See things clearly

Is the financial system becoming too complex to depict?

As I walked away from the bank HQ 6 years ago, Han Solo’s famous Star Wars quote came to mind,

“I got a bad feeling about this”

During the meeting I’d just attended, a manager from the bank had explained how some transactions with other financial institutions occurred.  The transactions were very valuable, worth millions of pounds, and happened regularly.  To paraphrase,

“...basically, traders transact deals, each using their own trading applications. The deal data then gets parsed into the SWIFT system and is subsequently fired off to the respective banks.


Some banks have straight though automated processing, others need some level of manual intervention to an automated process.  But in some banks, data flows just get spat out into printers, and, when they get round to it, workers in the back office pick up the piece of paper and re-enter the data into another system. 


One of the problems is that because there are thousands of trades a week, the wrong data is sometimes entered, or bits of paper get lost.  And with all these systems interacting there is a lot of complexity; sometimes it’s difficult to be sure exactly of what’s happening...”

There were some obvious business implications.  For example, what happens to the deal when the paper document goes missing?  How would this interruption in data flow be tracked?  There would be accounting discrepancies - a trading system would be showing one set of figures for trades done in the financial markets, while a bank’s system would have different values.


Multiplied across numerous transactions per year, via many institutions, located in many financial centres, it seemed to me that this lack of clarity on data flow was “trouble brewing”.


Today, as the global financial crisis continues, the pace of technology and complexity is far exceeding that of governance.


Finance is still trying to get to grips with precisely how it works.  For example in London, the Financial Services Club has launched working groups whose aim is to

“...take the mass of regulatory change – Dodd-Frank, FATCA, EMIR, MiFID II, Basel III and more – and work out:


  • what the regulation means and is trying to achieve;
  • how joined up the regulation appears alongside other regulatory  changes;
  • if it achieves the regulatory objectives it sets out to achieve;
  • if it is appropriate and feasible to implement as a result;
  • how it will be implemented;
  • what it means for systems and operations, and the changes required;
  • what it means for products and services, and the changes required;


with the intent of arriving at conclusions which can be communicated to all parties...”

But to quote some of the finance industry delegates at a recent meeting of the working groups,

“...we don’t even know what the problems are in financial markets, let alone solutions...


...technology is making everything far too complex...


...most banks are not even standardised and interoperable internally, so how can you expect the market to achieve standardisation?”

In “How ‘too big to fail’ banks have become ‘too complex to exist’”, Gillian Tett of the Financial Times, discusses some of the ideas of former financial regulator Professor Henry Hu,

“...technological advances and financial innovation have not only made financial flows and instruments so complex that they are hard to depict, but also financial intermediaries [e.g. banks] themselves are so complex that they are ill placed to make sense of shifting information flows...

The $64,000 question is, how can finance depict these complex data flows, and create more clarity on how its various institutions and markets work?


The long established practices of the process industries, like Nuclear and Oil & Gas, is where the beginnings of an answer can be found.


These industries have computer models of how everything is put together to enable the flow of product.  In, for example, an oil refinery, digital sensors are attached to every asset (pumps, valves etc), and digital flows (representing product flows) are clearly understood and constantly monitored.  The flow of oil and gas products is analogous to the flow of data.


Print-outs from these computer models depict the clear big picture of the business, which simplifies communication of complexity, providing a common language between business managers, technical specialists and regulators.  Everyone can see clearly how the business works.


Here at OBASHI, it is this well-proven approach that we have adapted for today’s data flow reliant businesses, including those in finance. 


This new thinking, which is incorporated into our methodology and software model, lets you understand how people, process and technology are put together to enable the flow of data through the business.  OBASHI is a simple way of analysing and easily communicating how a business works. 


In the context of finance, this approach can help provide the common language that Andrew Haldane, Director for Financial Stability at the Bank of England, called for recently.


As he points out, during recent years, ‘data networks became fragmented and unable to communicate effectively with one another,’ and ‘failures in data infrastructure and aggregation... were endemic across the financial industry...’,

“With financial data captured in a homogenous fashion across financial firms, the stage would be set for mapping much more comprehensively the contours of the financial world... Monitoring global flows of funds, as they ebb and flow, should be possible in close to real time...” [pdf pp11 & 13]

To understand and monitor a financial flow, the key is to have clarity on how everything is put together to enable the flow, as it traverses the business and travels between financial institutions.


OBASHI provides that clarity, joining-the-dots and depicting the business so that everyone can see things clearly.


While real-time monitoring of flows may be a little way down the road, as we’ve said before, it’s not a million miles away.


Assuming, that is, that finance adopts the tried and tested techniques of the process industries.



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