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The first half of 2023 witnessed volatility in the banking sector, with three major U.S. regional banks collapsing due to poor risk management and losses from long-term bond sales. As we enter the latter half of 2023, focus shifts to the commercial real estate (CRE) market, grappling with increasing troubled assets amid declining property values, occupancy rates, and challenging credit conditions.

In response, regulators and lawmakers have taken action. Congress, in 2018, rolled back Dodd-Frank protections, easing regulations on all but the largest banks. Now, lawmakers aim to repeal this rollback and enhance liquidity, stress testing, and resolution planning requirements for large and midsize banks. Furthermore, banking regulators updated a 2009 policy statement on CRE workouts and accommodations, emphasising prudent loan practices and introducing discussions on short-term loan accommodations. Additionally, the FDIC, Fed, and OCC replaced their 2008, 2013, and 2013 guidances on third-party risk management with a unified inter-agency guidance.

These developments underscore the importance of effective risk management for banks. It’s crucial for banks to assess their exposure to counterparty risks and adjust relationships with third parties and commercial borrowers based on newer guidance. However, achieving this requires overcoming challenges posed by existing systems and processes.

The role of contracts in banking

The banking sector operates within a framework of intricate relationships governed by a multitude of contracts. Among the most pivotal agreements crucial for a bank’s operations are:

1. Derivative Contracts

Banks frequently utilise derivative contracts to mitigate risks such as interest rate, foreign exchange, and credit risks. These contracts encompass ISDA master agreements, options, futures, swaps, along with provisions for close-out netting and termination events. Due to their complexity, managing these instruments demands specialised expertise.

2. Foreign Exchange Agreements

These contracts delineate the terms and conditions governing foreign exchange transactions, encompassing exchange rates, fees, and associated risks.

3. Third-Party Contracts

Financial institutions engage in various contracts with third parties, including vendor agreements, affiliate agreements, PCS contracts, and non-disclosure agreements.

Given the diverse and intricate nature of these contracts, enhancing data transparency and contract management is imperative for banks to navigate risks and regulatory compliance more efficiently. Below, we delve deeper into this subject with Stuart Brock, Senior Vice President of Contract Analytics & Lifecycle Management at Cimplifi.

Navigating the growing regulatory burden: a Q&A with Stuart Brock of Cimplifi

Stuart Brock, who has previously held senior management roles at prominent banking institutions, notably contributed to the enterprise resolution planning team. In this capacity, he played a pivotal role in overseeing and consolidating crucial information pertaining to third-party engagements. His efforts ensured that these obligations were meticulously documented, appropriately integrated into resolution plans, and adequately addressed in business continuity strategies.

In order to gain insights into the dynamic regulatory compliance environment of today and to explore effective strategies for banks to navigate this escalating burden, we sought Brock’s expertise. Drawing from his experience in spearheading third-party program compliance at a major enterprise bank, we asked him to share some invaluable best practices gleaned from his tenure.

What are your predictions for what we might see next in the market?

In the foreseeable future, there is a likelihood of witnessing an escalation in regulatory reporting requirements, alongside an expanded scope encompassing a broader spectrum of banks.

Tier 2 and 3 banks are urged to proactively evaluate their systems and processes to ensure preparedness for forthcoming regulatory mandates. This necessitates a thorough assessment of existing contract management programs to pinpoint any existing gaps or impediments to compliance. At Cimplifi, an uptick is observed in requests for advisory services, where the team of financial services experts assists banks in conducting readiness assessments.

It is noteworthy that these banks are also mandated to contend with new guidelines governing the management of their third-party relationships, jointly published by the Fed, OCC, and FDIC, effective June 6, 2023.

What are the biggest contract management challenges for today’s financial institutions?

Regrettably, many banks encounter challenges in swiftly accessing data, a significant factor contributing to recent instances of bank failures. Recognising that banks operate on relationships, it becomes evident that a lack of comprehension surrounding these relationships and their associated risks exposes institutions to unnecessary vulnerabilities, potentially culminating in failure.

While larger banks benefit from the presence of more mature processes, there remains room for updating and optimising these frameworks. Conversely, Tier 2 and 3 banks historically face lesser levels of regulatory scrutiny and reporting obligations. However, in the wake of recent banking failures and subsequent legislative activity, these banks are poised to encounter heightened regulatory requirements. Accordingly, they must prepare by establishing improved systems and processes for gathering and analysing data.

Encouragingly, there’s a growing acknowledgment within the industry and among stakeholders regarding the importance of data access and analysis. As a result, both the industry and customers are taking proactive steps to deploy solutions aimed at catalysing compliance efforts.

What’s been your experience with regulatory examinations?

In his previous roles, the individual interacted with multiple regulatory agencies, each delineating its own mandates and focus areas. Describing the regulatory examination as an intense experience, he highlighted the challenge of anticipating all potential queries from the examination team within a finite timeframe. Consequently, he emphasised the necessity of possessing a system capable of swiftly analysing data across various repositories and systems of record, facilitating the production of meaningful summaries and reports.

Drawing from his experience, he underscored the importance of demonstrating to examiners the existence of robust processes and systems designed to address identified gaps, even if comprehensive answers are not readily available. He noted that such proactive measures not only aid in navigating the examination process effectively but also serve to mitigate potential concerns from other examiners or regulatory entities in the future.

The way forward: principles of better contracting for banks

Given the growing importance of contract management, here are five key elements of establishing an effective, robust contract management process:

Utilise Dashboards for Risk Monitoring and Insight Generation

Employ purpose-built dashboards and advanced contract analytics tailored to specific use cases to proactively monitor risks and uncover actionable insights. These tools empower stakeholders with real-time visibility into contract-related risks.

Facilitate Intelligent Search and Data Transparency

Enabling advanced search capabilities allows for the swift identification and extraction of crucial data points within complex contract portfolios. Concept-based searches on key clauses and provisions, coupled with sophisticated contract analytics, aid in surfacing essential information like termination events and cross-default provisions.

Establish a Centralised Repository for Contract Management

Implementing a Contract Lifecycle Management (CLM) system serves as a centralised hub for critical documents, ensuring a singular source of truth. This enhances transparency and streamlines contracting processes, thereby boosting efficiency.

Extract and Route Key Data Points Effectively

Leverage modern contract analytics to efficiently extract and route key data points for compliance monitoring, stakeholder review, and integration with systems of record such as portfolio and collateral management solutions. This enhances data accessibility and facilitates seamless connectivity across various platforms.

Deploy Solutions for Systematic Modification and Remediation

Given the rapid pace of regulatory changes, it’s imperative to utilise solutions that facilitate efficient modification of agreements and contract language. These tools play a pivotal role in ensuring ongoing compliance with evolving regulatory requirements.

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