The practice of risk management has been transformed in recent times from one that used to look mainly backwards to one in which foresight and prediction are the keys to the game.
Risk monitoring and compliance have moved centre stage since the global financial crisis, driving the need for ever more advanced systems that attempt to capture the many and varied risks involved in the markets of today.
Ian Castledine, global head of investment risk and compliance product at Northern Trust, points out that five to 10 years ago, for the majority of pension funds, most risk measures were largely backward looking whereas now predictive models are much more the norm.
“Since the credit crunch the focus has been on counterparty risk, liquidity risk, transparency – in terms of the ability to understand what is going on in your portfolio at a security and derivatives trade level – and credit.”
He adds that with all of these factors efforts are made to integrate implied metrics into asset owner models. “For example, we are launching a credit dashboard that ties together the credit rating with a host of different metrics and paints a rich tapestry as a result. We also focus on how pension schemes use the analytics we provide. We have made efforts to break down and simplify the ‘technical talk’ into more easily understandable data and analytics,” he says.
Underlying much of the explosion of interest in risk management and compliance is heightened regulatory scrutiny. This has led many market participants to outsource to specialist risk managers the task of introducing the checks and balances necessary to satisfy regulators that their business is being conducted in the most prudent and transparent way.
Mr Castledine says regulatory change has created an immense area of opportunity across a number of industries, highlighting the examples of servicing Nordic banks for Solvency II or the pressure on Dutch pension funds to be fully transparent.
Companies are investing heavily in risk management tools against the backdrop of frequent regulatory change and the new climate of caution in the wake of the crisis.
As a result, providers of analytical tools have recently become sought-after acquisition targets. Evidence of this came earlier this month as IBM made its second analytics-related acquisition in a week, seeking to expand its offerings for risk management for financial services and related companies.
The company is buying Algorithmics, a Toronto-based provider of risk analytics and services to bank and other investment companies, for $387m. That follows its planned purchase of UK-based fraud prevention analytics provider i2 Group. It also bought OpenPages late last year to address operational risk. Indeed IBM has spent over $14bn on 26 analytics-related purchases in the past five years, expecting the market for analytics to be over $200bn by 2015.
IBM’s buying spree is further evidence that companies are increasingly recognising that their risk management monitoring must cover a vast array of potential factors.
One head of risk described what he was seeing as a new generation of client and risk monitoring characterised by the global trend of moving towards dynamic indicators, and away from a reliance on any one analytical measure.
New risks are continuing to be factored in to risk models. These include so-called frontier risks such as environmental and carbon, which were previously not quantified. Broadly, clients want their risk management providers to be able to capture, quantify and predict as broad an array of measures as possible.
Existing risk management providers are upgrading their services in the face of heightened competition. For example, Algorithmics, a provider of integrated collateral management and liquidity, regulatory and reporting solutions for the financial services industry, this month unveiled a new version of its regulatory reporting platform.
Within the asset management business itself, acquisitions have also been taking place.
For example, Natixis Global Asset Management announced earlier this month it had acquired a controlling interest in Darius Capital Partners, an investment advisory and research firm that provides customised hedge fund solutions to address institutional investors’ growing needs for transparency, liquidity and risk management. Such acquisitions are likely to be increasingly common as asset managers attempt to upgrade the risk management capabilities they can bring to the table.
Source: http://www.ft.com/intl/cms/s/0/aaf4a432-d923-11e0-884e-00144feabdc0.html#axzz1etVluwVV
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