PERSPECTIVES ON THE FUTURE OF RISK MANAGEMENT TECHNOLOGY EXECUTING TO A SUCCESSFUL END GAME

SAP VIEW “The industry needs to fundamentally rethink risk technology – both the sourcing and the consumption of risk technology and analytics. The costly nature of developing and maintaining risk platforms cannot go on indefinitely.” Divisional CEO Global Interdealer Broker “If online media and social networking canchange how people consume and track information, connect and collaborate to make, buy, and sell decisions, why can’t we achieve the same effect for risk apps?” Head of Risk Technology Broker-Dealer Financial institutions are busy – the front office is facing severe constraints compared...

PERSPECTIVES ON THE FUTURE OF RISK MANAGEMENT TECHNOLOGY EXECUTING TO A SUCCESSFUL END GAME Cubillas Ding, Medy Agami November, 2013

EXECUTIVE SUMMARY As firms execute to regulatory and risk transformation programmes, our conversations with market participants underline five themes which institutions should embrace in their efforts to strengthen risk management capabilities: 1. Remove “legacy baggage” to build new capabilities: Firms we interviewed mention initiatives to aggressively rationalize "bloated" portfolios of trading and risk systems and reverse misaligned decisions around a lack of standards, as well as efforts to unify finance and risk systems, data, and reporting. Knowing what systems to switch off (and when)...

INTRODUCTION TO MARKET STUDY FALLOUT FROM THE CRISIS: THE OPENING OF PANDORA’S BOX Pandora’s Box has been opened: Almost every corner of the industry is facing heavier regulations around risk management, compliance, and reporting — from new debit card interchange regulations and their broader impact on payments ecosystems in retail and commercial banking, to the ongoing implementation of market reforms to improve the transparency and functioning of over-the-counter markets, all the way through to efforts to enhance consumer protection and strengthen capital/solvency buffers in banking, asset...

FACING HEIGHTENED UNCERTAINTY, CHANGING FORTUNES, AND EVOLVING DYNAMICS For most firms we interviewed, the political, competitive, and regulatory landscape is characterized by a number of themes and dynamics around the management of risk: Reduction in risk appetite, tolerance, and leverage: The reality of diminished risk-taking is already playing out in the regulated banking sector and is expected to continue in the near to mid-term. Balance sheets of banking institutions will exhibit more liquid, less complex characteristics in the longer term. Demands for transparency: Regulatory and banking...

IMPLICATIONS FOR RISK TECHNOLOGY: PATHS TOWARDS A SUCCESSFUL END GAME Firms are already faced with a change in the economics of their lending and trading businesses. This has forced them to not only upgrade risk technology capabilities but also simplify overall IT architecture and re-examine the costs of their IT delivery models. From our conversations with market participants and our analysis, Celent observes five points for action which financial firms should look to pursue: Not all legacy systems are a drag, but firms have to recognize and aggressively switch off those that are. In most retail...

Initiatives mentioned by interviewees include the following: “Reversing” misaligned decisions around a lack of standards, rationalizing portfolio of applications, and/or removing IT complexities (e.g., create lean front to back, design “horizontal architecture stacks,” remove complexity, and retire overlapping legacy applications). Reunifying risk and finance data, either physically (e.g., replacing/consolidating a target application) or logically (e.g., employing a reporting or business intelligence tool to aggregate information). Ensuring architecture and data delivery mechanisms along the...

Deploy next-generation infrastructures as point solutions into existing frontline and risk workflows without giving explicit thought to changing processes. Implement next-generation infrastructure but simultaneously reengineer risk management processes, interaction models between front office, collateral desks, product control, risk, and senior management in a cohesive manner with the intent of exploiting the most out of emerging technologies. We would argue that the latter approach is superior in stretching risk technology budgets further, creating effective change and driving sustainable advantage....

Therefore, risk information chains need to be designed to also deal with “softer issues” of shaping risk-taking culture, improving collaboration between trading and risk control groups, enforcing accountability, and realigning incentive structures across the chain of stakeholders and their specific information needs (see Figure 2). Figure 2: Risk Information and Reporting: Need to Align Risk Culture, Incentives, and Accountability Requirements for effective risk supply chains: Action points and change levers: • Demand deeper transparency into risk profile of institutions • Engage in active dialogue...

Figure 3: Focus of Risk Capability Improvement Efforts Source: Celent “If online media and social networking can change how people consume and track information; connect and collaborate to make buy and sell decisions, why can’t we achieve the same effect for risk apps?” Head of Risk Technology, Broker-Dealer In short, front line and risk systems should not only be designed for "better reporting" but also designed to enable timely and well-informed decisions, and to directly facilitate risk takers, risk controllers, and risk overseers in collaborating to manage risk collectively as an organization....

In order to steer these initiatives successfully, senior management will require a regularly updated view on the business and client segments that are driving capital and RWA consumption, the returns associated with those various client segments, and estimates of “trapped” RWA that could be unlocked by various optimization initiatives explored. For example, forward-thinking institutions are already exploring levers to manage risk-weighted assets (RWAs) and improve capital ratios and returns. Here, the scope of activities mentioned ranges from technical “point-based” fixes and short-term tactical...