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Risk Management

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Andrew Rafalaf
Andrew Rafalaf
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Northern Trust Chooses BARRA for Aggregate Risk Solution

Northern Trust Corp. has signed a contract for BARRA's TotalRisk for Asset Management system.

Desperately canvassing the risk vendor community for a product that would meet the needs of its long-term investors, Northern Trust Corp. has signed a contract for BARRA's TotalRisk for Asset Management system. Donald Rieck, manager of Northern Trust's risk management group, explains how for years the firm - which provides custody, trust and asset management services - relied on a set of products that were good on an asset class basis, but not appropriate for its pension fund and trust clients.

"We started looking at risk systems back in 1996," Rieck says. "At the time, what we discovered is that none existed then that were built for our client base, which is a little different than the traditional risk management customer in that they are long-term investors like pension funds. The don't make a trading decision on an individual security. They tend to make them on a more macro-level basis."

Rieck continues to explain that Northern Trust has been using a hobbled-together grouping of products from BARRA and Capital Management Sciences. Recalling the firm's initial search in the middle of the decade, he says, "We started using technology that existed to give those clients the ability to do a little of what they needed to do. The technology we had at the time - BARRA and CMS BondEdge - was focused on individual assets. They let us do some real good work in terms of asset class analysis, but it was difficult to calculate aggregate risk across asset classes."

Having been a BARRA client for some time, Northern Trust participated in the vendor's client advisory board which was tasked with helping BARRA take the fruits of its Redpoint Software acquisition to create a product like TotalRisk. BARRA acquired Redpoint, a supplier of integrated risk management solutions, last year. According to Rieck, Northern Trust did review other systems in the interim, but none of them offered the aggregated risk analysis that the firm has been searching for. He declines to name the other vendors considered

Northern Trust began testing the product in April of this year, and finally signed the contract two weeks ago. Why the months of testing? "We really wanted to flesh out a couple of major things," Rieck explains. "First and foremost, we needed to test the validity and robustness of the output. We needed to make sure the answers the system gave to us made sense."

The firm, fearful that it would need to spend months integrating outside data feeds, also tested BARRA's included feeds. "For example, on a corporate bond, we don't need to go out and get a feed that will give us the call schedule for that bond. BARRA's already done that, and in terms of ease of implementation, that was a big plus for us," Rieck beams.

Northern Trust will begin offering within the next month TotalRisk to its institutional clients on a service bureau basis. Over the next six months, the firm will be working with BARRA to provide this system to its clients on an online basis.

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