Network Management Data – Risk and Regulation
“In god we trust; all others must bring data”.
The great American engineer W. Edwards Denning’s statement was clearly somewhat tongue-in-cheek, but it is nonetheless true – data is everything. In itself it is just snippets of information, usually valueless when out-of-context. Properly housed and organised it becomes intelligence – essential to a bank’s risk analytics, management and regulatory compliance functions. It is the most valuable asset that a bank has at its disposal. However enormous the firm’s processing power, however clever the AI, systems and algorithms, it is the data that really matters; the more the better. As practiced innovators in powerful data management and reporting technology, we at MYRIAD Group Technologies are vigorous proponents of this theory on the strength of long experience.
Network Management methods are continually under great scrutiny as Regulators and Risk Managers deepen their focus on the area, recognising that weak models can compromise AML controls, Liquidity Management and Client Money Protection. This makes it critical that the vast swathes of data that come into the area from the agents (and elsewhere) is utilised to demonstrate control and support. Using this data effectively will help the organization to increase efficiency, make better decisions, properly inform cases for projects, increase accountability and take preventative measures through analysis.
Whatever the data, and however much there is of it, it is next-to-useless if not structured and presented sensibly. Logically framed and coherently displayed, with context and workflow, nothing is more powerful. The information imparted to Network Management from the custodial and correspondent Network must be intelligently delivered to be able to support and inform the other divisions within the bank. The MYRIAD platform has been engineered to provide this facility, extensible throughout the organization for firm-wide transparency across the network.
The volume of data consumed by banks today grows exponentially and is delivered in a variety of inconsistent, disparate and fragmented formats. This makes it very difficult for internal stakeholders to process the pertinent information with any accuracy to build a picture and make educated decisions. It is here that the Network Management team plays an increasingly proactive role, in line with its own evolution, which has been profound over the last few years. The traditional responsibilities of the Network Manager – risk manager, regulatory and financial crime compliance, cost management, capability assessment and market information specialist – have somewhat morphed (whilst substantially maintaining the weight and content of these duties). Internal coordinator, knowledge provider, data integrator, partnership manager and driver of new (technological) solutions have now broadened his or her remit. Innovation is needed to concentrate this expertise, and innovative platforms are needed to deploy it to the greatest effect.
In assuming charge of data aggregation and integration, the Network Management team becomes a comprehensive source of knowledge for the whole business. In collaborating with other areas (global banking, markets, securities services, cash management) inside the organisation, it becomes invaluable as a source of information and an increasingly important player in the development of strategy and implementation procedures for the bank, as well as for its own clients. It is now the internal function charged with coordinating many different activities between a variety of business streams (Legal, regulatory compliance, risk, credit, operations, IT/Cyber) across banks who are utilising external and internal agents. It is crucial that just one party has full visibility and oversight of these agents and the information imparted by them.
Such centralisation helps to mitigate the risk of separate stakeholders within banks establishing their own bespoke Network solutions, which could lead to a surfeit of external agents, overlaps, inefficiencies and unnecessary costs. Network Management collates, manages and deploys all the data, and so this risk is adequately controlled – but only if it is well-organised and immediately accessible through a specialised platform.
Since Network Managers execute a critical role in monitoring risk management, regulatory and financial crime compliance, technological innovation and evolving risk dynamics will have a direct effect on their traditional activities. The rigorous regulations on client money protection and the recognition that significant client assets are often held via third party agent arrangements drives a heavy set of compliance obligations for firms. Regulators are seeking evidence of a strong set of procedures and enhanced control mechanisms.
The reputational and financial damage of poor Account Management can be a significant management distraction. For firms with complex entity operating models, the need for consistent standards and integrated control systems is of particular concern. It is only sensible, then, to deploy tools that encourage full transparency throughout all elements of the Network – account structures, fees, assets under custody and documentation. Speaking as both an ex-Network Manager and before that, an Operations Manager reliant upon the former, I have seen the fallout of the lack of the right technology from both perspectives. Neither was a pleasant experience.
Reflecting the asset segregation of the bank’s customers is a top priority in complying with the customer-protection rules of the US Securities and Exchange Commission, Commodity Futures Trading Commission, Financial Industry Regulatory Authority (FINRA) and UK’s Financial Conduct Authority (FCA), among others. The US Office of the Comptroller of the Currency (OCC) also requires that banks standardise and document the risk-weighting process they use to evaluate the safety of their assets and client assets held at all their external service providers. In an audience poll conducted at The Network Forum in 2019, 60% of the respondents said they are most affected by of the Alternative Fund Managers Directive (AIFMD) and UCITS V when it comes to segregation of client assets.
Regulatory requirements (or at least the thrust of the directives) mandate that measures are in place at banks and Global Custodians to prevent the loss of assets at the local agents. The GC must ensure protection by wording custody contracts to ensure that the agent has sufficiently protected the assets and cash of the ultimate fund manager by separating them from their own assets.
Network Management must be able report all this to the regulators and to the risk committee (often comprised of product compliance, legal, regulatory reporting and risk and control departments) to decide whether to retain the local agent bank relationship or to remain in the market at all. A reporting suite, integrated with a clever Network Management platform to source and present the data intelligently, firm-wide and automatically, is an invaluable asset to this end.
The enormous array of information and records involved in executing this work must be captured in systems that can impart the data as intelligence without delay, to communicate the exposure to Credit Risk should there be a local custodian bankruptcy, highlight the issues that are outstanding at the GC, automatically score an agent’s performance against an SLA, assess the results of a Request for Information or rolling Due Diligence exercise and alert to the expiry of documentation, all digitally held in context, governing each relationship. If the data is held in a discordant fashion, in various systems that do not talk to each other, this in itself is a risk. It will compound the operational, regulatory and commercial risks that Network Management would seek to address and alleviate. The chances of being able to present a coherent set of data in consolidated report format, quickly, for the benefit of any department in the firm would be extremely slim.
The ability to present network data as a full risk or regulatory report from a dedicated platform is a huge advantage in strengthening a bank’s resilience to adverse events and in satisfying the regulators. An implementation of the MYRIAD platform delivers that advantage.
Asset Servicing Times, Issue 268, 23rd June 2021