How the cloud can help address regulatory issues in a dynamic, secure, cost effective manner
The constant evolution of local and international regulation is a major challenge for the banking industry. According to the CCP Research Foundation the cost of fines, legal bills and customer compensation racked up by the world’s 20 biggest banks over the five years to the end of 2015 amounted to £252bn.
One specific challenge that we at Microsoft frequently discuss with Chief Risk Officers (CRO) is The Fundamental Review of the Trading Book (FRTB). FRTB overhauls the market risk capital requirements to meet the objectives of the Basel Committee in its effort to address shortcomings of the current Basel 2.5 market risk capital framework and reduce the variability of market risk weighted assets (RWA) across jurisdictions.
It is generally accepted that the new risk calculations will result in a requirement to significantly increase grid capability, and in some cases this could be 2 to 3 times increase in additional capacity that most banks currently have for their grid operations. This requirement ultimately leads to capital expenditure requirements of £10m’s to £100m’s.
A CRO is tasked with assessing and mitigating significant regulatory issues and threats to an enterprise’s capital and earnings. With increased regulatory pressures, and rising costs to avoid the wrath of regulators it is key for a CRO to understand how they can leverage Cloud to tackle some of their biggest challenges.
This article looks at five key things that a CRO should know about adopting the Microsoft Cloud to address regulatory requirements such as FRTB.
Understanding the Cloud
Adoption of the public cloud in Financial services is continuing to gain momentum. According to an article from the Wall Street Journal, a report published by Deutshe Bank in 2016 indicates that 30% of banking workloads will move to the public cloud in the next 3 years.
Forecasted adoption is also supported by regulators such as the Financial Conduct Authority introducing revised guidelines ‘firms outsourcing to the ‘cloud’ and other third-party IT services’ stating that ‘We see no fundamental reason why cloud services (including public cloud services) cannot be implemented, with appropriate consideration, in a manner that complies with our rules.’
Security and Trust in the Cloud
Microsoft understands that for our customers to realise the benefits of the cloud, they must be willing to entrust a cloud provider with one of their most valuable assets – their data. If you invest in a cloud service, you must be able to trust that your customer data is safe, that the privacy of your data is protected and that you retain ownership of and control over your data – that it will only be used in a way that is consistent with your expectations. Microsoft adheres to 49 Global and Regional compliance attestations across 34 Regions (100+ data centers).
This level of physical and information security cannot be matched by a single enterprise. The level of investment required to manage facilities that adhere to these standards at this scale is multi $B’s. In 2015 Microsoft announced that it currently investments $1B per annum in Security R&D, in addition to the investments to protect their DC’s.
As we are acutely aware of the stringent regulatory challenges our customers in banking face when adopting cloud technology, we developed the Microsoft Financial Services Compliance Program to cater for these needs. You can learn more about this program here.
An example of an FCA regulated customer entrusting the Microsoft Cloud as their strategic technology platform is ClearBank. ClearBank is the first clearing bank to enter the UK market in more than 250 years.
To find out more about ClearBank’s decision to use the Microsoft cloud, click here.
Trading capital expense for variable cost
The first opportunity the Cloud presents to a CRO is to trade capital expense for variable costs.
With the Microsoft Cloud customers simply pay for what they use. This means a CRO no longer needs to purchase expensive IT hardware like servers and storage arrays on depreciation cycles because Microsoft alleviates that overhead. This includes the cost of hardware maintenance, recurring hardware replacement costs and management costs.
This opportunity was realised by Milliman, an actuarial firm, who leverages Microsoft Azure for Solvency II simulations.
According to Brian Reid, MG-ALFA Director, moving to the Cloud for risk calculations saves their customers $1m’s.
He said: “running MG-ALFA operations on Microsoft Azure can cut the traditional $3 million cost for a traditional on-premises system by at least one-third.”
To find out more about how Milliman achieve these cost savings, click here.
Improve Asset efficiency
The Microsoft Cloud provides customers with the ability to scale resources up and down depending on the required utilisation, which is particularly pertinent to High Performance Computing. Customers can scale from 1000’s of cores to 10,000’s of cores to simulate risk calculations, and when complete scale back down. A similar pattern on a customer’s premises means that often grid platform utilisation is highly inefficient as often a grid is designed to cope or over compensate for peak demand or end of day/end of month reporting. This inefficiency means that asset utilisation is low for long periods of time, which is a significant cost to a bank.
MUFG, one of the world’s largest comprehensive financial groups, significantly improved the efficiency of their grid platform by leveraging the Microsoft Cloud. According to Dr. Robert K. Griffiths, Head of High Performance Computing, MUFG Securities EMEA
“Our efficiency of use during the utilization is about 97 or 98 percent, which is something rarely seen with on-premises resources”
To find out more about how Mitsubishi UFG leverage the cloud for Grid Computing click here.
Increase speed of risk calculations at no additional cost
The economic model of the Microsoft cloud is such that it presents an opportunity for customers to choose how quickly they want to execute a calculation. With a pay as you go model for compute it is the same cost for a customer to run 1 compute node for 1000’s hours as it to run a 1000 compute nodes for 1 hour.
Tower Watson, a global risk management professional services organisation, have significantly improved the amount of time it takes to run their customers risk calculations by leveraging the cloud. According to Wayne Bullock, Global RCS Software R&D Director, Willis Tower Watson.
“One example model took six hours to run on a single workstation; on Azure Batch, it took two minutes.”
To find out more about how Willis Tower Watson scale the Microsoft cloud based on demand click here.
The economics and security of the Cloud are such that the requirement to invest significant capital in ‘in house’ data centers to cater for regulatory requirements such as FRTB is now redundant. A CRO has a real opportunity to consider how cloud can help them address regulatory requirements, and significantly reduce the cost of going regulatory requirements for their bank.