Pressure is Growing to Monitor Risk and Margin in Real Time

Sell-side risk management is in need of an overhaul that consolidates systems and incorporates the increased importance of margin into risk calculations.

That is the central finding from a recent Acuiti study, conducted in partnership with Sterling Trading Tech.

In a survey of 55 banks and broker-dealers across the world, the study shows that fragmented legacy risk systems are hampering firms’ ability to respond to increased volatility across global markets.

The uncertainty of market movements this year, as well as the fallout from the Archegos blow-up, has thrown the issue of counterparty risk and monitoring margin into sharp relief.

The findings show that not only are volatile conditions forcing market makers to be more vigilant about collecting margin calls, but also that upgrades to existing infrastructure are needed across much of the industry.

Survey data shows that 86% of respondents use more than one system to manage risk across their derivatives business.

“Legacy infrastructure has accumulated at sell-side firms over the years through acquisitions and siloed business lines,” says Ross Lancaster, head of research at Acuiti. “This has led to costly and burdensome operations that often fail to keep pace with client demands for cross-assert trading strategies and miss the operational efficiencies of more consolidation and real time oversight.”

The key findings from the survey are:

Regulatory and market pressure is growing to monitor risk and margin on a real time basis
73% of respondents used between two and five risk systems, showing the burden and complexity of legacy infrastructure that firms have built up over the years
64% of respondents take more than a week to implement risk and margin policy changes in their systems, timescales that are increasingly out of sync with fast changing market dynamics
Risk committee changes to parameters lag the real time demands of current day markets
78% or respondents believe that a more dynamic risk and margin policy would provide a competitive edge

The findings reinforce the reality that in markets where real time risk management has become essential for managing counterparty exposure, systems often lag these demands. Legacy infrastructure has often become so embedded in firms that even if they want to overhaul it, the operational challenges are too big. This will require imaginative solutions, that can onboard new risk models while also avoiding costly and drawn out integration periods.

Source: Acuiti