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May 26 2011

Wall Street Journal- Dodd Frank, an Opportunity for India's IT Industry


By Pravin Lal


The global financial services industry and consequently the Indian IT industry have been through turbulent times. Now, banks and financial services players, especially in the U.S., are moving towards a more regulated business environment.

The proposed Dodd Frank Act, one of the most comprehensive reforms witnessed by Wall Street, will practically impact every aspect of the financial services world. Proprietary trading, hedge funds, broker-dealers, mortgage origination firms, consumer banks, insurance companies and asset managers will be more regulated than ever before.

Clearly these regulatory changes will also have an impact on the IT systems deployed at such financial institutions. From 2011 onwards, chief information officers will be under pressure to effectively utilize their resources – allocating budgets for business expansion and for regulatory compliance will be the challenge. Those who prepare in advance to address the higher levels of upcoming regulatory requirements will be at an advantage.

Indian IT companies have an opportunity to evolve into the roles of business consultants and offer solutions that meet these companies’ regulatory needs, though addressing them cost effectively will be key.

India’s IT industry has very effectively created “centers of scale” but has a long way to go towards building a domain competency led business model. Building domain led centers of excellence requires partnering with the client and playing the roles of business consultant and technology leader. For IT firms focused on the capital markets space, an offering around these reforms would position them as solution specialists in this niche domain.

IT systems will require fundamental changes to the architecture of their underlying applications. They will also have to be geared to address concerns around data aggregation, improving data integrity and quality. Systems will need to provide for flexible reporting so data can be provided to external regulatory bodies such as the Financial Stability Oversight Council, the Office of Financial Research.

Establishing connectivity with exchanges, multiple swap execution facilities and clearing houses for swaps trading which have traditionally been traded over the counter, and reporting of swaps trades to Commodity Futures Trading Commission and the Securities and Exchange Commission will be the another area for implementing technology changes to the existing infrastructure. In addition to these, the implementation of the Volcker rule, which prevents investment banks from participating in proprietary trading, could also potentially open a new window of IT opportunity.

Financial firms need to collate data to build an organization-wide and integrated view on risk. Adherence to regulations will require an integrated solution on top of the existing technology infrastructure. There isn’t an easy, off-the-shelf product that caters to these emerging requirements.

IT companies with a strong focus on capital markets will be more likely to leverage this business opportunity.

The exact details of the Dodd Frank Act will start emerging from July, but it’s clear that the new law presents an opportunity for the Indian IT industry. Any vendor demonstrating sound credentials in this space would be welcomed with open arms. This could very well be an entry strategy for Indian IT companies into newer accounts.

Pravin Lal is a director at Sapient Global Markets.

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