Top 10 Challenges for Investment Banks pdf

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Top 10 Challenges
for Investment Banks 2011
Top 10 Challenges
for Investment Banks 2011
Top 10 Challenges
for Investment Banks
2011
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Top 10 Challenges
for Investment Banks 2011
With leverage no longer an easy option
to drive returns on equity, and
proprietary trading now seen as risky by
both regulators and shareholders alike,
investment banks are faced with the
difficult task of identifying new ways to
propel their returns on equity back to
something close to pre-crisis levels. In
such an uncertain operating
environment, assessing risk, making the
most of existing revenues, and
capitalising on new opportunities have
never been more important.
Introduction
Navigating Through
Uncertainty
Focusing on the future:
Investment banks are increasingly operating in a volatile,
resource constrained and highly regulated environment.
Rigorous focus on strategic and operational priorities
provides the key to high performance.
The world economy is emerging from its
most severe recession in over 50 years.
And the mid-term prognosis is still far
from rosy. Recoveries from credit-

induced recessions take time. Often
twice as long, in fact, as recoveries from
recessions sparked by interest rates
hiked to contain inflation.
Signs of real structural strength are in
short supply. In the US, although
recovery is underway, underlying
fundamentals remain relatively weak.
The government’s stimulus package has
not delivered as significant a boost as
had been hoped. Meanwhile, in Europe,
the likelihood of any sustained
recovery from the worst downturn in 30
years remains at best uncertain. For
the moment, bank lending continues to
be constrained by new regulation such
as Basel III, as much as by now cautious
bankers – just when it is needed most.
While banks managed to dramatically
improve productivity over the past two
years, a new wave of banking
innovation and revenue generation has
yet to arrive. The most encouraging
signs of growth are in the emerging
markets – highlighted by the IMF for
their exciting catch-up growth
potential. In many of these markets,
escalating levels of wealth point to
accelerating demand for financial
services and products – an exciting

opportunity for investment banks,
provided they can tailor their offerings
to suit local requirements.
Introduction: Navigating Through uncertainty
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Source: IMF, World Economic Outlook Database, April 2010
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Emerging & Developing economies
EU
Figure 1: Real GDP Growth (% growth
year-on-year)
Introduction: Navigating Through Uncertainty
No surprise that investment banks are
still scrambling to adjust to the realities
of this ‘new normal’. In a straitened
operating environment where the only
certainty is increased regulation,
pre-crisis returns on equity (RoE) of,
on average, 20 percent look extremely
optimistic.
As banks seek to identify (and exploit)
every revenue opportunity, they need
to ensure a rigorous focus on strategic
and operational priorities. If they do
not, they risk undertaking a series of
broad-based transformations that
achieve little – other than squandering
precious resources and dulling

competitive edge.
To help achieve the focus that we
believe is essential to high
performance, Accenture has developed
a list of the top ten challenges facing
investment banks today. Although
these may not apply to all with equal
weight, each represents a major
concern (and source of opportunity)
for the industry going into 2011
and beyond.
Fundamental macro trends
As they face up to the challenges that
lie ahead, investment banks need to
keep the following six macro trends
front of mind. Each of them, we
believe, will play a crucial role in
shaping the future operating
environment:
1.Demographic challenges
Widely reported, most developed
economies are struggling to come to
terms with seismic demographic
challenges. To varying degrees, these
a
re set to transform the way people
live and work. Life cycle savings
and ageing populations point to the
need to save in developed economies,
making asset management an

increasingly vital source of revenue
growth for investment banks.
2.Emerging markets growth
Economies experiencing rapid growth,
combined with little well established
competition, offer exciting
opportunities for investment
banks. But the risks, and operational
challenges, of expansion into these
new geographies are still being
potentially underestimated.
3.Technology commoditisation
Technology has repeatedly
demonstrated its ability to
commoditise banking offerings –
particularly in non-relationship based,
low value added areas. With
commoditisation increasingly
dominating ‘flow’ businesses, clear-
sighted strategic decision-making is
vital. Banks must either make the
substantial investments in straight-
through processing capabilities
needed to achieve economies of scale,
or concentrate on areas such as
advisory, that cannot be
commoditised.
4. Ultimate value to investors
I
nvestment banks have to concentrate

on services and offerings where they
deliver value to their clients, not just
margins to themselves. This makes it
essential for banks to develop deep,
real-time insights into the risk/reward
b
alance of their products and services.
5. Re-evaluation of capital
S
avings deposits may be the most
desired form of capital, undemanding
and sticky, but those attributes also
make it rare and likely to become rarer.
Investors have many more choices on
where to place their capital and the
amount placed in savings has been one
of the slowest growing of all areas for
over a decade. With this in mind,
investment banks need to re-evaluate
capital’s importance in any service of
product and charge accordingly.
6. Resource constraints
Mounting resource constraints point to
gradually rising input costs becoming a
universal backdrop to all business and
banking activity. With oil approaching
peak output, and basic commodity costs
responding to wide demands of
emerging markets, a reordering of
economic priorities looks to be the likely

result. Sustainability is now on the
agenda (as a serious business issue)
across all business sectors and
investment banks must overcome their
institutional cynicism and follow suit
(as well as capitalise on the
opportunities presented).
Investment banking – three themes
f
or the future
With these macro trends in mind, we
have divided the challenges facing
investment banks into three broad
themes:
Responding to regulation
O
f course, banks must still take risks
to achieve their targeted RoE, but
t
hey must now do so through a
complex (and still evolving)
regulatory framework. Beyond
question, responding to the post-
crisis wave of regulation presents a
major compliance challenge for all
investment banks – although new
opportunities will be created from the
market dislocation that is already
underway. From now on, robust risk
management will be a crucial

demonstration of intent to regulators,
as well as allowing banks to shape
regulation and protect shareholder
value. If one lesson can be taken
away from the crisis, it must be that
previous risk governance models were
largely inadequate to shield
investment banks from the onslaught
of systemic turmoil. Going forward,
therefore, banks must commit to
adopting and embedding a culture of
managing risk throughout the
organisation (particularly in the
front office).
Driving the client agenda
W
ith proprietary trading operations
being limited by regulators and
questioned by shareholders, the
importance of building (and
maintaining) a successful client
franchise is now critical to the
b
ottom line. So too is the need to
drive greater efficiencies from
existing revenues. From now on,
banks must focus on providing
i
ntegrated client services to attract
and retain client business, as well as

developing the deep analytical insight
needed to monitor and maximise
client returns, and undertaking
realistic assessments of the costs and
benefits of the services that they
provide. As figure 2 shows, the results
of this discipline will allow them to
pinpoint where to invest to achieve
economies of scale, and where to aim
for high-touch differentiation.
Lastly, now more than ever, by taking
sustainability seriously, they
have an opportunity to regain trust
(amongst clients and throughout
wider society), while delivering
returns to their core business through
responsible business practices.
• Banks can find new revenue through effectively
segmenting clients and determining where value is delivered
• Realistic assessment of cost and benefits of services need
to be undertaken
• Result indicates where to invest to achieve
economics of scale and where to aim for high
touch distinction
• Services may well be denied even where marginal
costs are low in order to privide distinction
• Objective is not to focus on top 20% to the exclusion of all
else, but to be aware of costs and benefits of eack client
Access to Analysts
Broker reports

Electronic Trading - Direct Market Access
Client Coverage (%)
Low Touch
High Touch
Marginal Value of Provision
Source: Accenture Research
Value of Client

Access
to Core
clients
Access to Capital &
Select Investments
Figure 2: Effective Targeting of Client Offerings
Preparing for the new normal
Whilst banks must remain resolutely
f
ocused on the many challenges
of today, they also need to keep an
eye on tomorrow. That way, they
can ensure they are positioned to
t
ake advantage of the next wave of
growth – instead of having to react
t
o it. The banks that successfully
capitalise on future strategic
opportunities will possess acute
strategic insight, be early adopters of
emerging technologies and, critically,

be able to make measured
assessments of tomorrow’s key
battlegrounds – and their chances of
success in each of them.
‘Unknown unknowns’ may be
proliferating in today’s operating
environment. But one basic fact
remains – there are still really only
three ways to make money in
investment banking: take risks, grow
revenues and control costs. This year’s
report explains why we think banks can
and should keep each of these truisms
in mind – albeit, inside a wrapper of
customer centricity, operational
flexibility and risk awareness.
Pinpointing the core challenges
In such a competitive marketplace,
investment banks must move swiftly to
plan and execute optimal responses to
the complex challenges they face. To
help them, Accenture has used its
research, industry expertise and client
insight to pinpoint and examine what
we believe to be the ten key challenges
currently confronting the industry. We
have surveyed over 2000 of our capital
markets professionals across the globe,
and over 200 senior clients, to
determine the Top 10 Challenges for

Investment Banks 2011:
Responding to regulation
1 Responding to the regulatory
tsunami
2

D
ealing with OTC derivatives reform
3 Embedding effective risk
management
Driving the client agenda
4
Refocusing on client needs
5

M
aximising client profitability
6 Taking sustainability seriously
7 Delivering valuable transformation
Preparing for the next horizon
8 Harnessing innovative technologies
9 Engaging effectively in emerging
markets
10 Picking the right battles.
In this paper, we explore each of the
Top 10 Challenges in detail. For each
one, we describe the background and
context, as well as providing specific
examples of the challenges faced by
many investment banks today and the

reasons why these will be front-of-mind
issues for 2011 and beyond. We also
provide Accenture’s perspective based
on our research, experience and
insight in the market. Finally, we show
how our proven services and solutions
have already delivered benefits to
clients, helping them to overcome these
challenges in a ‘real world’ context.
Accenture Experts
Dean Jayson
Senior Executive, London

+44 20 7844 8295
+44 79 5841 4692
Ryan Westmacott
London

+44 20 7844 5259
+44 78 1030 4031
James Sproule
London

+44 20 7844 3387
+44 78 6680 8366
Responding to the
Regulatory Tsunami
Dealing with OTC
Derivatives Reform

Embedding Effective
Risk Management
Refocusing on Client
Needs
Maximising Client
Profitability
Taking Sustainability
Seriously
Delivering Valuable
Transformation
Harnessing Innovative
Technologies
Engaging Effectively in
Emerging Markets
Picking the Right Battles
1
2
3
4
5
6
7
8
9
10
Introduction: Navigating Through uncertainty
Top 10 Challenges
for Investment Banks 2011
Responding to the
Regulatory Tsunami

Fears in the financial services sector
of a drastic increase in regulation – at
a national and supra-national level –
have been realised. With so much
game-changing oversight being
introduced, it is increasingly difficult
for investment banks to ensure
complete compliance while
continuing to make money in an
uncertain market.
1
“The recent financial crisis has resulted in
a plethora of governmental and regulatory
actions. As the financial markets begin to
stabilize, governments are now seeking
to develop an improved regulatory
environment.”
Shearman & Sterling LLP
Challenge 1: Responding to the Regulatory Tsunami








Regula tory landscape
Market changes
Banking R equirements

Financial Stability
Board
FSA / BoE
Exchange
Trading
OTC Derivative
Central Clearing
Remuneration
Rating Agency
Regulation
Hedge Fund Regulation
Enhanced Capital
Requirements
Securitisation
Treatment
‘Volcker Rule’
Increased
Liquidity
reserves
Risk reporting
and disclosures
Living Wills /
Orderly Liquidation
‘Too
connected
to fail’
European
Supervision
Authority
As the dust has settled on the financial

crisis, it is clear that politicians and
regulators are keen to make up for their
perceived lapses in control in previous
years. However, notwithstanding
commitments made at the G20
Financial Summit in April 2009, for a
unified approach, national changes in
financial services regulation since
then have been uncoordinated, often
even contradictory.
Challenge 1: Responding to the Regulatory Tsunami
Figure 1: Global regulatory landscape
Background
Radical (and often uncoordinated) overhauls
of financial sector regulation
Shifting from ‘light touch’ regulation towards a more intrusive focus
on both strategic and low-level technical requirements
And there is little prospect of a more
‘joined up’ approach being adopted for
the foreseeable future. In the hope that
they can prevent a similar crisis from
happening again, the tangled web of
regulators and supervisors across the
UK, Europe and the US have all been
introducing significant changes to their
regulations. And in the face of ongoing
economic volatility, national
governments are likely to continue to
plough their own furrows as they strive
to garner political support through new

regulatory initiatives, instead of
focusing on a more systemic approach.
Beyond question, fears in the financial
services sector of a drastic increase in
regulation have been realised, with
ongoing scrutiny of both strategic and
more technical, low-level requirements.
The non-exhaustive list in figure 1 gives
an indication of the range of regulations
currently being implemented around
the world.
There has been a pronounced shift
away from ‘light touch’ regulation
(considered adequate pre-crisis),
towards a much more intrusive role
for regulators. Dodd-Frank, Basel III,
Capital Requirements Directives 2 and 3
and OTC derivative clearing regulations
on both sides of the Atlantic, all
examples of this stance, are each game
changers in their own right.
However these are layered with other
ongoing developments including
increased risk and reporting
requirements, stringent oversight of
remuneration and far-reaching changes
in the shadow banking sector. The
combined effect of this onslaught is
difficult to digest and, because
regulations are in continual flux, hard to

plan for with any certainty.
Challenge 1: Responding to the Regulatory Tsunami
Challenge 1: Responding to the Regulatory Tsunami
Key challenges
Reassuring regulators while continuing to
satisfy shareholder expectations
There are strong indications that in the
future, regulators will move away from
‘deep dive’ transaction-level audits
towards a more macro approach. This
will be geared to gauging the resilience
(or otherwise) of banks’ strategic risk
and control frameworks. In the UK, the
abolition of the existing tripartite
regime between the FSA, Bank of
England and HM Treasury (effectively
scrapping the FSA) is symptomatic of
this trend.
So what challenges does this shift
create for investment banks? At a high
level, bank CEOs and CFOs will have to
develop effective relationship-based
links with the regulators. This looks
inevitable and there is already evidence
that some banks are becoming more
proactive in this respect. These new
relationships see bank CEOs
communicating their in-depth
understanding of existing front-to-back
infrastructures and processes, as well as

whatever plans have been developed to
address weaknesses from both tactical
and strategic perspectives.
The writing is on the wall. With little
warning and at short notice, C-suite
bank leaders will increasingly have to
be equipped to provide macro-level
assurances on the state of their risk
and control environments. Inevitably,
therefore, the compliance director
(who will need to support this
relationship-based approach) will
become increasingly influential.
At a more granular level, the key
regulations are set to have a major
impact on the business operations and
behaviours of investment banks
worldwide. In the current economic
climate, it is already hard enough for
financial services firms to remain
profitable, without the added burden
of market changes, costly regulatory
programmes and further restraints on
their business models. In fact, an
Accenture poll of 101 financial industry
executives found that nearly half
(49 percent) thought their profits
would decline as a result of the
Dodd-Frank Act
i

.
At a high level, bank CEOs and CFOs will have
to develop effective relationship-based links with
the regulators
The scale of organisational challenges
should not be underestimated. The
combined effect of this new regulation
will require significantly enhanced
business and product transparency.
Costly overhauls and upgrades of existing
infrastructures will be unavoidable.
Additionally, clear control functions,
effective risk management and well-
defined processes and procedures will be
important – not just to have, but to
continually maintain and improve.
Accenture predicts that the industry will
spend between $3 billion and $5 billion
over the next three years to implement
The Dodd-Frank Wall Street Reform and
Consumer Protection Act alone
iii
, and a
recent survey of financial services
executives across the US revealed that 70
percent believed that proposed regulation
would increase costs.
With so many high-profile regulatory
changes hitting the banks, there is an
enormous amount of pressure on them

to manage these developments as
quickly and effectively as possible. As if
this was not challenging enough, they
must do this while satisfying increased
demands for the creation and delivery
of robust shareholder value.
It is clear that there will be winners and
losers as banks emerge into the new
world of regulation. The winners will be
those banks who have been able to view
the changes in a strategic way,
understanding how their business
models need to change, either in terms
of divesting or closing business, or
through regulatory arbitrage across
geographies.
Various hurdles stand in the way of
achieving these goals. As far as
satisfying the regulators is concerned,
poor data, limited understanding of
processes and lack of senior
management sponsorship are common
issues in most investment banks. As a
direct result, regulatory change takes
much longer than it should. It also
consumes far more costs and resources
than would otherwise be necessary.

What impact on your company do you anticipate as a result of proposed regulation?
Will weaken competive position
Will stengthen competitive position
Will decrease profitability
Will increase profitability
Will decrease costs
Will increase costs
Will have great impact on long term business
strategies

40%
27%
48%
31%
11%
70%
61%
Figure 3: Expected impact of proposed financial services regulation
The recent Basel III proposals, although
less onerous than originally expected,
demonstrate how deeply the new
regulations will be felt (see figure 2).
The agreement sets a new Core Tier One
ratio of 4.5 per cent, more than double

the current 2 per cent, plus a new
capital conservation buffer of a further
2.5 per cent, so the rule sets an effective
floor of 7 per cent. Further to this, there
is likely to be local variation as national
regulators determine countercyclical
capital requirements and additional
requirements for systemically-important
institutions. However as with all of
these announcements, the devil is in the
detail and along with the increased
ratios, the Basel committee has also
tightened up the rules around what
can be used as core tier one capital.
This has the potential to cause serious
pain as banks are forced to shrink their
balance sheets and assess the future
viability of business lines with high
capital consumption. We will see
increased levels of retained earnings,
and even capital-raising, to ensure
sufficient capital buffers, all of which
suggests a challenging proposition for
investors (and employees) as dividends
and compensation packages
are squeezed.
Figure 2: Building up to Basel III
Tier-One Ratio
Core Tier 1 Ratio

Current
Basel II
Regime
Increase to
Core Tier-One
Capital
Conservation
Buffer
Countercyclical
Capital Buffer
Proposed
Basel III
Regime
4%
2%
2.5%
4.5% 4.5%
4.5%
2.5%
2.5%
2.5%
0-2.5%
0-2.5%
8.5-11%
Core Tier1 =7%
8.5%
6%

Source: Accenture research
iv
Challenge 1: Responding to the Regulatory Tsunami
Source: Basel Committee
ii
Challenge 1: Responding to the Regulatory Tsunami
Our perspective
Enabling a continuous cycle of risk and
control enhancement
Regulatory change is notoriously
difficult for investment banks to
implement. In large part, this is because
the timescales are immovable –
something that banks find extremely
difficult to work with. In fact, the only
variable that banks can change is the
budget available for regulatory projects.
And in our experience, ‘throwing money
at the problem’ is commonplace, with
projects often running at least two to
three times over budget.
According to our estimates, over the
past three years an average bank will
have spent up to $900 million on

regulatory change-related programmes,
as well as tying up huge numbers of
resources. With such large numbers at
stake (see figure 4), poor delivery can be
very costly indeed.
Discipline Costs (US$m) FTE (per year)
Data 90 90
Finance 230 280
Risk 260 360
Operations 200 290
Technology 120 115
Total 900 1135
Source: Accenture research
Figure 4: Regulation-related costs over three years
History has shown us that
implementing a single regulatory
change, such as MiFID and Basel II, has
caused major problems for
implementation, with many banks still
struggling to integrate the changes into
their existing systems. Successful
responses to these regulations were
those that tackled the challenges
through a strategic and co-ordinated
response that embedded the changes
within both business and operating
models, rather than implementing
short-term tactical solutions to
the regulations.
The problem is that the current wave of

regulation is bringing several regulatory
programmes of this scale together at
the same time. More than ever, banks
need to ensure that they fully
understand the new regulations and the
effect on their business.
Based on Accenture’s extensive
experience in implementing large-scale
regulatory change programmes, we
have developed a framework for
translating and mapping regulatory
change requirements to improved
system architecture and process
changes. By using this approach, banks
can ensure that they are driving
through their implementations as
efficiently and effectively as possible.
With a delivery methodology specifically
designed for strategic regulatory and
operational implementation across
financial services organisations, we
enable banks to create, develop and
deploy new governance structures, risk
and control frameworks and processes
for ongoing monitoring and
effectiveness assessments. As well as
satisfying regulators’ demands for
ongoing oversight, these structures and
processes inject discipline and rigour
into the change process.

The objective is not just to make the
required changes on time and within
budget, but also to do so strategically.
That way, it will be easier to manage
further regulatory change as part of
a continuous cycle of risk and control
enhancement.
Challenge 1: Responding to the Regulatory Tsunami
The problem is the current wave of regulation is
bringing several regulatory programmes of this scale
together at the same time.
The objective is not
just to make the required
changes on time and within
budget, but also to do
so strategically.
Challenge 1: Responding to the Regulatory TsunamiChallenge 1: Responding to the Regulatory Tsunami
In practice
Developing a single operating model view
for regulatory capital reporting
A major European investment bank
urgently needed to develop a common
operating model view across multiple
areas of the enterprise, including Risk,
Finance and Technology, as well as
putting in place and delivering a multi-
year strategy and plan for delivering on
that model.
There were two principal drivers for this
project. First, having evolved over time,

the bank’s Basel II Regulatory Capital
Reporting environment (spanning
technology, data, process and
organisation) was fragmented, with
multiple tactical systems, parallel
processes, data issues and control gaps.
The net effect was unnecessary
production pressure and significant
regulatory risk.
Additionally, the bank needed to
increase its Regulatory Capital
Reporting capability to achieve daily
reporting for multiple asset types (from
an existing monthly reporting basis).
Using Accenture Target Operating Model
design and Basel II Regulatory Capital
assets, the Accenture team identified
the key objectives of this project:
• Achieve a common Target Operating
Model design (encompassing Risk and
Finance systems, data process and
governance) to simplify and
consolidate the reporting process,
enabling a daily reporting capability
• Bundle aspects of the Target
Operating Model design into logical
projects and agree the prioritisation
and plan for project delivery
• Secure long-term funding approval
for change and deliver projects.

Accenture supported the bank by
facilitating workshops and deep-dive
analysis geared to achieving a common
Target Operating Model design across
multiple stakeholders each with their
own business priorities. As a result, the
team achieved a single and agreed
delivery prioritisation schedule and plan
spanning a number of years, as well as
securing senior buy-in and funding
and implementing a multi-year
delivery programme.
By using the proprietary Accenture
assets, the team was able to successfully
implement numerous technology and
process change projects, including:
• Migration to a single Regulatory
Capital platform and reporting
process redesign
• Delivery of multiple risk system
enhancements
• Migration to daily reporting process
across multiple asset classes
• Mechanisms put in place to identify
and remediate regulatory
compliance gaps.
Challenge 1: Responding to the Regulatory Tsunami
Accenture experts
To discuss any of the ideas presented in
this paper please contact:

Chris Thompson
Senior Executive, New York

+1 917 452 4986
+1 917 378 1409
Peter McCloskey
London

+44 20 3335 0876
+44 77 4079 9130
Samantha Regan
New York

+1 917 452 5500
+1 404 790 7378
Challenge 1: Responding to the Regulatory Tsunami
i
Source: Accenture
(US Financial Regulatory Reform: Cost or Opportunity?,
June 2010)
ii
Source: Basel Committee Press Release
(BIS, September 2010). Note = capital ratios refer to
proposed ratios as of 1 January 2019, and are subject to
phase-in arrangements. Proposals are draft and are
subject to ratification by national authorities.
iii
Source: Accenture
(US Financial Regulatory Reform: Cost or Opportunity?,
June 2010)

iv
Source: Accenture
(US Financial Services Regulation Survey, June 2010).
N=102 (33% C-suite, 20% VP/SVP/EVP, 24% MD/Director,
24% Senior Manager/Manager)
Top 10 Challenges
for Investment Banks 2011
Dealing with OTC
Derivatives Reform
Banks are seeking to develop cohesive
responses to ongoing OTC derivatives
reform in the US and Europe. Although
the combined impact of these reforms
is still unknown, it is clear that the
industry landscape will be significantly
transformed.
“We will see derivatives moved through
clearing houses [and] traded
on exchanges.”
Senator Chris Dodd, April 2010
2
“The Wall Street reform bill will for the
first time bring comprehensive regulation
to the over-the-counter derivatives
marketplace.”
Gary Gensler, Chairman, Commodity Futures Trading Commission
i
Challenge 2: Dealing with OTC Derivatives Reform
Background
Reforming the maligned derivatives industry

Although the end-state of the OTC derivatives market following
this major regulatory thrust is still unclear, there is no questioning the
commitment to major reforms on both sides of the Atlantic
Accounting for 90 percent of the global
US$605 trillion
ii
derivatives market, the
over-the-counter (OTC) derivatives
market was widely viewed as a catalyst
of the financial crisis. Light on both risk
mitigation and risk management, it is
blamed for facilitating the build-up
of excessive exposures, as well as
operational inefficiencies, complexity
and an overall lack of market
transparency.
In July 2010, President Obama signed
into law the Dodd-Frank Wall Street
Reform & Consumer Protection Act.
This introduced an extensive set of new
regulations that focuses on both
reducing counterparty risk and
increasing transparency. The Act
mandates the establishment of a new
regulatory structure, limits on
proprietary trading and the reshaping
of regulation on swaps trading
(including the spin-off of certain swaps
trading operations into separately
capitalised businesses). Amongst other

consequences, the Act may have a
negative impact on capital efficiency,
as well as significantly reshaping banks’
operating models to ensure greater
market transparency and reporting.
Challenge 2: Dealing with OTC Derivatives Reform
Figure 1: The regulatory outlook for OTC derivatives
Sources: Deutsche Bank, Shearman & Sterling LLP, Accenture analysis
The Act is extensive in its scope, though
the focus of this discussion is around
the ongoing shift of bilateral and
uncollateralised transactions towards
regulated markets and central
counterparty (CCP) clearing. This move
seeks to lower systemic risk in the OTC
derivatives market. However, while the
Obama Administration is clearly
applying pressure on Wall Street, and
encouraging similar action from the
European Commission, it is still too early
to evaluate the exact impact of this
concerted effort to reform the OTC
derivatives market on investment banks.
What is clear, however, is that the
combined effect of these major reforms
will significantly transform the industry
landscape. The challenge for investment
banks is one of staying ahead of the
regulatory curve as it continues to
evolve. The focus throughout this

transitional phase and beyond must be
on ensuring agile decision-making
processes. These will be key in enabling
rapid responses and gaining competitive
advantage in a fast-evolving
marketplace.
Challenge 2: Dealing with OTC Derivatives Reform
• Financial Companies to centrally clear swaps
(grandfathering of existing swaps)
• Exception: Non-financial companies
(end-users) exempt
• Liquidity demand of high initial margin
• Daily variance margin
• Cash form of margin
Central Clearing
• All standardised swaps to be exchange-traded,
where an exchange/ASEF exists
• Exception: Non-financial companies
(end-users) exempt
• Inability to customise (important for hedging)
• Standardisation of swaps
• Increasing volumes
Exchange Trading
• Certain swaps trading operations to be
transferred into separately-capitalised
non-bank entities
• Exception: Hedging own risk, IRS, FX, and some
metals (gold, silver, etc.)
• US only
• Majority of market is exempt from requirement

(IRS=72%, FX=8%)
Swaps
Push-Out
• Conservative requirements for dealers and
major swap participants for cleared swaps
• Higher capital requirements for dealers on
OTC positions
• Increasing trading costs
• Increased focus on efficient capital allocation
Capital Requirements
• Stringent initial margin requirements with
clearing houses
Further daily variance margins
• Minimum margin requirements under debate
for OTC
• Tightening spreads
• Daily margin calls
• Higher OTC trade costs
Margin Requirements
• Real time price and volume reporting
(T+1 for OTC)
• Existing swaps also to be reported
Overseen by CFTC/SEC in US and new
ESMA/ESRB in EU
• Price transparency
• Standardisation of swaps
• Reporting infrastructure implications
Post-Trade Reporting
Regulation Implications US EU
Challenge 2: Dealing with OTC Derivatives Reform

Key challenges
Strengthening the core to execute
market strategy
These regulatory developments place
extreme and far-reaching challenges on
investment banks (see figure 3). Already
struggling to address wider financial
sector reforms, the priority for banks
must be one of determining a viable
strategic response to the shifting
regulatory environment for OTC
derivatives, and understanding the
internal transformation across people,
process and technology required to
bring this to life.
In executing their chosen market
strategy, we believe banks’ immediate
efforts should be focused on External
Positioning and Internal Strengthening:
External Positioning
The priority here is to develop a focused
business response to the fundamental
market change brought about by the
Dodd-Frank Act. The consequences of
the Act are still to be fully understood
within the industry, though the need to
clear OTC derivatives through central
counterparties (CCPs) indicates that this
topic alone will demand strategic
thinking at the C-suite level of

investment banks.
The scale of work involved in shaping
banks’ market responses should not be
under-estimated. Accenture Research
suggests up to 65 percent of industry
OTC derivatives could be eligible for CCP
clearing by 2013
iii
. Given this significant
scope of trades that could be eligible
for CCP clearing and as greater market
transparency drives compression of
margins, banks must be prepared for a
decline in the revenues generated on
a per trade basis. The upside for
investment banks will be the significant
increases in trade volumes driven by the
shift of OTC derivatives to clearing
through CCPs and the likely mid-term
consolidation amongst clearing houses.
The industry experience of the
electronification of exchange-traded
derivatives in the early 2000s serves to
corroborate this hypothesis;
commoditisation following
electronification led to volume growth
of over 400 percent from 2000 to 2010,
whilst average spreads fell
iv
.

Revenue
opportunity
Note: Illustrative only. Relative shares of revenue source will vary by Investment Bank.
Client trading
revenue
Interest
income
Clearing
commission
Agency
commission
‘Execution only’
service provider
‘Clearing only’
service provider
‘Full service’
provider

Figure 2: Revenue opportunity presented by the shift of OTC derivatives
to clearing through CCPs
Challenge 2: Dealing with OTC Derivatives Reform
Strategically, banks are deciding
between two key responses to the
market changes: whether to develop
clearing capabilities or outsource this
service to third party providers.
Building clearing capabilities opens up
the market opportunities of offering a
‘full service’ to clients across both
execution and clearing, or acting purely
as a clearing broker for those clients
that opt to execute their trades with
other market players. This latter
response seeks to capitalise on the
market dislocation and the creation of
what is effectively a new market for
derivatives clearing services. These
services include clearing access, cross-
margining, multi-asset risk
management, and client reporting. For
those banks unwilling to develop these
capabilities, outsourcing the clearing
process to a third party provides a

viable option to staying in the market
whilst stopping short of investing in
capabilities that will deliver a full
service to clients.
Regardless of the strategic response
adopted, the revenue opportunity from
the shift of OTC derivatives to clearing
through CCPs is significant
(see figure 2).
The main challenge for investment
banks is one of developing a client
offering that protects existing revenue
bases whilst capitalising on new market
opportunities driven by this evolving
regulatory landscape. The first challenge
that banks face, then, is to determine
their strategic response.
Internal strengthening
Investment banks must ensure a rapid
response to developments being driven
by regulators (including greater use of
electronic execution, mandatory use of
CCPs for all eligible products,
registration of all trades in central data
depositories and enhanced risk
management). Particular areas for
attention include:
• Upgrading ageing and inflexible
legacy applications to increase system
capacity that will enable growth

under a new market infrastructure
• Understanding the complex change
in operations needed to address the
shift of various asset classes onto
exchanges and electronic trading
venues for subsequent clearance
and settlement of CCPs