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Risk Management

12:46 PM
Julio Gomez, Founder, Gomez Markets
Julio Gomez, Founder, Gomez Markets
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Firms Can Improve ERM to Create Competitive Advantage in a Changing Risk Environment

In a world of increasing complexity and decreasing time frames, properly leveraging tools and technology can give firms the edge over their competition.

To paraphrase the late Tip O'Neill, all financial services is risk. How long will you live? I'll insure you. How much do you make? I'll lend to you. What are your company's prospects? I'll buy a piece of you.

In these and hundreds of other scenarios across the banking, brokerage and insurance industries, risk bets are made that define the fortunes and failures of financial institutions. At their core, financial institutions are buyers and sellers of risk. What challenges firms managing risk today is the convergence of two inexorable trends: increasing complexity and decreasing time frames. Contrast the financing of a merchant vessel (and waiting more than a year for your "ship to come in") with today's global, multi-asset-class, multi-currency electronic trading. Clearly the shape of risk is changing — and in real time. Leading firms will respond by leveraging tools and technologies in three ways to build competitive advantage:
1. Extending risk management systems to more business processes. Historically, most risk calculations were done as part of reporting activities that relied on receiving data that already had made its way through an origination or trading process. Increasingly, the capacity to run analytics that calculate risk can be found at each step in the process, allowing both improved data quality and increased frequency of risk awareness.
2. Leveraging SOA and data integration initiatives to advance ERM. Much of the regulatory pressure from legislation, including Sarbanes-Oxley and Basel II, has had the unintended consequence of accelerating enterprise initiatives in service-oriented architecture (SOA), and data integration and management. There has been significant energy expended attacking the problem of pulling together data from disparate systems. Leading firms are using these new capabilities to improve intracompany reporting of risk-related data and push toward an enterprise risk management framework.
3. Pushing risk management systems to real time. Of course, the ultimate goal is to move all of these capabilities to a real-time environment. Databases are straining under the load imposed by complex risk calculations that need frequent updating. As firms scale their operations, and as transaction and message volumes of all types grow, the database approach is yielding more and more ground to real-time environments, such as complex event processing.

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