Sibos 2012 – Day 4 Report: Compliance and innovation: mutually opposed?

1 November 2012

The final day of the Sibos 2012 trade show in Osaka, Japan, featured much discussion about the over the counter (OTC) transparency changes post-crash as the first ever compliance track at the show came to a close, says Tom Groenfeldt. Meanwhile, elsewhere on site the Innotribe Award to the best tech start-up went to Playmoolah, a finance website for kids. Not sure if the ‘tribe’ realise, however, just how much tech money, which could have been spent on innovation, is instead being sucked up into compliance projects. This was one of the departing thoughts of delegates, alongside other key themes like the rise of the East and using analytics.

SWIFT hosted its first ever compliance track at Sibos 2012 this year in Osaka, Japan, and regulation was certainly one of the hot topics of discussion at the show, alongside the increasing importance of ‘big data’ analytical systems and mobile technology. Inevitably the absence of the Chinese banks was also mentioned, along with the rise of the East, China’s currency, and a perhaps hopeful desire for a return to simplicity.

Never one to dodge an issue, of course, one of the leading sessions of SWIFT’s dedicated compliance stream was a topical panel debate entitled ‘CCPs for OTC Derivatives: The Right Answer or a Nightmare in the Making?

The answer, in a survey of the large audience gathered to listen to the panellists, was that about 70% thought the regulation was on the right track. Considering that the move towards centralised systems, depositories and more OTC transparency represents such a big transformation this was perhaps a surprising result. The panel consisted of:

• Takeshi Hirano, director of OTC derivatives clearing at the Japan Securities Clearing Corporation (JSCC).
• William Filonuk, of BNY Mellon’s asset servicing unit.
• Paul Swann, president of IntercontinentialExchnage (ICE).
• James (JR) Lowry, the global lead for DerivOne at State Street.
• Craig Pirrong, professor of finance, Bauer College of Business, University of Houston.

Compliance Track: AML and Financial Crime

Another session at the final day of the Sibos 2012 compliance track looked at the topical issues of anti-money laundering (AML), market abuse and sanctions screening, in the wake of the fines in August against HSBC and Standard Chartered for processing Mexican cartel and Iranian money. Entitled ‘Analytics Application in Financial Crime – Joining the Dots’ the session stressed the need to look at financial crime and compliance in a business context.

According to David Howes, global head of financial crime risk in wholesale banking at Standard Chartered, professionals coming from a risk or compliance background tend to have a control mindset. Standard Chartered forms financial crime teams and strives to maintain specialisation, while also looking at security from the business point of view, he said. “Otherwise you get control functions designing things like client on-boarding, which is bad for service.”

Tony Wicks, director for AML solutions at Omnicision, said the scope of regulation is changing from prescriptive to descriptive, and from rules-based regulations to risk-based regulation. “We spent 10 to 20 years buying very complex analytic systems, which people have traditionally used as black boxes. Now regulators are asking for more transparency.” Wicks agreed on the need for change: “We have systems in place; now we have to justify the value.”

Michael Cho, global head of AML compliance at Northern Trust, took up the point, adding that: “We exist in order to protect the banks and create strong controls. We are in a very different economic environment, and we have to continually show value and show our compliance model is consistent with the business model.”

Compliance professionals must understand the business, added Cho, who suggested that having a compliance forum at Sibos 2012 for the first ever time shows just how important the topic is becoming. “I have had the opportunity to sit in on business meetings with international business people who were shocked at seeing my business card. What I have learned will help me create a business strategy that targets where my partners are going in the business.”

Compliance specialists need to understand their business’s risks, he added. “Your institution may not have the 20 to 25 risks that regulators talk about [but there will be others].”

Lighting up the Black Market

Many banks are not exposed to black market peso or online gambling risk, and for those it doesn’t make sense to spend a lot of effort protecting against them. Northern Trust has created metrics for measuring compliance, explained Cho. If a bank buys software and just turns it on, the application may collect a lot of false positives, which are expensive to report and resolve. If one client is causing a lot of problems on wire transfers, the bank may have a conversation about ways to improve the wires to reduce delays. And if that doesn’t work, the bank might want to move in a different direction, continued Cho. In other words, it might want to fire the customer, although he was too polite to say so.

Daniel Buckingham, head of transaction monitoring at Barclays, said banks need more feedback from regulators. “We are trying to figure out what regulators want.”

Omnicision’s Wicks said that he thought regulators are beginning to provide additional transparency into the processes they want to see, “but they don’t understand the problems any better than we do”. For instance, the US Treasury is starting to provide more information about filings and the law enforcement results.

Finally, Northern Trust’s Cho had a suggestion to extend the compliance effort to the sales staff. “A lot of AML is due diligence and the best time to ask your client for information is upfront – not from compliance but from your sales staff, because they are the closest to the client.” An interesting proposal but chasing the commission, or chasing the compliance, could create conflict.

Clearing Issues and Controlling Data
Back on the exhibition floor at Sibos 2012, Euroclear and SmartStream were explaining how they have 20 clients in either full production or pilot programmes on the central data utility that they teamed up to create in mid-October. The new launch has been a major preoccupation for the clearing and the vendor throughout this week in Osaka.

The joint venture between the two lets Euroclear clients send the data they subscribe to, plus the data Euroclear generates from new issues and eurobonds, to a cloud computing environment where SmartStream cleans it up and delivers it directly to the banks’ trading desks and accounting offices, thereby creating a single version of the truth that aids transparency.

“In the traditional model you have a container and you scrub the data,” explains Daryl Twigg, executive vice president for product management at SmartStream, who added that he believes the offering strips out costs and delivers the highest quality data. The service delivers the data in any format the customer uses, from Calypso to Charles River and Summit, among other rival applications.

Denis Peters, head of marketing and communications at Euroclear, said the venture was a response to client requests: “Clients said they would like a single place to get cleansed data. So we will offer a service and use SmartStream technology.”

Euroclear had considered trying to build a system itself: “But we have moved to a point where we don’t have to do it all ourselves,” said Peters. “Here we have joined SmartStream’s expertise to ours which is data.”

Innotribe Award Goes to Singapore Start-Up
The Innotribe, SWIFT’s innovation forum at Sibos 2012 which invites small tech firms to pitch for investments, awarded its $50,000 start-up prize to a kids' finance programme called Playmoolah. The offering beat out rival presentations because it allows children to earn, save, invest and donate via a playful website that aims to hold their attention through its entertaining interaction and fun functionality. To date it has drawn more than 10,000 young participants to the Playmoolah website. The company hopes to license it to more banks, which can then use it to attract and educate youngsters or as part of marketing campaigns.

Playmoolah, a Singapore-based start-up, said the programme will help create the next generation of banking customers by reaching out to children early. Some users remain on the site for up to 70 minutes because it is so entertaining, said the owners.

“It’s the piggy bank of the next generation,” said a co-founder. She also pointed out that where children go, parents are apt to follow, providing an excellent opportunity to sell new products or up-sell opportunities. “We are engaging parents, and parents are half a bank’s customer base,” she added.

Japan Day and Conclusions
The fourth and final day of Sibos 2012 was also the conference’s ‘Japan Day’, which brought in 1,700 extra Japanese bankers for a full day’s worth of discussions and networking. SWIFT, of course, had earlier in the week claimed 6,126 registrants for this year’s show in Osaka, but the actual figure on the exhibition floor and in the conference sessions seemed much lower, with the expense of the Japanese city, its far-flung location and the withdrawal of the Chinese banks, all seeming to reduce the number of attendees.

The uncertain economic situation in the world today, with recession in certain parts of the Western world and slowing growth in Asia, also no doubt contributed towards the reduced attendance figures at Sibos 2012 – not to mention the fact that the Asian shows have traditionally attracted less attendees in the past, compared to European or American stagings of the annual event.

There was, however, a mood of cautious optimism at this year’s Sibos. Several speakers noted a continuity, or similarity, from the Toronto event last year in Canada – many of the same issues and concerns were still prevalent but the banking industry and its technology partners were getting a better handle on how to respond to the challenges, particularly the regulatory one.

Regulation and compliance activities have certainly been one of the key themes of this year’s event, which is only appropriate given the huge fines banks have faced for money laundering, or insufficient controls, for Libor rigging, and inappropriate sales such as the UK Payment Protection Insurance (PPI) scandal.

What do regulators want, ask the banks, who then spend hundreds of millions lobbying against what they suspect the regulators do want. The answer is that the regulators want a better banking system, with more post-crash controls covering transparent OTC trades, more financial inclusion via the use of mobile and online technology, better payment systems, more standardisation and more reporting and analysis – all topics which have been discussed at Sibos 2012.

It was left to the Nobel prize-winning Professor Muhammad Yunus, the founder of Grameen Bank in Bangladesh and father of the microfinance movement, to symbolically wrap up the show. After earlier talking to the Innotribe about innovation, Yunus said in his closing plenary speech at 4-5pm, alongside SWIFT’s new chief executive Gottfriend Leibbrant, that he is predicting India and China will together represent half the world’s total economy by 2030.

Yunus’ closing speech referenced another key theme of Sibos 2012 – namely, the shift of power from West to East. The founder of Grameen Bank also noted that the Soviet Union fell apart with absolutely no warning, showing just how sudden such shifts in power can be. He refrained from speculating about what sudden power shifts might occur in the East that could disrupt his projections, such as the dispute between China and Japan over the sovereignty of the Senkaku / Diaoyu islands in the East China Sea, but the changing nature of our world was plain to see.

• The Bobsguide daily show reports from Sibos 2012 in Osaka, Japan, can be seen here –Day 1: New CEO speaks and making technology work; Day 2: Targeting securities (T2S) and the rise of RMB; Day 3: Payments and news from the exhibition; Day 4: Compliance and innovation tribes: mutually opposed?. All preview material, subsequent interviews, blogs and opinions surrounding the show and other general technology trends can be seen via the bobsguide blog section here.

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