• Mike Lines, Director of Financial Services at Recommind


• 23.09.2015 02:34 pm

Today’s connected world has seen technical and legislative developments increasingly put pressure on financial organisations to improve their data strategies. The sheer volume of unstructured data being created is reaching exorbitant heights. This, coupled with the stringent regulations encroaching on the banking sector such as EMIR and Basel III, makes it imperative for banks to control collateral costs and optimise capital allocation.

Investment banks now hold more Over-the-Counter (OTC) International Swaps and Derivatives Association (ISDA) agreements than at any time in history, and managing them is only getting more difficult given each OTC derivatives contract now has hundreds of data points. In some cases, banks have lost between $5 million and $25 million in a single trade after using the wrong interest rates, posting the wrong type of collateral or being arbitraged by counterparties. To mitigate these risks, banks are beginning to rely on solutions that automatically sift through tens of thousands of counterparty agreements and identify relevant data that traders need to drive profits – eligible collateral, interest rates, termination events, netting, thresholds and independent amounts.

Minimising manual methods

More and more, banks are moving from traditional processing methods that can take months to complete to using machine learning technology that automatically categorises data and extracts counterparty agreements for early insight. Banking businesses need systems and processes in place that can visually help identify the patterns in information flows and prioritise the data review process. Using machine learning technology drastically reduces contract review time and helps eliminate error-prone manual processes that can lead to regulation headaches and substantial financial losses.

This speed is only possible with technology especially since banks are racing to find relevant information among millions of archived documents, faxes, emails, spreadsheets, instant messages, social media and audio conversations. These kinds of data are the most difficult to examine because the information is rarely kept in a single document – typically it’s hidden within a sequence of events across different file types. In the past, the industry used compliance officers to process information, but today’s banks are producing billions of documents so it’s no longer feasible to manually review all of the information within the time required to build a case that satisfies regulatory demands.

Finding the facts

Failures in financial controls have cost banks large sums of money in fines that impact everyday operations and their ability to perform. For instance, the recent Forex investigation involving five banks cost the banks $1.7 billion in fines. This fine falls on top of money already set aside to fund the investigations and other legal expenses, which is often in the millions.

The Forex investigation also proved that the FCA is willing to reward banks that cooperate in investigations. For example, the governing body will grant a 30 percent reduction on any fines for the five banks that have participated in inquiries as part of efforts to quickly reach a resolution. It highlights that in today’s evolving regulatory landscape, financial institutions need to quickly get their hands on the facts to assess their exposure and respond appropriately to demands.

The Bottom Line

The regulator’s appetite for creating a more controlled market is only increasing. When allegations of manipulation erupt, financial organisations can be on the front foot though when it comes to dealing with an investigation by investing in early data assessment technology and a platform that prioritises the review process to quickly and accurately assess their exposure and respond appropriately to the regulator in the race for leniency. This automated, repeatable process helps banks better understand what has happened and where the responsibilities lie, which ultimately reduces the impact of investigations on banks’ balance sheets – all the while keeping litigation costs down.