Faster and More Complex Markets Spark Calls for Added Investment in Risk Management Technology
Less than half of global risk professionals are confident in their risk management processes during normal market conditions. Meanwhile, fewer than 40% believe their practices are adequate to handle the next unexpected market shock.
A new study from Coalition Greenwich concludes that uncertainty about risk management capabilities are rooted in two main issues: 1) Risk management has become more challenging as markets move faster and the list of risks facing financial service firms broadens, and 2) Many financial service firms still struggle to aggregate the data needed to assess and manage risk from multiple internal and third-party systems.
“Financial service firms are in a race to keep up with the increasing complexity, speed and scope of today’s global marketplace,” says Audrey Costabile, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of Preparing for Financial Markets Shocks with Smarter Risk Management. “Risk managers understand the stakes at play and are pushing for continued investment in in faster and more accurate risk management technology.”
The expansion of investment and trading into global strategies, new products and electronically traded markets has increased the challenge of managing risks for financial service companies. In an era of real-time communications and increasing market volatility, overnight risk management might no longer be sufficient. In addition, managers need faster access to larger sets of good quality data to accurately model shocks to underlying risk factors to avoid outsized shocks to underlying risk factors. Meanwhile, political and corporate instability, financial markets turmoil, climate events, and others, are forcing financial service firms to move beyond traditional risk management metrics and data and introduce multifactor stress tests to prepare for future shocks.
“Professionals who feel confident about their risk management practices still struggle to aggregate the necessary data to support a thorough analysis of risk exposure,” says Audrey Costabile. “Risk data is siloed and difficult to combine, and many risk managers are relying on multiple, disparate systems to view risk across all their books.”
Although many study participants believe that overnight processes are still sufficient, a growing number of risk managers are concerned about a lack of real-time risk assessment.
“At a time when markets are trading in real time, a reliance on overnight metrics could result in response times that are slower than those of competitors and could leave firms in the lurch when unexpected market or macro events occur,” says Audrey Costabile.
Preparing for Financial Markets Shocks with Smarter Risk Management presents the complete results of a recent study of risk management professionals in the U.S., U.K. and Europe. The report assesses risk managers’ confidence in current capabilities, examines what risk managers see as the top risk management challenges facing their firms, analyzes perceptions about key issues like data acquisition/management and scenario testing, and looks at the configuration of current risk management platforms.
