In this anonymised example we glimpse the process by which a bank upgrades its compliance software and integrates the process into its general commercial effort.

Excelian Luxoft Financial Services recently completed a strategic consulting engagement with an international bank that wanted to install new software to meet the requirements of the impending 'Fundamental Review of the Trading Book' or FRTB regulation. This regulation was promulgated by the Basel Committee for Banking Supervision. Some think of it as the prospective successor to the 'Basel III' regulatory capital rules - some people are already calling it Basel IV.

The FRTB contains standard criteria that will, when the deadline comes, set the boundary between trading and banking books. The idea is to eliminate banks’ incentives to abuse their discretion in saying that individual positions belong to one book or the other with the intention of minimising capital totals (i.e. "capital arbitrage"). It also contains more sophisticated schemes for standardised capital charges. It will compel banks to calculate and disclose standard capital charges for all trading book positions.

We talked to Christian Marshall and Anthony Hammond, two of Excelian Luxoft’s directors, about the project on which they worked, the methods the company uses when sizing projects up, and the way in which it initiates them - a crucial, complex and often neglected part of a successful project. We quote the pair here as though they are one person speaking. The bank they were helping remains anonymous.

An overview of the project: what led to it?

Marshall and Hammond said that the project grew out of a need to replace a platform that was many years past its end of life, combined with the bank's obligation to meet its FRTB requirements. They told Compliance Matters: "The bank wanted to meet these two requirements in one go. It already had to replace all of its day-to-day trading systems, which was a major initiative, but also needed an achievable solution to get FRTB 'live.'

"We had already completed a proof-of-concept exercise for integrating proprietary analytics into Murex [an IT system used for trading both exchange-traded and over-the-counter financial securities and derivatives], which helped the bank make the decision to proceed with Murex, but they still required help initiating the project, undertaking pre-scoping and creating a functional design and a Target Operating Model. So the bank wanted our help.”

What problems did the bank have?

"In order to become FRTB-compliant, the key element was the alignment of two programmes – a large-scale and long-running change programme for its rates business and a less complex credit programme. We needed to show the bank how to run these initiatives in parallel rather than sequentially, making them alight on the same system where the less complicated delivery could not 'design out' any features that the longer-term one would require at a later date.

"This meant decoupling dependencies between the two, even though they will arrive on the same platform at the end. This includes dependencies that could cause delays and cross-dependencies that could limit future design choices. Our motto was: do it once, do it right, and have everything building incrementally to your ultimate strategic goal.”

As always, cost was also a major concern for the bank, so in the early stages of the project the consultancy deployed three senior directors instead of a large team of the kind that usually works on this type of job. Working together, the trio made rapid progress. They worked self-sufficiently for a three-week period, sending all information back to the company in the requested formats, which in this case were concise presentations and PowerPoint decks. Eventually, Excelian Luxoft had held more than 20 workshops in the bank's various business areas, disseminating its analysis face-to-face. Many consultancies merely deploy a team of mid-level consultants coupled with a huge document that gathers dust. The directors preferred their own method:

"This is often most important when the bank has relatively little experience of major change programmes, so when you are introducing a successful change programme it is crucial to get early stakeholder engagement and to do some pre-scoping and requirement gathering to bring stakeholders on-side. By taking them on this journey we gave the bank a realistic view of time frames, resourcing requirements and the cost of the project. Because of this, the bank had a realistic programme budget rather than a random figure."

Three weeks is a very short time frame in which to expect such a small team to gather all of the required information, but by deploying a senior team Excelian Luxoft found it more than adequate.

"The workshop process was the key. They were all limited to 90 minutes and all scheduled within a two-week period with the write-ups outside of that. Essentially, they were very quick 'deep dives' into parts of the business which you could only do by having highly experienced individuals with deep knowledge of both packaged software and the day-to-day operations of an investment bank. This meant we could quickly gain buy-in from the stakeholders, establish credibility, get the information and then move on.

"Ultimately, it means there’s no need to ask for business concepts to be explained. We can get straight in to the bank’s unique requirements rather than just trying to understand how the bank operates. Again, we minimised the time required from the client and therefore we reduced disruption to the day-to-day processes of the business.

"We’ve completed so many of these projects before that we can identify and highlight the requirements that will significantly increase the complexity of the programme at the outset. With this information we can work with the client to plan effectively and minimise project risk. For example, we spent a lot of time with their front office and quants, advising them on best practice for integration of their own bespoke pricing models. By managing time well, we were able to focus more deeply on the areas of greatest concern to the business.”

Standard practices

Compliance Matters asked the duo to explain Excelian Luxoft’s standard approach to regulatory jobs such as this one. They replied that on regulatory projects they almost always tried to 'go live' with the smallest 'build' possible, i.e. the lowest project risk.

"Go live, get the first stage of the project successfully done, and then the bigger things that we identify. It’s best to do these in later stages on a platform that’s already been delivered. Why? Because you’re not trying to do 74 things simultaneously with an army of 250 consultants. Keep your project team as small as you can, keep your project risk as small as you can and do things in phases.

"It was also important to get the bank to agree that this was not a technological project but a business change project supported by technology. The approach involves forging tight links between technology and the business and building up an ‘it can be done’ mentality. We put together roadmaps that didn’t just show ‘this is what we think you should do next’ but instead showed the parallel activities that you should absolutely be doing now to hit the goals you want to hit.

"The business needs to see traction. They want to see a programme that’s starting. They want to see that experienced people are engaged, are working productively and are regularly making deliveries that build towards the programme’s objectives. The business can see victories in a year, they can see victories in the second year, they can see victories in the third year and that they can therefore stop worrying about the five-year behemoth that never seems to materialise. It's about taking an incremental approach."

* Excelian Luxoft can be reached on +44 0207 993 0737