Jun 23, 2011

Improving Risk Management and Transparency for Structured Products

Partners Microsoft, Numerix and Thomson Reuters teamed up for an engaging panel discussion about how organizations are striking a balance between innovation and transparency--in both the data management and analytic models areas--to embed risk management effectiveness into their companies' culture.

Information has outpaced our ability to understand and manage it. Even before the financial crisis, enterprise-wide risk management was among the next big initiatives for Financial Services firms.

According to Panel Moderator, Ben Narey, Managing Director, Banking and Capital Markets at Microsoft companies are finding major challenges in the areas of data management and analytics modeling.  The lack of relevant and/or timely data, coupled with greater demand for complex analysis scenarios, such as VaR and counterparty risk, hampers  today's organizations' ability to deliver a holistic and, in some instances, real-time view of their firms' risk profile.

Risk Management Thought Leader's PanelistsPhoto from Left to Right: Panel Moderator: Ben Narey, Managing Director, Banking and Capital Markets, Microsoft; Panelists: Ted Pendleton, SVP, Global Business Development, Numerix and Tim Lind, Global Head of Strategy, Enterprise Content, Thomson Reuters

 

Photo from Left to Right: Panel Moderator: Ben Narey, Managing Director, Banking and Capital Markets, Microsoft; Panelists: Ted Pendleton, SVP, Global Business Development, Numerix and Tim Lind, Global Head of Strategy, Enterprise Content, Thomson Reuters

Tim Lind, Global Head of Strategy, Enterprise Content at Thomson Reuters, underscored how regulatory pressures exacerbate the data management challenge. "We need to gear-up for massive regulatory reform," he added. Mr. Lind also passionately warned about the 'demonization' of Wall Street and the potentially adverse impact of over-regulation, stating that politicians, "never waste a good crisis."

"It's going to be a Renaissance from an analytics perspective"—Tim Lind, Global Head of Strategy, Enterprise Content, Thomson Reuters

On the horizon, all the panelists agreed that the regulatory impact for the OTC industry needs to be seriously evaluated by financial institutions, in relation to the following:

  • European Securities and Markets Authority (ESMA) & European Reform
  • Dodd Frank and Office of Financial Research (OFR)
  • Hedge Fund Registration & Compliance
  • Pension Benefits Standard Act
  • Global Harmonization of Regulations
  • Basel 3, Capital Adequacy, Topic 820 (formerly FAS 157)

    While the industry does clearly need to make changes in the way it handles risk management for OTC derivatives going forward, "…with massive legislation often comes bad legislation,"  added Mr. Lind.

 Speaking out on Industry Best Practices

"Americans know the price of everything and the value of nothing"-- Oscar Wilde

As the panel discussion continued, Ted Pendleton, SVP, Global Business Development at Numerix cleverly referenced Oscar Wilde and the parallels on the OTC derivatives market and lack of understanding behind OTC valuation practices.

Mr. Pendleton also addressed the following challenges when it comes to developing risk management best practices for OTC Derivatives and Structured Products:

  • Consistent valuation of all trades and portfolios – from Vanilla to Exotic derivatives and structured products
  • Access to information, as needed—getting data to the right people at the right time:
    • Data delivery process takes too long
    • Risk systems need direct, timely front office links
  • Data Accuracy vs. Performance
  • Transparency (data, models, historical, future)
  • Correlated risk (RORAC)
  • Efficiencies in business and technology operations
    • Internally, with counterparties, administrators and regulators

When it comes to risk management and consistent valuations, "…we are grappling with legacy technology," added Mr. Pendleton.  "What's needed is a single version of the truth when it comes to OTC valuation—enterprise-wide from front-to-back-office, and we are seeing an uptick in model validation and advanced modeling for risk."

For more information about Numerix real-time pricing and risk analytic solutions, contact sales@numerix.com.

Blog Post - Apr 05, 2010

The Art and Science of Risk Management for Today's Markets

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