Global financial services company with the world’s largest asset servicing business - Case Study #1
The client was lagging behind its peers in implementing a compliance program to adhere on a timely basis with the Volcker Rule for its trading business. The client needed help to define the components of the compliance program and oversee its implementation in order to get it back on track.
Approach and Key Findings
The first phase was to bring together the key stakeholders, i.e. Legal, Compliance, Market Risk, and Front Office, and reach a consensus on the interpretation for each of the exclusions, e.g. riskless principal, and exemptions, e.g. market-making, under Volcker. This process involved exhaustive discussions about the purpose of each exclusion and exemption that included an assessment of how the client itself operates in various products compared to industry peers. The goal was to ensure that the consensus interpretation was neither too conservative nor too far ahead of the industry.
The second phase was to deconstruct the consensus interpretations into components of a compliance program with an overall project timeline. Working with guidance from Legal and Compliance, we developed conformance controls checklist for each exemption and exclusion in order to identify pre-deadline gaps, e.g. missing procedures, focus resources on closing those gaps, and then having a traceability matrix to demonstrate how each trading desk complies with Volcker. Simultaneously, we worked with capital markets senior management to define an operating model for a front office supervision team to assume 1st line of defense (FLOD) responsibilities for Volcker along with other Dodd-Frank initiatives such as Swap Dealer. Building the operating model included socializing various operating model concepts and subsequently obtaining stakeholder agreements as to how this group would interact with other control functions such as Market Risk and Compliance.
The final phase of work was to build the governance model to ensure proper management review of the Volcker metrics and meet the “tone at the top” requirement of the regulators. A Volcker governance charter was drafted and signed off by senior stakeholders and management review packs that included the metrics and related commentary were designed, piloted, and refined over the course of six initial governance forums.
A compliance program was implemented by the regulatory deadline. Project artifacts included drafting a comprehensive, 160-page supervision manual (similar to Written Supervisory Procedures) that defined procedures and business process flows for the supervision of trading activities. The Volcker compliance program was deemed satisfactory with no significant gaps by a Big Four firm that was retained by the Board of Directors to conduct an independent evaluation of the efficacy of the compliance program.