For some financial organisations, the word ‘compliance’ is one that induces fear. Non-compliance can be a costly business, as was demonstrated last year when Merrill Lynch were fined £34.5 million by the FCA for failing to report transactions in line with the European Marketing Infrastructure Regulation (EMIR). And with the amount of red tape in the industry increasing, networks are often feeling the strain from all the requisite data.
The demands that compliance places on companies only further exacerbates the issues created by other changes in the industry: faster trading, smarter IT and greater customer demand. With increasing amounts of data being added onto networks and into storage facilities, data must be stored, managed and/or reported upon in a timely and responsible manner to comply with the new regulations. The stress being placed on networks in the investment banking industry is growing at a considerable rate, making it imperative that companies have a robust IT infrastructure in place to cope with the growing demands.
Tighter regulations are giving Investment Banks food for thought
The process firms must go through to comply with EMIR is just one example of how regulation is creating challenges for the financial services industry. EMIR is part of a broad regulatory drive within the EU to reduce the operational risk in the derivatives market, as well as protecting the counterparties who take on the credit risk. The regulation in question stipulates that direct trading between two parties should always be cleared through a central counterparty in the EU.
Additionally, risk management procedures should be adhered to for uncleared transactions, and all derivative transactions must be reported to a trade derivative. Compliance with EMIR requires a large amount of processing power, and is a fairly recent burden having only been enacted in the last five years.
It’s not as simple as making preparations solely for EMIR, either, as there are differences between the reporting requirements mandated by the EMIR and those that are appropriated under the Markets in Financial Instruments Directive (MiFID). The complexity of complying with both legislations could cause further difficulties for companies already struggling with network capacity due to the pressure placed on the infrastructure. On top of that, Brexit will almost certainly bring its own set of rules and regulations that will require suitable consideration and yet more mass processing of information.
Compliance is putting added strain on network & IT infrastructures
Companies wishing to adhere to regulatory compliance will need to update their processes in order to do so. This will no doubt be an extra burden on network and IT infrastructures, as the efficient management of them will rely on streams of accurate and timely information reaching senior decision-makers – giving them a clear idea of the company’s compliance profile, while at the same time, allowing the company to fulfil its external reporting duties.
There is also an international dimension to compliance issues, given the number of market participants who operate across borders. Data centre operations, data management processes and networks must all comply with country-specific regulations as well, in addition to their other considerations. And whilst these are not as data-heavy or taxing as other regulations, they still cannot be ignored.
What networking options are available?
The issue of compliance tends to be the elephant in the room for investment banks when it comes to discussing making major changes to existing IT infrastructure. The large range of national and international compliance requirements means that there’s greater complexity when designing a network’s structure, capacity and capabilities than there was previously.
The requirement for the information to be routed to senior managers is an unhelpful one, as it may also heap significant operational pressures on networks and IT departments in the process, but it’s a necessary burden, as it’s vitally important that the data is being monitored. Some legislations, such as GDPR, even advise appointing a member of staff full-time to be responsible for overseeing the smooth-running of the process; such as the scale of the operation.
Compliance may also change the scale and scope of some operational matters – such as altering security requirements. But the fundamental problem every company needs to be prepared for is the potential operational shortcomings of the network. Without a robust, dependable and secure network, that can protect and support the business, many may find their compliance attempts derailed.
In line with compliance, the amount of audit trails have increased in recent years, and as such, the number of reviewers and approvers has risen in kind. This has added to the number of data processes for networks to handle, which subsequently leads to more delays to contend with and more data to capture.
The consequences of non-compliance are undoubtedly weighty. The punishments in place for firms that compromise the financial standing of their customers and partners are rightly severe to deter poor business operations. As such, the practice of fault tolerance and geographic diversity of key systems has become of paramount importance for businesses looking to observe the guidelines.
With the sheer amount of data that needs to be stored and processed by investment banks in accordance with the rapidly rising number of regulations, the importance of a reliable network, with a large data capacity, cannot be overstated. A secure network is a must-have for investment banks in today’s climate.