Risk Management Evolves for Risky Times
As the new presidential administration and regulators continue to try to pick up the pieces of the shattered U.S. economy, the heat is on financial institutions to make sure their risk management practices are fully aligned with rapidly changing economic and market conditions. For most Wall Street firms, this means a growing demand for real-time systems, particularly for the valuation of securities, and increased automation, according to experts.
"Whether you're a business or a regulator, I wouldn't be surprised if in the near term more real-time systems are brought into play," says John Jay, a senior analyst with Boston-based Aite Group. "People before weren't paying attention. Now, knowing implosions have occurred, they're moving forward, and the trend is toward real time."
And with so much information flowing so quickly, automation is a key component of any risk management strategy. "If firms have significant assets, they would be foolish to still be using spreadsheets," Jay asserts.
"Size is an issue," he continues. "Over the past few years values have come down, but maybe the line items are still there. So for a lot of sell-side companies that are buying and selling all day long, particularly with over-the-counter derivatives, they might have tens of thousands of line items. And that's just a small portion of their business. So to have a spreadsheet would be rather dangerous."
As recently as a year ago, with the credit crunch and financial crisis looming, many firms relied on reactive and manual processes, confirms Dave Stewart, director of risk solutions for Misys and global solutions manager for the vendor's Misys Opics Plus front-to-back-office multi-asset-class processing platform. "They needed to put data in a spreadsheet, do analysis, get information to be aware of their positions of risk and have a bunch of metrics to enable them to make decisions for business," he says. "That type of practice has not been very effective. That practice doesn't give them the level of transparency or visibility to make the right decisions."
To avoid the kind of systemic meltdown that caused the financial crisis in the first place, companies need much better access to information in real time, Stewart stresses. "A lot of how they monitor their business can be improved dramatically if they have the ability to be aware of what's going on in a more holistic and real-time manner," he comments.
Finding a Good Value
One of the main issues financial firms are facing today is valuing their over-the-counter derivatives, according to Robert Park, CEO of FINCAD, a Surrey, British Columbia-based provider of derivatives analytics tools, who says firms increasingly are interested in getting independent valuations of derivatives positions. "Most of the assets being traded are Level 2 instruments for which there is no market quote available," Park explains. "So getting an independent valuation is one of the key concerns in the marketplace today."
Reliance on valuation models also is greater than in the past, adds Jason Hahn, SVP of market risk management for the mortgage lending division at BB&T Corp., a Winston-Salem, N.C.-based financial holding company with $137 billion in assets. But the models face their own challenges, he notes.
"A lot of people have taken the stance that fair-value accounting has been detrimental to the financial system's stability," Hahn relates, referring to the mark-to-market practice of valuing financial instruments using available market prices. "To do that in cases where the instruments are really easily tracked is good, but for more-esoteric instruments, some market value might be available for a benchmark, but you also need to have financial models that allow you to translate the benchmark to your simple calculation."
Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio
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