Rise of RegTech


Just as we have got used to the ubiquitous term “FinTech” so we are now noticing the increasing visibility of its little brother, “RegTech”.

The financial crisis exacerbated an already marked trend towards increasing regulations, to the point where regulatory red tape is seen as a major obstacle to effective business operations. Anecdotal evidence of bankers in the front line of the regulator’s assault indicates an almost Kafkaesque level of bureaucracy governing every aspect of banking operations as regulators seek to ensure no repeat of past sins.

Of course what is often conveniently forgotten in assessing regulatory regimes is the simple fact that they exist to protect industry participants from themselves as much as anybody else. Regulatory compliance costs much but poor practices usually ends up costing many multiples of that.

So, the increasing demands of regulation have begotten RegTech.

There is something about regulation and compliance that seems to evoke images of paper forms and fountain pens, as if it is a task that requires above average levels of human intervention to accomplish. As if it is a place beyond the reach of automation.

In fact, as Deloitte notes, there has been technology used at various levels in the Regulatory space for over 20 years. However, what the new ReghTech label recognises is that “the gap between software and non-software enabled services has widened significantly”.

That is to say that non-software enabled services are now considered to be markedly inferior and inefficient by comparison to their software-driven alternatives. In fact, in any enterprise of scale, regulatory compliance without the aid of technology can now be considered almost inconceivable.

A good part of the reason for this is the incorporation of cognitive technologies that, as Deloitte puts it, allows people “understand not just explicit meaning from regulation but also the implicit meaning or ‘nuance’ that is so often a challenge to digest and assess.

Yet the perception remains of regulation in general and regtech in particular as a cost centre rather than a contributor. This misses the reality that opportunities abound to create significant value added from efficient compliance.

Consider collateral management, for example. Use of collateral in a derivatives context (rather than a pure credit context as security for loans) has taken off since the crisis.

Collateral in mitigation of counterparty credit risk (CCR) is now a permanent part of the securities trading landscape and collateral management is growing in sophistication.

The challenges are many and complex.

•    The overall exposure must be calculated at various levels of probability
•    The collateral must be appropriate to the risk and of sufficient quality/liquidity

Consequently a new role has evolved within investment banks: the collateral manager whose duties include:

•    Design, negotiation, and set-up of new collateral legal agreements
•    Collection and return of cash and collateral
•    Collateral valuation and marking-to-market

Technology to facilitate real-time monitoring of exposures is an absolute must. The objectives of regtech platforms therefore include:

1.    Agility – the ability to separate and organize intertwined data sets through ETL (Extract, Transfer, Load) technologies.
2.    Speed – The ability to generate custom reports quickly
3.    Integration to provide solutions in short timeframes
4.    Analytics – Intelligent data mining to maximize the potential of existing “big data” sets for multiple purposes.

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