FS Infrastructure: Surfing the regulatory tidal wave

The prevailing mood after the financial crisis was that the market had been under-regulated; that situation has only intensified with subsequent scandals, and is no less true today in light of recent FX fines, which have been given out to major institutions. As a result, there is now an increased level of regulation hitting banks, brokers, insurers and, to an increasing extent, the buy side in the form of Dodd-Frank, EMIR, AIFMD, Basel III / CRD IV, Solvency II, and MIFID II compliance to name just a few. There is no let-up in sight.

All this regulation requires changes to the business and operating models of impacted firms, and consequently this is having a knock-on effect on IT deployments both directly and indirectly. Infrastructure projects are being spawned, where additional storage/compute is required to analyse and report on compliance. Issues such as accurate data feeds/time stamps and the length of time that execution reports (across a wider range of asset classes) need to be stored are two examples of direct impacts anticipated from MIFID II alone.

All these changes require higher overhead costs and are mandatory projects for all firms to remain compliant, in a business where profitable trading models are increasingly hard to find. 

At the same time, many institutions are grappling with the problem of what to do with increasingly creaky legacy IT estates. Refreshing legacy IT estates simply hasn’t been a priority use of capital at a time when banks have been building reserves and looking for large scale cost savings. IT budgets have often been seen as a soft target for savings. Large projects to “fix” something that is working today (especially where a refresh carries a high degree of risk) are not readily approved. To compound the issues, these companies have found that year on year, they have less legacy IT expertise in their organisations, which is needed to implement large-scale change and this means buying in those skills when budgets are already tight.

The likes of Basel III and Solvency II focus on the capital adequacy ratios that capital markets and insurance firms should maintain, and with those who fail capital stress tests showcased in the media, the pressure is high to ensure more than adequate coverage. The “traditional” way that IT professionals in large institutions have solved these problems is to make periodic large scale investments in IT infrastructure with a high capital spend. The argument has traditionally been that over the long term, the total cost of ownership is lowered by the institution using its own money to make investments, rather than buying in managed services. However, with capital more constrained than ever and with regulation adding more cost overheads, there is really no option but to look for alternative, more flexible ways to refresh these legacy environments.

As a result, there is increasing awareness in the industry that cloud technology and the associated economics are enablers to more flexible and agile infrastructure services.  However there is also concern that “migrate to the cloud” should not be seen as a panacea response that is right for all workloads.

Financial Institutions are therefore increasingly considering single service providers that supply a range of hybrid services on a single platform, allowing firms to select the service that best suits the workload being deployed. This is especially key when looking at legacy IT issues, where colocation, or basic hardware management, may be the only options in the short term, due to lack of support for the applications on a cloud or managed services platform.

There is no silver bullet but financial organisations are being forced to rethink the way they approach IT to ensure compliance. Multiple regulatory bodies are not always joined up and the need to be compliant with regulations in various jurisdictions all adds to the burden and resultant need for agility. These are multi-disciplined projects that will take time, but we can expect to see a fundamental change in the way the financial services industry thinks about IT over the coming years.