Under the spotlight

Regulation W

It’s been a decade since the Federal Reserve implemented Regulation W, which was designed to limit certain transactions between financial institutions and their affiliates. For some banks, enterprise-wide compliance with Regulation W has been a particular challenge—and remains so—due to the significant growth in capital market activities, pressure to rationalize compliance and operations, and increased numbers of mergers and acquisitions. Plus, their current compliance programs have been unable to keep up with the complexity and volume of affiliate activities and pace of automation to report transactions, among other factors.

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In this paper, we’ll describe how banks might implement a centralized, end-to-end Regulation W compliance program by focusing on six components including: 

  • Governance
  • Risk assessment
  • Monitoring and testing
  • Reporting and communication
  • Training
  • Technology enablement

We will also highlight some specific obstacles banks may be likely to face on the path to compliance.

To learn more about the Regulation W compliance program

Key challenges

Some key challenges for banks implementing Regulation W requirements include:

  • Disaggregated or lack of an end-to-end awareness of regulatory requirements across business and support/control units—particularly technical provisions, such as exemptions, attribution rules, and market terms
  • Inaccurate and incomplete affiliate lists and inadequate processes to identify affiliate transactions (according to Regulation W’s definition) within risk, financial, and underlying transaction systems
  • Limited knowledge of technical regulatory requirements, such as the attribution rule in transaction-related reviews and approvals
  • Outdated policies, and limited procedures that do not provide end-to-end transactional guidance specific to Regulation W
  • Ill-defined compliance monitoring and testing programs that are also not aligned to appropriate controls
  • Inadequate monitoring of intraday credit and derivatives for affiliates
  • Limited to no processes that support derivative transactions, including collateral requirements
  • Outdated/nonexistent service-level agreements and insufficient pricing methodologies to support charges
  • Ineffective training programs across business/support functions
  • Overreliance on business certifications that do not have the appropriate substantiation to show compliance with Regulation W
  • Lack of corporate compliance programs that provide an end-to-end view of Regulation W
  • Inadequate internal audits and testing to determine the level of inherent risk of Regulation W and its technical aspects

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