BST Awards 2020: Best buy-side risk management initiative over the last 12 months—Confluence

As regulators such as the European Securities and Markets Authority (Esma) begin to require fund managers to develop a clear understanding and control of the sources of liquidity risk, firms are looking for a streamlined process that integrates market data for different asset classes onto one platform. Confluence bags this category thanks to its Revolution platform, which has introduced a new, universal approach that looks into different components such as fair bid–ask, bond nominal, equity market cap and percentage owned data.

Tom Pfister, vice president of global product strategy at Confluence, says the most important component here is the bid–ask. “The bid–ask rebuilds, with a quantitative approach based on observed market data, the fair value of all the financial instruments that can be priced via an arbitrage-free pricing function, providing a solid and consistent benchmark of liquidity risk,” he says. 

The platform provides liquidity scenarios to reproduce normal, stressed, and highly stressed market conditions, as well as liquidity scores, so that firms can have a consistent way of looking at liquidity across an entire fixed-income portfolio. Pfister says the scores allow firms to compare and rank portfolios. “Translating the potential liquidity risks into plausible time to liquidate is key,” he says. “Revolution allows different approaches: from volumes and open interests to liquidity scores, from funds frequency to model bid–ask and liquidity costs mapping, as well as the hierarchical application of any approach in combination with custom overrides.”

Confluence is focusing on enhancing its current liquidity risk solution further, particularly in the area of liquidation strategies, distressed investments, monitoring of the divergences between time to liquidate and time to cash, as well as swing pricing. “Confluence’s goal is to allow our client base to more confidently cope with any regulatory deadline globally, starting from Esma liquidity stress testing (LST) but spreading to the US and Australian regulations,” Pfister says.