Case Study

Creation of master agreement management utility enables investment bank to reduce Basel III cash reserve requirement

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Client: Fortune 300 integrated global bank

Industry: Private/Investment Banking, Wealth Management

Business need addressed:
Created a consolidated view of all legal agreements to improve visibility on cash reserves for regulatory requirements

Genpact solution:
Developed a process-led technology operating model to more accurately manage all legal agreement materials through one agreement data utility (ADU)

Business impact:
Fuller visibility provided by the ADU enables the client to more precisely calculate how much cash is needed to comply with new regulations that call for reserves to be kept equal to 8% of the client’s risk weighted asset (RWA) exposure.

Business challenge

The 2008 crash of capital markets permanently changed how financial institutions must operate. In Europe, the Basel II requirement was enhanced, and Basel III was developed in response to the liquidity deficiencies at the heart of that crisis. This regulation mandates that investment banks maintain certain capital reserves in relation to the RWA held. Under Basel III, the Capital Adequacy Ratio, or CAR, must be at least 8% of a bank’s risk-weighted assets. Although investment banks may want maintain a safe RWA-to-cash-reserve, they want to do so in a way that does not unduly reduce their leverage. One of the first steps for optimizing RWA positions and collateral is to consolidate the bank’s view of legal agreement data.

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Genpact approach

Creating an operating model for an Agreement Data Utility (ADU) required Genpact reengineers to map more than 50 processes. While doing this initial mapping, Genpact figured how the client could safely automate operations related to User Acceptance Testing (UAT), and calculated the move would deliver millions of dollars in direct savings once it was rolled out operation wide.

The reach of the resulting Target Operating Model (TOM) spanned six pillars: Process, Technology, Data, People Organization, Partners, and Supplier. The TOM was evaluated in terms of the risk controls and cost framework provided. In what is perhaps the best testament to the consensus required (and ultimately acquired) to make the ADU a reality, the utility’s framework was approved only after sign-off was secured by stakeholders from across 25 department areas, all of whom, to some degree, contributed data that would flow through the ADU.

Exception management and validation, it was determined, would be performed during the initial pilot period, before the solution was implemented. This would allow time for the shareholders to agree on process exceptions, metrics, and reporting, and to be involved going forward.

The agreement management process was eventually handed over to operations by a team of Genpact reengineers who provided “train the trainer” support. Genpact also provided “playbook design” support and validated the process capacity required. Last, the team oversaw the implementation of performance dashboards and a framework for process governance.

Business impact

Collectively, standardizing the agreement templates, outsourcing legal clause management, and automating UAT are expected to yield multimillion-dollar direct cost savings. Ultimately, a more precise RWA dollar-amount calculation and subsequent reserve estimation could free up to US$1 billion for reallocation elsewhere. Most notably, this model is readily replicable for use by other investment banks confronting the same challenges and for other Banking and Financial Services enterprises with similar needs.

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