When it comes to implementing and updating complex risk management IT systems, financial institutions have been at the mercy of technology vendors. Peyman Mestchian of Chartis Research explains how open architecture risk and trading analytics platforms are handing power over to end-users.
Financial institutions find themselves in the position of reassessing their business models as they rebuild after the financial crisis. It’s not just balance sheets that are in need of repair. Weaknesses in many firms’ risk management and trading IT infrastructures were exposed during the crisis. However, the way in which IT traditionally has been procured and implemented means it’s difficult and costly to make much-needed changes.
In certain respects, the appetite for large-scale IT infrastructure projects is waning. Firms seeking to restructure their risk management IT systems are finding that in most cases there is no single vendor-supplied solution that can meet all their needs. Many of the world’s largest and most sophisticated firms are faced with building their own systems using a combination of off-the-shelf solutions and those designed by in-house IT teams.
Firms are still struggling to keep pace with the demands of new regulatory reporting requirements as well as meet board-level scrutiny of model risk.
Firms would like to modernize by moving to a unified architecture and away from operating risk management IT on a siloed basis. However, the prevalence of black-box solutions means most are beholden to their technology vendors to make changes.
This status quo, where vendors dictate the pace of change and prevent customers from building the systems they need, is starting to change. Today financial institutions are in a unique position to use so-called open architecture platforms to overcome many of the problems created by legacy systems. What’s more, open architecture platforms put end-users in control of system design and allow them to make changes when needed—not when the vendor is ready with an update or new product. Using an open architecture platform also means firms can reuse the best parts of their legacy systems and retain their monetary and intellectual investments.
Legacy systems
At any firm risk management and trading are the two largest consumers of IT and there is hardly any reuse of technology between the two groups. Firms, particularly those trading complex derivatives, typically use numerous systems to comprise their risk management and analytics infrastructure. There are a few elements common to legacy risk management and analytics infrastructure: commercial trading systems, in-house flow trading systems, overnight risk management, trader-specific tools and Excel-based solutions. Each of these systems represents a silo, which generally operate independently and do not share infrastructure with other systems.
The silo-based approach may meet the minimum requirements firms have for analytics and risk measurement. However, silos also pose a number of problems, such as a lack of transparency, duplication of effort and reconciliation issues– all of which were brought to the fore by the financial crisis. Furthermore silos hinder the delivery of accurate risk information to the right people at the right time.
Today, senior management and risk managers need to have confidence in risk metrics with full transparency. However, the way their systems are set up using silos means calculations critical to firms’ trading operations are often scattered throughout many ad hoc systems. It makes it very difficult to explain to senior management, regulators or auditors how a key metric was computed.
Beyond silos: open architecture
Silos are a mainstay of system architectures, but ideally technology shouldn’t be siloed at all. Most user groups have similar needs such as the delivery of analytic measures on a firm’s positions to end-users. Firms shouldn’t have to duplicate every piece of technology they have for every line of business. Firms will be better off using a risk management and trading infrastructure that can serve both constituents while retaining the intellectual capital accumulated in the legacy systems.
In the post-Credit Crunch world firms, particularly those trading derivatives, have a greater need for end-to-end system transparency as well as the ability to compute intraday or live risk positions. Their technology architecture needs to support pre- and post-trade analytics, multiple models, enhanced data delivery, and multiple and dynamic views of risk positions. They should be able to change calculations without IT support, quickly integrate new financial products onto their system and, to a certain extent, be able to reuse existing systems.
Firms can deploy a new, open architecture that unifies risk and analytics computation. It can meet technical and business requirements firm wide in a single cohesive framework. An open architecture is one where individual components are designed to be replaceable by the end-user. For risk management and analytics architectures that are comprised primarily of software solutions an open architecture is one where the underlying software components can be replaced or altered easily by the end-user.
Crucially, this new open architecture approach empowers end-users by giving them the ability to make changes to computations and add new functionalities quickly with minimal integration costs. Furthermore, end-users should be able to make these changes without the direct permission or support of the vendor.
Unlike conventional vendor-supplied systems, open architecture does not dictate a single way of doing things or what some refer to as a single view. An open architecture allows end-users to customise and expand the system quickly while enabling multiple views. End-users can make changes by swapping out old systems for new or by introducing new code.
Beyond making it easier to do integration, open architecture provides end-to-end transparency firms are seeking, which means they have reconciliation and can debug more easily. Firms using open architecture will benefit from the clear view and therefore understanding of the entire data flow in the computational system this approach allows. Contrast that with black box solutions that offer no transparency, because vendors are trying to protect their proprietary products.
Implementing an open architecture platform
Using an open architecture platform, firms don’t need to discard all their existing technology and replace it with a monolithic super system. For any firm that isn’t a start up, a point project such as setting up a trading desk or introducing a new financial instrument for trading, would be a good place to begin. That way a firm doesn’t have to rethink the entire system all at once. It can start using an open architecture platform for one system and gradually roll it out to replace legacy systems.
Sometimes cultural issues within a firm impede the establishment of a unified risk management and analytics platform. For example, it’s hard to get people to agree on what data and analytics tools should be used. To use an open architecture platform, a firm doesn’t have to get every stakeholder to agree on a single approach to risk management and trading technology. Once the open architecture platform is up and running, traders and risk managers can adapt it to reflect the views they require.
Importantly, an open architecture platform means end-users will no longer be wedded to one vendor in a long-term relationship. End-users will have greater freedom to pick and choose software instead of having to compromise on a package that fills some requirements, but not all and includes unneeded features. Therefore, it is more likely a unified risk management and trading analytics system will build up around an open architecture platform rather than come packaged as a single vendor-supplied solution.
