items of work.

• Provides the ability resource up for intense periods or for projects requiring particular skillsets.

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Coordinate and plan client engagement

A dedicated global client outreach workstream tightly

linked to the other parts of implementation, allows

clients requests to be joined up and managed, including

during changes of direction.

Regulatory change initiatives typically require firms to

obtain a substantial amount of information about, or

obtain additional legal agreements with, their clients.

Often, obtaining the information will only be the first

step, with regular ‘refreshes’ of information required.

In most situations, several projects (potentially

originating from different regulations, from different

geographies, and/or from different parts of your

organisation) will need to interact with the same clients,

meaning a dedicated coordination function is vial.

Client engagement checklist

A single point of contact for each key client to avoid forcing clients to manage internal organisational and functional boundaries.

A client outreach strategy (e.g. support and coordination arrangements, the approach per asset class, jurisdiction etc.).

Coordinated high quality client communications with clarity of options for each regulation.

Clients’ expectations managed: regular progress updates, no over-promising and under-delivering, a forecast of likely future requests.

Coordination with client facing departments, such as Sales, so that they can be the first line of defence for queries.

A maintained and regularly updated central client contact system, built into KYC.

Clients contact and responses tracked to allow management information and an audit trail.

Create a regulatory processing factoryInvesting in setting up a ‘processing factory’ allows data,

due diligence or legal agreement processing tasks to

be turned into a production line that makes resource

planning easier, drives cross-functional productivity and,

in many cases, allows the tasks to be handed to cheaper,

commoditised resources.

Every regulatory change implementation inevitably

involves routine and repetitive processing of large volumes

of client and internal data, often at short notice, and also

often with a cross-functional coordination challenge. The

ability to respond robustly and flexibly is very important.

An effective production line needs a well defined work

package to scope its task. Multiple production lines will

likely need to exist in parallel. A project management

function overseeing the activity is thus helpful.

Figure 2: a factory approach to a regulatory data processing task

• Production line process• Scope of clients• Data and controls approach• Roles and skill-sets• Targets

Management information to stakeholders

Production line continuous improvement

Factory work packages

Factory management and reporting

Step 1

Step 2

Step N

QA

QA

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Master your data

A strategic approach to data is required to manage the

wide-ranging compound impact of the overall regulatory

agenda on the data landscape of market participants. This is

important to both provide the accurate data that is critical

to the success, and to provide the flexible capability to set

up and change new regulatory reporting requirements.

New regulations are causing continual introductions of

new ‘master’ data, the core information that financial

organisations hold, re-use and trust to be correct.

Regulations often require data to be reported at levels of

both abstraction and granularity that disparate systems

do not easily allow. The inevitable tactical solutions, with

manual processes and spreadsheets, and the inevitable

consequent human error and duplication complicate the

picture further.

We recommend taking a fundamental review of the data

infrastructure, the approach to storing client reference data

and how you maintain the corresponding support systems.

Data management checklist

A centralised master data strategy defining where new master data will sit (e.g. CRM versus trading systems), and related internal and external data flows.

Invest in systems that allow strategic data controls (e.g. workflow tools, business rule validations, audit trails, and automated writing to master reference data systems).

New data requirements defined at the start of each new regulatory implementation (including the storage, maintenance and sharing approach).

Data sources, verification needs and options for updating from supplementary sources captured, and data refreshed on a regular basis.

Good practice and control built into every process (including second person validations, clear ownership of data points and processes for reviewing data issues).

Data quality KPIs are clearly understood and managed.

Business as usual teams trained in processes for updating master data and inputting new master data.

CONTROLTake proactive steps to drive a long term sustainable approach to compliance.

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Master your data

Think BAU from the start

Control, monitor and assure compliance

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Think BAU from the start

Regulatory implementation initiatives almost always

have two parts. The first, known as the project, uplift

or remediation phase, is to make the existing business

(e.g. clients, trades, documents) compliant. The second

phase is to ensure that the new regulatory regulations

are met on an ongoing basis, both for existing and new

clients – the ‘BAU’ or business as usual phase.

To avoid complicating transition, we have found it is

important to focus on the BAU phase from the start.

Preparing for BAU involves transitioning processes and

functions set up in the project into the BAU teams. It

may also involve setting up a new service to clients or

even a new department.

BAU transition planning checklist

A transition plan for each regulatory initiative, identifying the optimal point for handing over each task.

Coordinate the BAU transition approach across the whole regulatory change project portfolio, assessing where it makes sense for roles and tasks to sit together.

A set of robust checkpoints ‘gates’ that governs transition, with business sign-off at each stage.

Project phase teams and processes set up to allow easy transition into BAU, with department subject matter experts involved to support the approach.

Technology opportunities used to support transition (e.g. workflow and automated controls).

Training programmes run before, during and after go-live and dual operating periods used effectively.

Control, monitor and assure complianceThe ultimate aim of regulatory change is ensuring

compliance. However, the nature of implementation

can paradoxically lead to high potential for ‘breaks’,

or instances of non-compliance.

Some tactical systems, processes or workarounds are

inevitable. New processes are often untested in a BAU

environment. Controls to manage the associated risks

are of paramount importance. Further underpinning

this need, regulators, and increasingly clients, look for

a demonstration of a robust set of controls and risk

management measures.

Compliance control, monitoring and assurance checklist

Monitoring processes for non-

compliance (including both reporting

and technology controls).

Exception reporting and escalation

processes, including key criteria and

tolerances.

Strategic controls implementation

projects included on your regulatory

roadmap.

A formal review process to quality

assure process for weaknesses.

Measures taken to proactively avoid

non-compliance (e.g. preventing non-

compliant accounts from trading).

The Quality Assurance function

and subject matter experts

involved in shaping controls during

implementation.

A plan to engage with regulatory,

clients, trade repositories and other

external parties.

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Conclusion

The tidal wave of new regulation has wrought an implementation requirement that has challenged, and in some cases overwhelmed, the industry’s usual approaches to managing and delivering change. The bad news is that there will be no let up.

The good news is that the necessity of meeting the challenge has led the industry to adapt and innovate, creating

new approaches to delivery to help make it a more controlled, sustainable and cost effective exercise.

Those organisations that manage to outperform their peers in this regard will find themselves at an advantage when

it comes to managing client relationships, controlling operational costs and complexity, and delivering other strategic

priorities. The prize is worth fighting for.

The inherent nature of delivering regulatory change is unlikely to change. It will inevitably involve large amounts of

ambiguity, unpredictable workloads, moving targets, changes of direction, tactical solutions and complex data and

controls landscapes. The scale of these challenges can be reduced by adopting some of the approaches we have

described, but many of the techniques have focused on accepting reality and taking strategic action in order to

manage around it.

The successful approaches we have seen have one important thing in common: taking a step back to see the bigger

picture and applying strategic planning and project management principles in an intelligent way to develop strategic

solutions. This is the surest path to taking advantage of further innovations that will surely follow.

While there is obviously no panacea, in setting out the best of what we have observed to date, we hope this helps

you to navigate this complex delivery challenge and ‘Be More Swan’.

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“ Those organisations that manage to outperform their peers in meeting the implementation challenge will findthemselvesatanadvantage…theprizeisworthfightingfor.”

Gate One is a Business Transformation consultancy that specialises in the design and delivery of complex business

change. We have a simple cause: to make your organisation better. We work in small teams embedded seamlessly

alongside your own people. We have the knowledge, experience and approach to get to the crux of problems

quickly, shape intelligent solutions and deliver tangible, lasting results which can be felt quickly.

Tofindoutmorepleasecontactus

+44 (0) 207 293 0893 info@gateone.co.uk www.gateone.co.uk