Over 50% of Buy-Side Firms Cite Data Aggregation as the Major Challenge in Managing Enterprise Risk, Says TABB
Buy-side Traders Now Play a Larger Role in Identifying Information Unavailable through Risk Models and Counterparty Data
In a new risk management research report, “The Buy-Side Perspective on Risk: Frequency, Aggregation and Process,” TABB Group says 51% of the buy-side firms they interviewed cite data aggregation as their most significant challenge in managing enterprise risk. This is leading buy-side traders, closer to the profit and losses of the portfolio itself, to play an increasing role in risk management, identifying information that has not been readily available in risk models or counterparty data.
While this proximity to real-time risk tends to be clearer within options funds, many traditional asset managers tell TABB they are revamping trader compensation to be more explicitly aligned with the success of the strategy.
According to Adam Sussman, director of research who co-authored the report with Alex Tabb, partner and head of the TABB Group’s crisis and continuity services practice, specialists in process mapping and analysis, “counterparty risk has become one of the most frequent risk-related questions from investors.” When asked what their firms are doing currently to improve their risk infrastructure, Sussman says traders cited technology, process and new hires. With 36% pinpointing technology, firms are investing in new IT projects, from market risk monitoring and counterparty data, to information security and disaster recovery, which he explains further in a video interview available at http://www.youtube.com/watch?v=gjxYTKY79oI,
Although companies can spend all the money in the world on IT projects, he says that they will only be as successful at managing risk as the risk-management processes they implement. On this point, he adds a growing number of buy-side firms are acutely aware of this, with over 25% revamping risk processes, particularly counterparty risk and operational controls. “Because lack of data and coordination across the organization poses challenges to counterparty risk, collaboration has become the central theme of process improvement. On the other hand, operational controls are threatened by weak authorization processes and technologies, and therefore the theme is limited access and change-management monitoring.”
However, Tabb cautions that before companies can overhaul their risk-management processes, they need to understand processes already in place. He explains that many of buy-side firms have not formally mapped out processes to aggregate, analyze and manage counterparty risk. “Process mapping is often the first step taken by a chief risk officer, CRO, or senior-level executive whose job it is to oversee and implement better enterprise-wide risk management in its various forms. Even at firms which aren’t hiring, the general consensus is that risk practitioners should have a much bigger seat at the table than they did in prior years.” He adds that fewer than 25% of the firms interviewed by TABB since early 2008 had specific third-party risk tools. Today, nearly half tell TABB they will be using a third-party risk-management solution by the end of 2010.
Improving risk management practices and procedures is difficult, says Sussman, because a single weakness in the system can render useless the strengths of the other components. “The buy-side CRO needs to know what the total exposure is to a given entity, whether that be direct investments in stocks and bonds, credit risk inherent in bi-lateral agreements, as well as assets, be they stocks, cash or CSA dollars, held in that counterparty’s name. Each of these transaction types is recorded in very different systems, none of which are likely to easily share information with one another.”
The data in the report is based on conversations with over 107 buy-side equity and equity options traders, drawn directly from in-depth, one-to-one interviews with long-only asset managers and hedge funds covering a wide range of strategies including long/short equity, statistical arbitrage, equity sector-focused, index funds, volatility and global macro.
The 22-page report with 17 exhibits can be downloaded by TABB Group Equity Research Alliance clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, please visit http://www.tabbgroup.com, or write to email@example.com.
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