Enhanced Risk Management: Realizing a Dynamic Risk-adjusted Investment Cycle
One element that is consistent across capital markets in any age is a fervent desire to pursue alpha couched in efforts to optimize risk, all of which finds a point of equilibrium as determined by the market. Today all market players pursuing modernization are doing so in an environment that is subject to the below common factors.
- Diversification of trading product (asset class) and trading method (execution method)
- Deployment of new frameworks for securities settlement and margin trading
- Volatility in cash, leverage, and particularly liquidity
- Continuous strengthening of capital requirements
As regulatory scrutiny intensifies and investor expectations for investment alpha rise, buy side financial institutions are being pushed to modernize their management functions in ways that accommodate their investment strategies with advanced levels of diversification, defensiveness, and risk transparency.
Looked at from the perspective of investors, it is clear that in addition to the deployment of advanced operational methods and superior investment strategies, that to execute these new ideas it is imperative that firms develop the capabilities needed for robust operation and risk management. Indeed, these investor expectations are likely a more daunting prospect than the stress tests and other regulatory requirements.
To perform well in today’s capital markets, Celent has advocated the need for excellence in business operations—in other words, the establishment of effective risk management and control. Toward this end, it is imperative that companies destroy institutional barriers and silo-riddled organizational structures, understand regulations and risks in the context of the market, products, and trading, and seek to strengthen their organizations with an eye to securing greater transparency.
Until now, finance (funds management or capital management) has been carried out in silos, spawning competing control and management initiatives. This is proving increasingly untenable and driving the need to better integrate finance with governance, risk management, and compliance—what Celent refers to as GRC. In the meantime, the costs only continue to surge both in terms of time and money stemming from confusion related to information transmission and the value chain.
What is the best path forward?
To accurately gauge the magnitude of this issue requires a firm awareness and comprehension of the facts, but today the management of risk and finance, processes, data, and technology are fragmented. This spaghetti-like situation and disparate nature of data routes and management systems slows business processes and obscures the reality of the issue itself. Action is urgently needed to establish data flows that cut across risk and finance as well as to create agile front office control and strive for enhanced portfolio optimization.
In addition to bringing together the three elements of data—establishing a set degree of data freshness, data quality, and data routes—it is similarly imperative to integrate seamlessly front office trading systems (OMS), portfolio management (PMS), risk management, and capital management mechanisms.
The approaches taken demonstrate the limits of long-implemented stop-gag measures implemented to meet regulatory requirements. Put another way, to heighten effectiveness, there is a need to overhaul both business and technology architecture.
Management of Risk and Finance: Disparate Processes, Data, and Technology
Celent helps buy side organizations in the market today modernize their risk management—which is to say, implement initiatives to improve the effectiveness of their risk management. Celent does this in part by using the below six items as a conceptual framework to get a handle on the situation, research available solutions, and then offer advice on implementation.
- Understanding regulation and risk that accommodate the market, products, and trading: What is the backdrop or context and what changes are on the horizon?
- Integrating regulation and risk management with control functions: What targets should be integrated?
- Unifying risk data and risk value chain objectives: Which data and processes should be redefined?
- Selecting architecture and components aligned with objectives: Which solutions should be chosen?
- Securing mobility and flexibility in data management and platform strategies: How should the solution build be implemented?
- Rethinking business processes to achieve consistency with risk management: Where are the ancien régime legacy elements that hamstring business modernization?
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