Real-time intelligence key for robust operational resilience

Last year, spooked by the pandemic and fearful of a systemic fallout like that seen with the financial crisis, UK regulators unveiled new arrangements to shine a much brighter light on the operational resilience of financial firms.

The move last March by the Prudential Regulation Authority (PRA) to create a new, enhanced regulatory framework for monitoring the ability of key financial institutions to withstand, contain and recover from shocks was widely welcomed. Hot on the heels of the PRA’s initiative, the Bank for International Settlements issued its own revised principles for operational resilience.

Nick Applebee, Principal Consultant and Solutions SME at real-time treasury software expert Planixs, believes the ensuing war in Ukraine, ongoing economic turmoil, volatility and geopolitical uncertainties makes the PRA’s new operational resilience policy look even more prudent. However, he is concerned by the watchdog’s policy demands being set at a “minimum level” and its neglect of one aspect of banking operations that he believes is vital for truly effective operational resilience.

“The events of the last two to three years show how shockingly, suddenly the operating environment can change,” says Applebee. “If the PRA’s proposals are to make a truly satisfying impact on assessing the ability of key financial sector actors to withstand, recover and contain future shocks in a fast-moving world, I cannot see how you can neglect the importance of leveraging of real-time data.

“Whether it is for supporting operational resilience or other activities aimed at gaining visibility and control, access to cleansed, real-time data and tools are imperative for supporting the more preventative and proactive approach that everyone really wants to see,” he says.

“Once you have data then it can be used to construct key measures and indicators to generate trigger points and red flags and help ensure informed decision making. As the saying goes, in God we trust, everybody else must bring data to the table.

Three elements

As it stands, there is still time for Applebee’s championing of real-time data for operational resilience monitoring to gain traction, if not with the PRA, through revisions of its policy, then firms in the crosshairs of the new regulations taking on real-time themselves as a matter of prudent governance.

The PRA’s policy is aimed at banks, insurers, financial market infrastructures (FMIs) that allow the clearing, settlement, and recording of financial transactions, and “critical third parties” such as providers of IT, cloud and managed services. It features three main elements:

• Firstly, it requires financial firms to identify “important business services” (IBS) – services they are providing external end-users which have the potential to harm consumers, damage market integrity or threaten the viability of firms in the event of a disruption.
• The second is the requirement for firms to set “impact tolerances” for these IBSs. Here the PRA expects firms to assume that disruption to these services will occur and then set clearly defined time-based metrics, and well-defined thresholds, at which the disruption would threaten regulatory objectives.
• Finally, the PRA’s last and most challenging operational resilience requirement, the one where leveraging real-time data would be especially advantageous in Applebee’s view, is the expectation of firms to perform mapping and testing so they are able to demonstrate their ability to stay within their impact tolerances.

“Firms’ testing strategies should incorporate the risks and vulnerabilities they will face in severe but plausible scenarios and then demonstrate how they will remediate any disruption in a timely manner,” according to the PRA, “The experience gained from this testing can then inform how firms monitor risks to their operational resilience and increase the maturity of their overall processes.”

The first milestone

By March 2022, one year from the policy first emerging, firms had to have met the first two of these elements. Looking three years ahead, firms will have had to prove they are able to remain within the impact tolerances that they have set out. This is where the PRA believes “assurance gained from high-quality mapping and testing will be key”.

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