Six years ago, when Merrill Lynch began looking to unfreeze liquidity through a technology that would integrate balance sheet information, P&L data and risk information, it was a strategic capability that few companies, if any, could claim. The project was eventually dubbed ARCTIC, which stood for Architecture for Regulatory, Credit and Treasury Consolidation, and it envisioned data feeds from a variety of sources in and outside finance that would all be ultimately reconciled back to the balance sheet. The view would be real-time and at a very granular level for those who needed to see the grains.
Clearly, it was cutting-edge, but Merrill Lynch didn't appreciate just how farsighted it was until a short time later when the dimensions of what would be the Basel II international banking accord began to emerge. Very quickly, ARCTIC was catapulted from a great-to-have innovation to a must-have requirement of good compliance that no longer needed to stand the return-on-earnings test. "It's something we now have to do, so we're glad we decided to do it the smart way in the first place and take the wins wherever we could get them," says Marc Baumslag, a Merrill managing director and chief technology officer for liquidity and risk technology. "There's no question that this will let us manage the balance sheet better, reduce manual work by the treasury and finance teams and improve ROE." And even better, Merrill managed to save money on compliance by getting a head start.
The foundation of ARCTIC is a massive, up-to-date database. On top of that will sit liquidity and risk analytics that will be more accurate, complete, integrated and automated than anything Merrill has had, Baumslag notes. The project has already been completed for some balance-sheet lines, he reports. Others are still being fine-tuned, but should be finished by yearend.
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One big payoff will occur in treasury, where the system will provide better "liquidity risk analytics," Baumslag says–essentially, more detailed information so treasury will be able to better judge the funding needs of the firm without tying up excess cash in underperforming liquidity cushions. ARCTIC is "getting us to a higher level of analysis," notes John Laws, treasury's head of funding and liquidity management. "The challenge is to get data to reconcile. We've been working with a lot of offline data that doesn't flow through to the general ledger. With ARCTIC, we'll start with reconciled data at a very granular level. The more granular the data, the more accurately and less expensively we can fund." That means a better yield on cash when the liquidity cushion can be calculated more precisely and reliably. And it means less manual labor "when we no longer will have to spend time hunting for data," he notes.
Merrill's data integration colossus has been "largely an internal effort," Baumslag reports. "Improvements in database technology and messaging standards have certainly helped us, but the biggest challenge has been closing the cultural gap between finance and risk. Third-party tools haven't been all that useful."
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