FOW Learning: What is governance, risk and compliance?

Governance, risk and compliance are all hugely important when an organisation aims to achieve its goals. By integrating them together into a GRC strategy, your organisation will be better placed to ensure that it can meet internal, legal and regulatory requirements, manage risks, and achieve its objectives and goals in a more structured manner. 

Without a consistent GRC strategy, organisations leave themselves open to heightened risks, fragmented management, inefficiencies and a lack of communication and a lack of adherence to regulations.  

In this article, we’ll look at what governance, risk and compliance are, why it’s important, and what some of the challenges are in implementing a coherent GRC strategy.  

How is governance, risk and compliance defined? 

Managing risk and compliance is vital, both from a regulatory standpoint and a business perspective. With a governance, risk and compliance framework in place, traders and organisations can ensure that their decision-making, risk management and compliance strategies are aligned. 

The acronym GRC was coined by the Open Compliance and Ethics Group (OCEG) and introduced in 2007 when OCEG’s founder, Scott Mitchell, wrote a paper in the International Journal of Disclosure and Governance on it. The concept precedes the name; however, organisations having employed it for many years.  

Governance, risk and compliance is defined as a more holistic approach that integrates governance, risk management and compliance together. This can aid organisations in making better-informed decisions and mitigating risk while adhering to regulatory requirements at the same time. This way, everything is consistent across all efforts.  

This will be explained in more comprehensive detail further on, but in short, the three aspects of GRC are as follows: 

• Governance: Ensures that teams are united and processes, policies and leadership structures are aligned with corporate objectives. 

• Risk management: Identifies, addresses, assesses and mitigates risks and potential disruptions to regular operations and regulatory compliance, helping organisations manage uncertainty.  

• Compliance: Ensures adherence to internal, legal and regulatory requirements to reduce the risk of penalties and reputational damage and build more trust with stakeholders. 

Why is governance, risk and compliance important? 

Governance, risk and compliance help organisations meet regulations, manage risks and achieve objectives while operating more efficiently with everybody on the same page – they know who does what and how decisions are made. You’re ensuring that standards are being met while also protecting the entity from potential risks that could arise.  

Generally speaking, the benefits to governance, risk and compliance can include greater alignment across the organisation, more accurate and consistent data, reduced costs and greater risk mitigation. 

In the derivatives industry more specifically, GRC is important when identifying and analysing credit, liquidity and market risk and ensuring compliance with regulations including the European Market Infrastructure Regulation (EMIR) in the European Union and the Dodd–Frank Wall Street Reform and Consumer Protection Act in the United States. 

Because roles, responsibilities and decision-making structures are clearly defined in GRC, entities can ensure that trading decisions align with their strategy, while coherent governance can also reduce the likelihood of error and help prevent fraud.  

Without a clear, consistent strategy, organisations can find themselves in a situation where different departments manage risks in isolation without sharing and collaborating with other teams, leading to fragmentation and potential blind spots. 

Compliance processes can become inefficient and lead to an organisation becoming left behind as the landscape evolves, and non-compliance with industry standards can potentially lead to penalties and breakdowns in trust. 

To avoid running into these issues, or at least minimising their likelihood, it’s important to keep up with regulations as they evolve and ensure that risk and compliance management are integrated into strategic planning.  

The components of governance, risk and compliance 

Governance, risk and compliance are all connected and are most effective when integrated together. Governance tends to have a more overarching, longer-term outlook and focuses on improving results and protecting stakeholders, while compliance is more the practical approach of keeping up with new regulations.  

And, while compliance involves adhering to established regulations, in turn avoiding some risks, risk management revolves around identifying and mitigating risks – which may include those that arise through non-adherence to regulation or legislation. 

Here’s what to know about the three components of a GRC strategy, and how they relate to the derivatives industry. 

Governance 

Governance sets out and clearly defines the rules and internal regulations that help guide both risk and compliance – it’s the foundation of the approach and ensures that everyone is united – processes, policies and leadership structures are aligned with the entity’s objectives.  

There should be clearly defined roles, including for risk managers and compliance officers, regular monitoring and reporting to board-level committees, and policies ensuring compliance with legal, internal and regulatory requirements. Because everyone is aligned and decision-making and performance management are coordinated, it also helps enhance transparency within the organisation.  

Data governance, meanwhile, is defined as a subset of governance that focuses specifically on the availability, access and security of data, and it forms a key part of overall governance, particularly in the derivatives industry. Because derivatives trading involves a few stakeholders, governance helps reduce the opportunity for errors and conflicts of interest, while ensuring that trading decisions are compliant and backed by data. 

Risk management 

Risk management involves identifying, addressing, assessing and mitigating risks to minimise the chance of disruption to regular operations and compliance with regulations and help organisations manage uncertainty.  

A risk management strategy should allow entities to evaluate cyber, financial and operational risks throughout the entire operation, put plans in place to mitigate risks before they become more serious, and prepare response strategies for potential problems – from changes in regulation to fraud.  

Because the derivatives industry can be volatile, risk management is important in ensuring entities can set appropriate limits and reduce losses. Processes such as evaluating a party’s ability to meet its obligations can be laid out with a solid GRC strategy, mitigating risk. 

Compliance 

Compliance involves ensuring that the entity adheres to regulations, therefore avoiding any penalties, legal issues or reputational damage and building and maintaining trust with stakeholders – something particularly important in the highly regulated derivatives industry. A comprehensive GRC strategy will reduce the risk of any issues. 

Compliance processes can include regulatory mapping – tracking requirements to ensure compliance is maintained – automated compliance monitoring using GRC software and training employees to ensure they are familiar with compliance obligations.  

How to implement governance, risk and compliance 

First, it’s sensible to look at the current GRC practices, even if they aren’t yet integrated with each other. Analyse your existing governance policies, risk management processes, and compliance practices to look for gaps or anything that could be made tighter or more efficient.  

Then, make sure you have clear, coherent goals so that you can align your goals with your business strategy and regulatory requirements. Assign roles and responsibilities and ensure consistent reporting processes are in place for governance and compliance.  

GRC frameworks – models to better manage these processes – can help guide organisations in establishing the best GRC strategy to help them meet their goals. Among the widely-used frameworks are ISO 27001, COSO and COBIT.  

You can integrate technology, using GRC software to automate compliance and help you assess risk and track changes in regulations, with human oversight. Ensure that you’re continually monitoring your strategy and preparing for any changes, with regular audits, risk reviews and policy updates.  

Using technology in governance, risk and compliance 

With regulations becoming more complex, it makes sense to use GRC technology rather than rely on manual compliance processes. With GRC technology, you can have compliance monitoring in real-time to improve accuracy and reduce time and effort, and centralised risk dashboards that provide visibility of governance, risk and compliance together. 

Automated risk assessments can help by improving cybersecurity and regulatory oversight and mitigating operational risk, too.

In terms of cybersecurity, frameworks generally integrated into GRC programs include ISO 27001, the standard for information security management, the NIST Cybersecurity Framework guidelines for cybersecurity risk management and incident response, and the Payment Card Industry Data Security Standard (PCI DSS). 

Making the most of technical solutions can help reinforce governance, reduce risks and keep on top of, or automate, compliance. 

What are the challenges in implementing governance, risk and compliance?

When putting governance, risk and compliance strategies in place, there are some potential challenges – including the following:   

• Finding the right people for certain roles: There could be delays when defining roles and allocating responsibilities, which can lead to frustration if people are unsure as to what they’re working on.  

• Lack of communication: It’s important that communication is prioritised so that everybody is on the same page – particularly as some workers may view GRC to be impractical, time-consuming or unnecessary.  

• Changing regulations: Derivatives are regulated relatively heavily, and these regulations can change over time. It’s vital to keep track of changes and updates and adapt accordingly. 

• Managing data: Large volumes of data are produced through derivatives trading and inadequate governance can lead to inaccuracies, failures in mitigating risk, and potentially breaches of regulations. 

With no consistent, coherent governance, risk and compliance strategy, entities risk being more inefficient, making trading decisions that don’t align with their wider strategy, and being penalised for not adhering to regulations, and potentially eroding trust. 

Indeed, a solid GRC strategy is essential, but keeping on top of compliance and risk management in the face of constant evolution can be difficult. 

You can keep up to date with regulatory changes with FOW Intelligence. It provides everything you need to stay on top of regulatory issues including opinions from regulators and industry leaders. 

Our FOW Reference data makes it simple to comply with the rules of regulatory trade reporting mandates by providing attributes that are built for your contracts, across asset classes and exchanges, covering the relevant regulatory technical specifications. Request a data sample today.

Frequently asked questions 

What are the three pillars of GRC? 

The three pillars of GRC are governance, risk and compliance. While they’re all separate and distinct components, they’re most effective when integrated together in a consistent, coherent GRC strategy.  

What role does data governance play in a governance, risk and compliance strategy? 

Essentially, data governance is the framework for managing data, ensuring that it’s accurate, secure and used in such a way that’s compliant with regulations. It forms an integral part of any GRC strategy by putting policies and procedures for quality, storage, security and access in place. This can help organisations and traders better manage data-related risks.  

Why is governance, risk and compliance important for derivatives traders? 

Derivatives are heavily regulated, and GRC helps traders to reduce risks and comply with regulations including the European Market Infrastructure Regulation in the European Union and the Dodd–Frank Wall Street Reform and Consumer Protection Act in the United States. 

What are the biggest challenges when developing a governance, risk and compliance strategy?  

Among the challenges to consider are a lack of communication and difficulties finding the right people to fit defined roles, as well as dealing with large volumes of data and frequently changing regulations that organisations need to keep on top of.