Risk & Compliance special report

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Goodbye and Good Riddance

It wasn't long ago that risk was managed on a piecemeal, after-the-fact basis, where firms sought to establish their value-at-risk-the risk measure du jour in the pre-financial crisis dispensation-based on positions they had taken in the market the previous day. This VAR number, expressed in dollars and cents, had, at best, a limited influence on firms' trading strategies, impelling appreciable numbers of risk professionals to question the appropriateness and reliability of such measures in recent years.

But the notion of managing one's risk exposure, and specifically who was at risk from whom, changed in 2008with the high-profile failures of Bear Stearns and Lehman Brothers, as market participants faced the sobering realization that no organization was too big to fail and that buy-side firms, traditionally considered by the sell side to be the weakest link in the risk chain, were no longer the black sheep of the industry. This perception led to significant tightening of risk management practices on both sides of the industry, as firms sought to extrapolate their counterparty, asset class and country risk exposure in ever greater detail and shrinking timeframes, rendering previously acceptable risk practices obsolete almost overnight. It was a case of out with the old and in with the new-and not a moment too soon. Goodbye and good riddance, I say.

While the notion of real-time risk management might have been entertained by the more forward-thinking organizations prior to the financial crisis, the technology simply wasn't available to them to support their aspirations. But that is no longer the case, as technology vendors-both hardware and software-have stepped up in recent years to provide financial firms with the wherewithal to support their data management, and, by association, their risk management endeavors. Now, close-to-real-time pre-trade risk management and on-the-fly credit value adjustments are not only realistic goals- they're also achievable.

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