Brokers need to focus on risk management says Tabb Group
Tabb: risk management requires new tools – including an understanding of big data
Brokers will need to spend more on risk management over the remainder of 2013 if they are to survive incoming financial regulation and new technologies will be required to make that possible, according to new research by Tabb Group.
“The market needs new eyes,” said Paul Rowady, senior analyst at Tabb Group. “The missing piece in today’s risk management stack – discovery, one of four main phases in the risk analysis process, including measuring, monitoring and managing – is a much more powerful interface that allows a wider range of practitioners, both IT and non-IT, to explore all of the data, not just some of it.”
Regulation has been one of the main factors driving increased attention towards risk management in recent years. Basel III requires banks to set aside more capital; new rules governing the collateral that must be set aside for derivatives transactions, as well as margin requirements for cleared and uncleared derivatives contracts make the need for strong risk management more pressing.
In the capital markets, it is broadly accepted that data flows and market complexity are increasing as technology advances. The Tabb report suggests that visual analytics are needed to help firms keep track of their risks; it also suggests that while significant resources have historically been channelled into finding sources of alpha, risk discovery has been relatively neglected. That may be about to change, though – risk management is one of only two categories in which sell-side IT spend is increasing this year (the other is pricing/reference data). The biggest falls in spending this year compared to 2012 are in origination (decreasing by -10.25%), customer facing (-8.5%) and research (-8.25%). Risk management is expected to increase by 1.2%, while pricing and reference data is forecast to increase by 2.4%.
“There is so much of a firm’s competitive advantage embedded in discovery and monitoring components and yet few firms seem to realise how much risk discovery and monitoring contributes to the development of strategy success, or the ‘special sauce’,” said Rowady. “Alpha and risk discovery are two sides of the same coin, totally inseparable.”
According to the Tabb research, the tools best suited to deal with risk management are greater automation of raw data flows, larger, faster and more streamlined computational engines and better data storage, as well as continued innovation in standards. However, the research also notes the demise of MF Global and Lehman Brothers as proof that a strong human element will remain indispensable in staving off operational risk – a list to which could be added HSBC, which was fined $1 billion for failures in its AML procedures last year, and Standard Chartered, which was also fined for alleged breaches of US sanctions on Iran. Therefore, personnel workflows should be adjusted to include risk analysis.
Ultimately, ‘big data’ will have to be worked into risk management strategies, with a strong emphasis on data visualisation to make the unending stream of information comprehensible and relevant to risk management staff, according to TabbGroup.
“Putting the right tools in the hands of the greatest number of roles, if not the greatest number of people, along a workflow is going to increase the potential for identifying currently unknown risks,” said Rowady. “Although there have been vast improvements in the deployment of solutions to measure and monitor a far greater spectrum of risks – and at higher update frequencies – the roles tasked with discovering new risks continue to be focused in technology and quantitative research departments. To quote Marcel Proust, the journey to discovery consists not in seeking new landscapes, but in having new eyes.”
