“Your day of reckoning is coming, when an evil wind will blow through your little play world and wipe that smug smile off your face. And I’ll be there, in all my glory, watching, watching as it all comes crumbling down.”
– Newman, in “The Finale” of Seinfeld, reacting when Jerry refuses to take him along to Paris
The time between President Obama announcing the Volcker Rule as a centerpiece of the Dodd-Frank financial reforms and the approval of the rule by federal agencies in December of last year was 1,419 days. Even while issuing their “final” approval, federal agencies delayed the effective date for compliance to July 2015. This allows plenty of time for bank lawyers to jostle with federal agencies on what amount of speculative positions can be held as risk mitigating hedges and to meet the “near term demands of clients.” For some market observers, the chance of the “day of reckoning” ever arriving may seem remote.
Despite what will surely be a continued focus on the possible loopholes, certain proprietary trading vehicles like internal hedge fund platforms are clearly banned in the final rules. Thus, it is imperative for bank executives to realize that the day of reckoning is indeed coming. Delay is no longer an option.
As forward-looking front line managers responsible for these divestiture efforts begin planning, a key element of their success will be in anchoring these plans around three key dimensions: process, people and technology.
- Existing business processes and workflows which existed while connected to a bank mother ship will need to be modified and streamlined for the new independent entity. Given the sheer size of a bank’s support infrastructure, a hedge fund can get away with disparate trade workflows per trading desk. This is not a luxury available to smaller organizations. Similarly, key business processes like trade capture, reconciliation, PnL and investor reporting tend to be spread across so many people that responsibility is hard to identify. Even the seemingly mundane process of procuring market data fundamentally changes from an “all you can eat” buffet available at a bank to a more cost sensitive direct relationship with market data vendors.
- One of the key decisions to be made during divestiture is deciding who stays and who goes with a new entity. Tough decisions need to be made when it comes to breaking up risk, compliance and IT departments. With budgetary constraints, a new entity will need to consider partnering with outsourced providers who can augment key operational functions. Engaging these outsourced providers early in the planning process is essential to allowing the appropriate knowledge transfer necessary for a seamless transition.
- Typical technology infrastructure while at a bank is a mix of homegrown and third party systems. In many cases these homegrown systems cannot be run outside a bank and thus need to be replaced. In addition, the desktop and data center footprint needs to be replaced with new equipment in a new data center. Historical databases first need to be cleansed of a bank’s proprietary data before being brought over to the new entity. New business continuity plans and procedures need to be implemented.
When it comes to the Volcker Rule, there is a business opportunity awaiting those willing to accept that the day of reckoning is coming. Repositioning assets outside of an organization for Volcker Rule compliance goes beyond a “lift and drop”. The solution requires an ability to have and blend top-to-bottom capabilities. Business leaders that are now deliberating all of the issues at play must understand that this is equally about process, people and technology.