Risk & Compliance special report

Click here to download the PDF

A Study of Inadequacy

Of all the business processes exposed by the recent financial crisis as being woefully inadequate, risk management is top of the list. But before the legions of risk mangers in buy- and sell-side land take offence to this assessment, I should add that pointing the finger of blame in their direction is as senseless as it is unwarranted.

You see, prior to financial crisis - which to all intents and purposes is as close to the perfect storm as the financial services industry is ever likely to get - issues like counterparty and liquidity risk were anything but industry-wide concerns. In fact, from a buy-side perspective, counterparty risk had historically always been a broker-related or sell-side consideration, which goes a long way to explaining how and why significant numbers of hedge funds were forced to close their doors when Lehman Brothers went belly-up, hot on the heels of Bear Stearns which failed in March 2008.

The sobering risk management lessons played out in the wake of the banks' sensational failures have already been sufficiently well documented in the pages of most financial journals, which means rehashing the recent past serves little purpose. What's far more useful to our industry is assessing current risk management practices with the view to developing the types of procedures to ensure that the deficiencies of the past stay in the past.

In this respect, what has become patently obvious over the past 18 months is the realization that, as buy- and sell-side firms overcome their inertia and start moving toward managing their risk on a close-to-real-time basis across business units, asset classes and geographical locations, data lies at the heart of the challenge. Managing risk in such a manner is the natural end point to which all risk professionals should aspire. And, even though that end point is still a long way off, it is none-the-less realistic and achievable.

But before we get carried away on a wave of pragmatism, even the most sanguine risk manager will concede that unless you can guarantee that all the data within your organization is clean, consistent and homogenized - and, perhaps most importantly, it is processed in close to real time so as to reflect up-to-the-minute changes in the market - aiming for that end point is an exercise in futility.

Click here to download the PDF