InsightsTaking on Risk: Moving to Fully Integrated Risk Management through Shared Infrastructure
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Taking on Risk: Moving to Fully Integrated Risk Management through Shared Infrastructure

Perspectives from Chris Walsh, CEO at Acadia and Donal Gallagher, President of Quaternion – A division of Acadia

The derivatives industry is at an inflection point when it comes to risk. While the 2010s were about developing the tools and regulations to help avoid a repeat of the 2008 financial crisis, the next decade will usher in the future of risk management. It will be a key driver of success for firms, influencing their entire operations. Whereas risk management in its current state is often siloed and isolated, new technologies like cloud computing and analytics are moving it toward a centralized process with shared infrastructure that is self-reconciling and highly automated, where the analytic insights flow right into the process of mitigation and optimization for firms.

What we consider “risk management” in the derivatives space today often does not include steering and improving allocation of the core capital resources across an entire firm. As a result, firms do not take full advantage of the capital efficiencies available to them. Rather, most resources are focused on risk measurement, meaning the day-to-day business of running the data and assuring its quality. This takes up so much of a firm’s internal resources that most firms have not had the opportunity to use that data to better manage their risk. However, new technologies and the availability of more insightful data is fast changing that concept, enabling firms to manage risk better, smarter and faster. Acadia, in collaboration with the industry, is helping to evolve risk management into an integrated function, allowing firms to address their overall risk on what will essentially become a real-time basis.

The importance of standards

Since the financial crisis of 2008, the industry has been shifting towards increased automation and standardization in risk management. Much of this has been catalyzed by regulations implemented in the wake of the crisis, particularly the Uncleared Margin Rules (UMR), as well as standards such as ISDA’s Standard Initial Margin Model (SIMM), the Fundamental Review of the Trading Book (FRTB) and the Standardized Approach for Counterparty Credit Risk (SA-CCR). This incentivized firms to incorporate technology and use service provider hubs such as Acadia to ensure compliance. However, the benefits go far beyond ensuring compliance and preventing a repeat of 2008.

Currently, much of the risk management function tends to be siloed, meaning that it operates separately from the rest of the firm’s operations. This not only reduces the benefits of technology for a firm but also limits their trading capacity because cross-silo capital efficiencies are not available. However, in part due to the precedent set by the progress in the Initial Margin space, there is a push towards a more seamless, integrated risk management approach that will unlock efficiencies for firms that embrace it.

The road map for achieving this is built around regulatory requirements and extends out across the trade cycle for derivatives. We have already seen this with UMR. The next steps are to bring those same benefits to regulations such as SA-CCR and the Fundamental Review of the Trading Book (FRTB) set of capital rules. As more and more firms experience the benefits of centralized solutions that help them manage risk, they will see that the benefits of automation and standardization extend far beyond compliance and can be applied across all aspects of their business.

Today there is ever-increasing demand for integrated front-to-back risk management. Firms want a risk platform that delivers a full range of IM, XVA and capital adequacy solutions in a cohesive way. As a result, the industry is evolving towards a centralized shared infrastructure for measuring and managing risk, where data is provided to counterparties by a centralized hub but the models used to produce it are not disclosed. Meanwhile the hub ensures that the trading counterparties are working “from the same playbook,” allowing firms to optimize their risk management and trading capacity while keeping their insights and strategies proprietary.

Making the leap towards true risk management

As this development takes greater hold throughout the industry, derivatives trading firms will be able to shift their focus to the true management of risk. With machine-driven analysis seamlessly integrated, firms will be able to both prevent many inefficiencies before they happen as well as identify and quickly address those inefficiencies that do occur on a near real-time basis. For example, IM pre-trade analysis allows firms to identify the potential initial margin that may be required if a trade is placed, thereby giving the firm a clear insight into the likely cost of the trade and whether or not any counterparty thresholds might be breached.

There is little competitive advantage in risk measurement, but there is a huge competitive advantage in risk management. By truly managing their risk using the latest data and analytics from the hub, trading firms will be able to achieve the best possible operational results and provide maximum trading capacity to their clients. The derivatives trading process will then become a free-flowing highway of data and analytics that is leveraged across the entire trade cycle.

This comes just in time for the buy side, the bulk of which will soon fall into scope for UMR. Buy side firms are actively working to accommodate the new initial margin requirements while determining the impact on trade capacity and costs with each of their counterparties. To optimize within this environment, trading, compliance and post-trade must be fully aligned at the very point where a firm falls into scope for the rules.

Centralized and automated risk management will also free up massive amounts of resources that banks and other impacted firms are currently spending on software to measure risk. This will not only save many millions of dollars industrywide, but it will open up the ability to prioritize higher-level functions within each firm, such as optimizing balance sheets and gearing operations around new insights generated from all the data and analytics that is now available.

While we are still in the early stages of this seismic shift, enthusiasm and demand for an integrated, automated and centralized risk management solution is growing larger by the day. However, a shift of this proportion will require buy-in from a critical mass of the financial industry. Every firm needs to be willing to take the leap from using its own bespoke risk management systems to adopting shared centralized solutions across the entire risk management cycle. As the industry continues to gravitate towards greater automation and shared infrastructure enabled by centralized hubs, firms that fail to do so will not reap the benefits realized by their competitors.

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Perspectives from Chris Walsh, CEO at Acadia and Donal Gallagher, President of Quaternion – A division of Acadia

The derivatives industry is at an inflection point when it comes to risk. While the 2010s were about developing the tools and regulations to help avoid a repeat of the 2008 financial crisis, the next decade will usher in the future of risk management. It will be a key driver of success for firms, influencing their entire operations. Whereas risk management in its current state is often siloed and isolated, new technologies like cloud computing and analytics are moving it toward a centralized process with shared infrastructure that is self-reconciling and highly automated, where the analytic insights flow right into the process of mitigation and optimization for firms.

What we consider “risk management” in the derivatives space today often does not include steering and improving allocation of the core capital resources across an entire firm. As a result, firms do not take full advantage of the capital efficiencies available to them. Rather, most resources are focused on risk measurement, meaning the day-to-day business of running the data and assuring its quality. This takes up so much of a firm’s internal resources that most firms have not had the opportunity to use that data to better manage their risk. However, new technologies and the availability of more insightful data is fast changing that concept, enabling firms to manage risk better, smarter and faster. Acadia, in collaboration with the industry, is helping to evolve risk management into an integrated function, allowing firms to address their overall risk on what will essentially become a real-time basis.

The importance of standards

Since the financial crisis of 2008, the industry has been shifting towards increased automation and standardization in risk management. Much of this has been catalyzed by regulations implemented in the wake of the crisis, particularly the Uncleared Margin Rules (UMR), as well as standards such as ISDA’s Standard Initial Margin Model (SIMM), the Fundamental Review of the Trading Book (FRTB) and the Standardized Approach for Counterparty Credit Risk (SA-CCR). This incentivized firms to incorporate technology and use service provider hubs such as Acadia to ensure compliance. However, the benefits go far beyond ensuring compliance and preventing a repeat of 2008.

Currently, much of the risk management function tends to be siloed, meaning that it operates separately from the rest of the firm’s operations. This not only reduces the benefits of technology for a firm but also limits their trading capacity because cross-silo capital efficiencies are not available. However, in part due to the precedent set by the progress in the Initial Margin space, there is a push towards a more seamless, integrated risk management approach that will unlock efficiencies for firms that embrace it.

The road map for achieving this is built around regulatory requirements and extends out across the trade cycle for derivatives. We have already seen this with UMR. The next steps are to bring those same benefits to regulations such as SA-CCR and the Fundamental Review of the Trading Book (FRTB) set of capital rules. As more and more firms experience the benefits of centralized solutions that help them manage risk, they will see that the benefits of automation and standardization extend far beyond compliance and can be applied across all aspects of their business.

Today there is ever-increasing demand for integrated front-to-back risk management. Firms want a risk platform that delivers a full range of IM, XVA and capital adequacy solutions in a cohesive way. As a result, the industry is evolving towards a centralized shared infrastructure for measuring and managing risk, where data is provided to counterparties by a centralized hub but the models used to produce it are not disclosed. Meanwhile the hub ensures that the trading counterparties are working “from the same playbook,” allowing firms to optimize their risk management and trading capacity while keeping their insights and strategies proprietary.

Making the leap towards true risk management

As this development takes greater hold throughout the industry, derivatives trading firms will be able to shift their focus to the true management of risk. With machine-driven analysis seamlessly integrated, firms will be able to both prevent many inefficiencies before they happen as well as identify and quickly address those inefficiencies that do occur on a near real-time basis. For example, IM pre-trade analysis allows firms to identify the potential initial margin that may be required if a trade is placed, thereby giving the firm a clear insight into the likely cost of the trade and whether or not any counterparty thresholds might be breached.

There is little competitive advantage in risk measurement, but there is a huge competitive advantage in risk management. By truly managing their risk using the latest data and analytics from the hub, trading firms will be able to achieve the best possible operational results and provide maximum trading capacity to their clients. The derivatives trading process will then become a free-flowing highway of data and analytics that is leveraged across the entire trade cycle.

This comes just in time for the buy side, the bulk of which will soon fall into scope for UMR. Buy side firms are actively working to accommodate the new initial margin requirements while determining the impact on trade capacity and costs with each of their counterparties. To optimize within this environment, trading, compliance and post-trade must be fully aligned at the very point where a firm falls into scope for the rules.

Centralized and automated risk management will also free up massive amounts of resources that banks and other impacted firms are currently spending on software to measure risk. This will not only save many millions of dollars industrywide, but it will open up the ability to prioritize higher-level functions within each firm, such as optimizing balance sheets and gearing operations around new insights generated from all the data and analytics that is now available.

While we are still in the early stages of this seismic shift, enthusiasm and demand for an integrated, automated and centralized risk management solution is growing larger by the day. However, a shift of this proportion will require buy-in from a critical mass of the financial industry. Every firm needs to be willing to take the leap from using its own bespoke risk management systems to adopting shared centralized solutions across the entire risk management cycle. As the industry continues to gravitate towards greater automation and shared infrastructure enabled by centralized hubs, firms that fail to do so will not reap the benefits realized by their competitors.

Perspectives from Chris Walsh, CEO at Acadia and Donal Gallagher, President of Quaternion – A division of Acadia

The derivatives industry is at an inflection point when it comes to risk. While the 2010s were about developing the tools and regulations to help avoid a repeat of the 2008 financial crisis, the next decade will usher in the future of risk management. It will be a key driver of success for firms, influencing their entire operations. Whereas risk management in its current state is often siloed and isolated, new technologies like cloud computing and analytics are moving it toward a centralized process with shared infrastructure that is self-reconciling and highly automated, where the analytic insights flow right into the process of mitigation and optimization for firms.

What we consider “risk management” in the derivatives space today often does not include steering and improving allocation of the core capital resources across an entire firm. As a result, firms do not take full advantage of the capital efficiencies available to them. Rather, most resources are focused on risk measurement, meaning the day-to-day business of running the data and assuring its quality. This takes up so much of a firm’s internal resources that most firms have not had the opportunity to use that data to better manage their risk. However, new technologies and the availability of more insightful data is fast changing that concept, enabling firms to manage risk better, smarter and faster. Acadia, in collaboration with the industry, is helping to evolve risk management into an integrated function, allowing firms to address their overall risk on what will essentially become a real-time basis.

The importance of standards

Since the financial crisis of 2008, the industry has been shifting towards increased automation and standardization in risk management. Much of this has been catalyzed by regulations implemented in the wake of the crisis, particularly the Uncleared Margin Rules (UMR), as well as standards such as ISDA’s Standard Initial Margin Model (SIMM), the Fundamental Review of the Trading Book (FRTB) and the Standardized Approach for Counterparty Credit Risk (SA-CCR). This incentivized firms to incorporate technology and use service provider hubs such as Acadia to ensure compliance. However, the benefits go far beyond ensuring compliance and preventing a repeat of 2008.

Currently, much of the risk management function tends to be siloed, meaning that it operates separately from the rest of the firm’s operations. This not only reduces the benefits of technology for a firm but also limits their trading capacity because cross-silo capital efficiencies are not available. However, in part due to the precedent set by the progress in the Initial Margin space, there is a push towards a more seamless, integrated risk management approach that will unlock efficiencies for firms that embrace it.

The road map for achieving this is built around regulatory requirements and extends out across the trade cycle for derivatives. We have already seen this with UMR. The next steps are to bring those same benefits to regulations such as SA-CCR and the Fundamental Review of the Trading Book (FRTB) set of capital rules. As more and more firms experience the benefits of centralized solutions that help them manage risk, they will see that the benefits of automation and standardization extend far beyond compliance and can be applied across all aspects of their business.

Today there is ever-increasing demand for integrated front-to-back risk management. Firms want a risk platform that delivers a full range of IM, XVA and capital adequacy solutions in a cohesive way. As a result, the industry is evolving towards a centralized shared infrastructure for measuring and managing risk, where data is provided to counterparties by a centralized hub but the models used to produce it are not disclosed. Meanwhile the hub ensures that the trading counterparties are working “from the same playbook,” allowing firms to optimize their risk management and trading capacity while keeping their insights and strategies proprietary.

Making the leap towards true risk management

As this development takes greater hold throughout the industry, derivatives trading firms will be able to shift their focus to the true management of risk. With machine-driven analysis seamlessly integrated, firms will be able to both prevent many inefficiencies before they happen as well as identify and quickly address those inefficiencies that do occur on a near real-time basis. For example, IM pre-trade analysis allows firms to identify the potential initial margin that may be required if a trade is placed, thereby giving the firm a clear insight into the likely cost of the trade and whether or not any counterparty thresholds might be breached.

There is little competitive advantage in risk measurement, but there is a huge competitive advantage in risk management. By truly managing their risk using the latest data and analytics from the hub, trading firms will be able to achieve the best possible operational results and provide maximum trading capacity to their clients. The derivatives trading process will then become a free-flowing highway of data and analytics that is leveraged across the entire trade cycle.

This comes just in time for the buy side, the bulk of which will soon fall into scope for UMR. Buy side firms are actively working to accommodate the new initial margin requirements while determining the impact on trade capacity and costs with each of their counterparties. To optimize within this environment, trading, compliance and post-trade must be fully aligned at the very point where a firm falls into scope for the rules.

Centralized and automated risk management will also free up massive amounts of resources that banks and other impacted firms are currently spending on software to measure risk. This will not only save many millions of dollars industrywide, but it will open up the ability to prioritize higher-level functions within each firm, such as optimizing balance sheets and gearing operations around new insights generated from all the data and analytics that is now available.

While we are still in the early stages of this seismic shift, enthusiasm and demand for an integrated, automated and centralized risk management solution is growing larger by the day. However, a shift of this proportion will require buy-in from a critical mass of the financial industry. Every firm needs to be willing to take the leap from using its own bespoke risk management systems to adopting shared centralized solutions across the entire risk management cycle. As the industry continues to gravitate towards greater automation and shared infrastructure enabled by centralized hubs, firms that fail to do so will not reap the benefits realized by their competitors.

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