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Risk Management

12:51 PM
Cristina McEachern
Cristina McEachern
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The Whole is Only as Good as the Sum of its Parts at Putnam

It's no longer a roll of the dice. Taking the risk out of risk management through a holistic approach.

Putnam relies on Oracle databases, along with a FAME installation for time-series data. ""We're trying to reduce any of the legacy silo applications and we're making good progress, but it takes a while to switch all of the older technology,"" adds Martens. Philip Best, a managing principal in the risk practice at The Capital Markets Company, observes that while Putnam's approach with centralized risk data but separate processes and products for market and credit risk may be more work, it's actually a trade-off for better data.

Best says that past talk about moving away from a central database for risk information and relying on the data from separate systems has actually created more problems for the firms. ""The trouble with keeping the data separate is that the end systems keep changing the way they define data. For example, you do a query one day and do a query the next day and maybe the market positions haven't moved, but the answer you get is completely different,"" says Best. While smaller firms may be able to get away with one system and in turn one database, that's because their business is more simple, he adds, whereas an investment bank or fund manager has more complex business lines and therefore more systems and more databases.

Overall, Best says that the trend toward integrated market and credit risk is good in the long run, but in the mean time it requires major work that firms might not be ready for. ""Look at history. Credit risk systems grew up in the 80s with very old-fashioned technology and took account of things like loans and bonds, but not much else,"" explains Best. ""Then there was a great big push in the first half of the 90s to spend some amount of effort and money on market risk, but just ignoring the credit piece. Now in the late 90s and into the new decade, people are trying to force the two together to end up with one consistent view."" He adds that the theory may be a good one, but the job of re-designing central data warehouses is lengthy and complex. In other words, Putnam is on track with their risk approach in moving towards an integrated platform for market and credit risk management.

Where Does Risk Fit In?

Finding a good fit and aligning the goals of risk management with that of the rest of upper management is something that Putnam takes very seriously, says Martens. ""I work collaboratively with legal, which oversees compliance, and I also work with the head of financial engineering on quantitative methods,"" he explains. ""Rather than duplicate efforts, we work on a more holistic basis here and create joint efforts between discipline groups."" When it comes to making decisions and evaluating risk management technology, there are a series of groups that come up with ideas and solutions for various objectives. Members of these groups include IT specialists, traders, researchers and financial engineers who get together to ""discuss priorities and sequence what to achieve in terms of implementing technologies,"" notes Martens.

Martens also describes what he calls a ""disciplined approach"" to executing technology installations and improvements in addition to the day-to-day running of the systems. He breaks the approach into two areas, when the department has a project or the actual implementation, and the resulting production environment that runs every day. ""To succeed at implementing a risk management platform, the team must translate project attitudes into the production platform,"" explains Martens. ""That's where the discipline comes in, executing day in and day out at high levels of efficiency and accuracy. That's where the difference is between having a brilliant application and a brilliant production environment."" Putnam's risk department specifically is made up of ten risk professionals as well as anywhere from 10 to 20 IT employees, depending on the stages of development or production on any of the various platforms.

Strategy Stands Apart

When it comes down to it, Martens says Putnam's ""holistic"" and ""disciplined"" approach to risk management is what differentiates the firm from other competitors and makes it more attractive to customers. ""Many times when we get new clients, particularly institutional clients, they want to meet the risk management team to understand how the firm thinks about risk and the technology in place,"" he says. ""At Putnam we feel comfortable that we're in a good position to provide those services and to differentiate our firm from the others."" Martens attributes the heightened awareness of risk management issues to recent disasters such as the Long Term Capital Management downfall and the Russian currency crisis as well as a significant increase in the amount of information that is available these days over the Internet.

Taking a step back from the technology and strategy details, Martens says what makes his position as head of risk management interesting is the various moving parts, ""investment professionals, chief investment officers, portfolio managers and such are always analyzing the markets, which are constantly in flux."" Balancing that with the increasing awareness and demands of clients and potential clients when it comes to risk is what makes it even more of a challenge. ""It's not bad to have a boring day in risk management,"" concludes Martens.

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