Looming financial services regulation deadlines are putting big pressure on big banks

February 11, 2016

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It is understandable that financial services regulatory challenges seem unavoidable with drastic increases in velocity and the complexity of change. Financial institutions are aware there is a cost of non-compliance yet concerns still remain in the management of these changes. For some, compliance with regulatory reform seems far from attainable, particularly while continuing day-to-day operations in a changing global landscape.

Global authorities created an international framework of reform including initiatives to make the derivatives market safer and measures outlined by the Financial Stability Board (FSB) to address the “Too-Big-To-Fail” problem. One of the areas of impact is financial markets documentation, which continues to be amended to comply with several regulatory directives, such as the non-cleared margin rules through the Dodd-Frank Wall Street Reform & Consumer Act in the United States and the European Market Infrastructure Regulation (EMIR) in Europe. Failure to comply with these new regulations could not only lead to compliance related issues and fines, but could also damage a financial institution’s reputation and client relationships.

Balancing Financial Services Regulatory Compliance with Reality

As multi-national global banks weigh options in dealing with these changes, they aim to balance regulatory compliance with business realities. Simultaneously, global financial institutions are refining their business strategies to account for changes in the global landscape, selling off business units, reducing investment in lines that are not profitable or are constrained by capital requirements and exiting geographies. As certain financial institutions look to shift from “one stop shops” to greater specialization, there is more competition and differentiation.  Clients will re-evaluate their relationships and banks must be ready for it.

Documentation departments are in a particularly difficult position. They are faced with what some say is the most noteworthy development in documentation since the 1992 ISDA, re-documenting every Credit Support Annex (CSA) for margin over the next few years. The most painful part of the effort is that documentation departments are being forced to do so with reduced budgets and in some cases, hiring freezes. This pressure will ultimately lead to less tolerance for deviations in their preferred legal and/or economic terms, as most stakeholders within banks do not have the capacity to analyze and approve a wide range of bespoke language for every client. Banks will simply be forced to prioritize their client base, most likely with significant pushback from the front office. This approach puts at risk the bank’s relationship with its clients and could accelerate a client’s interest in seeking alternatives. On one hand, banks want to strengthen their client relationships by becoming more specialized and on the other hand, they are hesitant to develop a response to regulatory change that could cause these very same clients to walk away.

Global financial services regulatory deadlines are quickly approaching and banks are looking for financial trade documentation solutions to solve the overwhelming pressure to ensure compliance is achieved within the required timeframes without impacting client relationships. Most global financial institutions are considering partnerships with organizations that can provide well-trained lawyers in technology-enabled, process oriented environments; ensuring quality work is delivered as an alternative to using costly law firms or temporary staffing. Whatever the solution may be, organizations need to take action or risk paying substantial fines.

Charlie Minutella leads the global business development team for the Financial Trade Documentation Practice at Thomson Reuters Legal Managed Services and can be reached at Charles.Minutella@TR.com.