Technology will be a key differentiator in risk management

Digitalisation of risk technology will be a key differentiator in the monitoring and management of risk during periods of volatility and continuing market uncertainty triggered by Covid-19. according to findings by Aite Group, a global research and advisory firm and Torstone Technology, a post-trade processing and risk management group

The White Paper ‘The Digitalisation of Sellside Risk Management‘ found that firms will need a sharper emphasis on the requisite upgrades and requirements in order to weather the current and future storms. In addition, they will also have to be able to identify synergies across regulations and optimise the use of data in risk management and other business areas, which in turn will lead to lower costs in the long term.

Audrey Blater, senior analyst at Aite Group

The report notes that banks must prioritise business areas that are most exposed to increased data volume and complexity, such as trading, risk management, and regulatory compliance. Those that continue to rely on legacy processes and architecture will not be able to keep up with increasingly rigorous risk calculations.
As Audrey Blater, senior analyst at Aite Group put it, “The boundaries of existing risk management technology are being tested more intensely now than ever before. Ongoing market volatility necessitates rigorous calculations as well as increased data management and consumption. The shift to digitalisation will continue to find its way into various parts of banks as technology creates common threads across business areas.”

In terms of technology, the report found that for half of the firms polled, the cloud is an area of focus for risk analytics because of the computing-intensive nature of the function. It predicts that hosted deployment will continue to replace on-premises risk systems as cloud-native solutions become increasingly commonplace. In addition, it expects cloud bursting or hybrid set-ups to continue to grow in popularity. This is an application that runs in a private cloud and ‘bursts’ into a public cloud when the demand for computing capacity spikes.

Anthony Pereira, Head of Torstone’s Risk Platform

As for artificial intelligence and machine learning, practical use cases have been slow to develop although this technology will eventually equip chief risk officers with a better toolbox of analytics and capabilities. However, getting the right modern risk platform in place will be critical to take advantage of these technologies as they evolve. The main challenge according to Anthony Pereira, Head of Torstone’s Risk Platform is that AI engines require vast amounts of data in order to operate which requires banks to have firmwide data sets that are clean, monitored and maintained.

However, it is not just about technologies’ impact on processes and systems but also on organisational structures needed to achieve scale while reducing cost of ownership. For example, take XVA or valuation adjustments for derivative contracts. In the past activities may have been siloed but half of the firms canvassed have established a centralised and coordinated desk which pools together the requisite skillsets needed for the credit, capital and pricing functions.

Looking ahead, looking ahead, Pereira believes that centralisation of the risk function across different teams will continue to be a key theme and also expects the decisions for cloud based technologies to move up the agenda for front office and across business lines. At the moment, 82% of firms still rely on IT to pull the trigger on investment in a cloud.

With new regulations coming through the pipeline, “sellside firms that have invested in upgrading their risk systems will have a clear advantage over those who have not,” he adds. “Reviewing the existing inefficiencies and identifying areas for improvement would be a key first step. Always-on, centralised, cloud-based risk technology that is scalable in times of volatility is the foundation for robust risk management in the years to come.”

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