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IT experts in financial services have long claimed that finance would never move to the cloud because of security concerns, as well as increased regulatory pressures that would result from such a move. Those opinions appear to be changing, at least according to Ovum research.
“The capital markets are set to increase investment in cloud services, continuing the trend of technology adoption in the industry, according to Ovum. New research from the global analysts indicates that due to improvements in cloud security and a wider variety of applications, investment in cloud, by both the buy side and the sell side, is set for further growth. The research highlights that although the capital markets aren’t fully integrated with the cloud, this situation is set to change in the coming years.”
Cloud services adoption in the capital markets has increased in the last few years. In the future, there will be an even faster uptake of cloud services. The process of migrating services to the cloud is often driven by cost constraints. Now there is also the need to prepare a platform for the sector’s future evolution.
Currently, the buy side has more integration with cloud services. Order management systems (OMS) increasingly exist as hosted and managed services delivered by third parties, rather than in-house applications, although they are not yet wholly cloud services. Meanwhile, portfolio management systems (PMS) are now commonly hosted solely in the cloud, at least according to Ovum.
However, the use of cloud-based resources for the world of financial services should be carefully considered, in light of the core strategic objectives of the organization. This includes the existing and future business processes, the data management and data analytics strategy, as well as the regulatory and privacy issues that most firms must deal with on an international level.
Why Cloud for Financial Services?
Many of the benefits of cloud computing are well known. You can read about elasticity, scalability, and the ability to align usage to costs in most of the technology and business press on a daily basis. However, many reports fail to mention hidden and more valuable benefits. Here are a few that are less understood, which include benefits that are typically more important to the financial sectors:
· Agility. Most companies understand that cloud computing provides better agility for businesses. However, many companies don’t factor this into their ROI thinking when it comes to cloud computing. Agility through the use of cloud computing comes via the ability to move quickly into new markets, adapt core business processes around new business opportunities in a timely manner, and/or grow financial services companies through acquisition.
· Avoid procurement roadblocks. When building systems in the world of financial services, you have to deal with budgetary issues to buy hardware, software, and even obtain space in the datacenter. Cloud computing allows you to wire around those issues and go directly to the provider for all the infrastructure resources required to operate a system.
· Opportunity to improve. In many cases, the move to cloud computing means a system migration from one platform to another. Take the time to improve the code and database as the application moves to the cloud. Most migrations to cloud platforms will at least drive some platform-specific changes anyway. This is a common benefit for financial services firms that move to cloud computing.
· Better security. There is a myth that public and private clouds are a hacker’s dream, and that we should not move to the cloud due to security vulnerabilities. The reality is that, if financial services firms do just a bit of planning, most public or private cloud computing systems should provide better security than your applications and data currently enjoy. At the same time you upgrade security, you can install a data and service governance approach and system that will provide better managed and controlled IT infrastructure.
Legal and Compliance Issues
Regulated financial firms that spend any substantial time thinking about cloud computing implementation issues quickly recognize several key concerns that must be addressed before cloud computing becomes a viable solution. These concerns include:
· Data privacy
· Data and systems security
· Business continuity and contingency planning
· Liability and risk management
Overall, financial regulatory agencies have indicated that they will apply the same regulatory requirements and standards to cloud computing activities that apply to IT outsourcing activities in general. The Federal Financial Institutions Examination Council (FFIEC) issued a joint interagency statement (Cloud Statement) on the use of outsourced cloud computing services by financial institutions, and the key risks associated with such services. “The statement discusses key risk considerations associated with outsourced cloud computing activities and identifies applicable risk mitigation considerations contained in the various booklets that comprise the FFIEC IT Examination Handbook.”
Moreover, the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board, and the Federal Deposit Insurance Corporation (FDIC) have been detailed about their expectations when a regulated banking organization chooses to outsource technology services to third-parties such as cloud providers. Federal securities regulators and most self-regulatory agencies have also issued guidance for regulated securities firms that is substantively similar, albeit less detailed. However, securities regulators have limited the authority of securities firms to outsource functions and services that would require registration or qualification of the cloud provider under the Federal Securities Laws.
In general, the banking agencies' major expectations of IT outsourcing activities include the following core elements:
· Effective oversight and risk management of IT outsourcing arrangements.
· Risk assessment and requirements.
· Substantiated service provider selection.
· Effective contract issues.
Outlook for Financial Services and Cloud Computing
The use of cloud-based resources is still new for most financial services firms. However, the issues outlined in this article make the use of cloud-based resources in the financial services sector the clear direction for the future. Key business drivers include cost savings, time-to-market advantages, and the ability to change IT quickly around new business requirements.
While the data security and regulatory issues seemed like deal breakers just a few years ago, most firms have found them much easier to deal with than anticipated, and regulatory agencies are quickly adapting around the use of public cloud-based platforms. Indeed, many firms report more secure and more compliant systems through the use of public clouds, and this will only improve over time.
For now, the use of cloud computing in the financial services vertical seems like a forgone conclusion.
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