As finance becomes more global, risk becomes more global. As such, the pressure to provide evidence of supervision and risk management is on the rise, especially for firms looking to catch the eye and approval of Western investors.
Mitchel Kraskin, managing director and co-founder of Compliance Science, a provider of regulatory compliance technology and services, says a lot of the standards typical in the US are being increasingly applied in the Asian and emerging markets.
"We're seeing hedge funds spring up in Beijing, and while the regulatory framework in that jurisdiction is only still catching up to the West, those managers are trying to attract LP investor dollars from all over the globe," explains Kraskin.
Typically, if a firm is targeting investors that fund in the West, it needs to put products in place to satisfy their due diligence. The level of demands are usually based on Western standards, to the point where potential investor concerns are driving technology demands in other markets.
The Risk Factor
Risk is growing exponentially and there are many more players in financial services than there ever has been, with a lot of little firms popping up each week. Dodd Frank sees to it they are all registered, but as a general rule the more entrants in market place, the more products they are creating and trading. The products themselves are becoming more sophisticated and leading to greater risk.
As a result there is a specific trend is an upward cost of compliance and supervision. The Wall Street Journal recently reported the average salary for compliance officer is skyrocketing due to high demand and not enough supply. "Risk is growing, the genie is out of the bottle, and it is something we don't see retreating," says Kraskin. "We don't expect market participants to get smaller. We don't expect sophisticated and complex problems to get any simpler. The risk quotient keeps climbing and the burden to supervise and keep up is very significant."
Examples of capturing analysis around very specific risk include insider trading and front running. Analytics are commonly used to detect this behavior in individual traders, but Kraskin believes this is an era where that kind of trading analysis can to be used on entire hedge funds, or branches of the hedge funds. This is not only for its own protection from reputation risk and revenue loss, hedge funds are learning they are being judged by regulators and potential investors by their active supervision and ability to provide reports on a regular basis.
And this is where technology can help level the paying field. While the numbers of risk factors keeps growing, so does the speed of computing to create risk analysis and other risk systems. Firms can effectively leverage technology to take their risk quotient down and start to balance it. The technology in and of itself creates a standardization.
"Globalization of risks and standards, and ultimately application of technologies that initially emerged in the North American market is a trend we're betting on," says Kraskin. "We've seen it take root."
He adds that a number of Compliance Science clients are domiciled in America but have operations in Asia and European markets. Additionally Compliance Science has a growing number of clients that are foreign based looking to expand into the United States. "It's useful for them to have one set of standards across all divisions no matter where they are located… It certainly becomes easier for the organization to create one set of global standards and best practices so all regions have the same advantage under the corporate umbrella."