Events, Dear Boy, Events

Events, Dear Boy, Events


March 10, 2020

“Events, dear boy, events”;  a quote often attributed to former British Prime Minister, Harold Macmillan when asked, what could bring down your government. For many CEO’s, CRO’s and Enterprise Risk Management professionals, the quote could easily apply when asked; “what could bring down our firm?”

This was very clear yesterday. In the face of a potential global pandemic, two of the world’s leading oil producers started an oil price war. We saw an immediate 30% oil prices drop and one of the largest declines in global stock markets in history.

The immediate impact of the events of the last 24-48 hours will leave many firms carrying significant trading losses. Ultimately, these losses will lead to a substantial destruction in the shareholder value of listed and unlisted businesses, alike. Over time, we will see which firms have the business model, strategy and operational capabilities and the capital to survive and thrive in these uncertain times.

At KRM22, we feel confident that the firms who have an integrated, real-time, enterprise-wide approach to risk management will a competitive edge.

Analysing the day's events

In the aftermath, firms should be looking what they could do in the midst of yesterday’s turmoil;

  • Were traders and market risk team able to clearly view their positions? Did they benefit from using an integrated suite of tools and data, covering the complete trade lifecycle; pre-trade, at-trade and post-trade?
  • Could the operations team monitor, in real-time, how well they were processing orders and clearing trades? Were there intra-day notifications and alerts signalling if they going to be able to clear all trades by end of day? Could they tell if they were ahead or behind completing operational tasks, compared to their previous 10 days performance?
  • Did the compliance team ‘scale-up’ and leverage a comprehensive suite of industry best practice market abuse alerts? Were they able to spot anomalies and potential market abuse amongst yesterday’s particularly heavy trading volumes? When the dust settles, will they have the tools to hand to replay key moments of the trading day to understand in-depth order and trades flows to root out any market abuse?
  • What were the senior management and executive teams doing yesterday? Were they shouting down the phone, going from meeting to meeting and scouring their inbox? All of this done in an effort to try to figure out what was going on and what the events in the market meant for them? Or were they (relatively) calmly reviewing a suite of risk-based dashboards providing them with a real-time view across the firm? Did this view provide insights and alerts into what was happening within their trading book, and its effects on their capital and P&L position? Could they see, in real-time, the ebb and flow of orders and trades hitting operations and monitor how well they responded the day’s exceptional volumes?
  • How about the technology team? Did they have the tools and data to ensure that critical systems and information assets were online? Were systems performing as needed? As the technology stack strained under the pressure of high trading volumes, were they able to capture and prioritise incidents? Could they do this as events unfolded to minimise the impact on the trading day?

What happens next?

What will the risk report presented at the next board or executive meeting look like? Will the team review professional, well-constructed dashboards which surfaces the enterprise-level risks and impacts of the events? Will the report show how the firm responded on the day, who is accountable for delivering any ongoing mitigation plans and the current status of those plans? During the meeting, will your senior management have the ability to look across the entire firm? Can it look beyond market risk and incorporate compliance, regulatory, technology, operational and overall enterprise risk. Will the risk report deliver the insights and analysis to enable the senior team to take a portfolio view of the firm; understanding the interplay and trade-offs between the various major risks within the enterprise?

Or will the executive team receive yet another risk report that has been hastily cobbled together? Subsequently, will they have to wade through a combination of Word, Excel and PowerPoint documents? Will they be presented with a list of Top 20 risks linked to a cumbersome spreadsheet-based risk register? Hidden amongst the hundreds of ‘key risks’, will they find two new entries;  ‘the risk of global pandemic’ and ‘the risk of an oil price war’?

So, what caused those trading losses yesterday? What could cause further losses tomorrow? It was “events, dear boy, events”.

Events that can only be effectively managed using an integrated suite of risk management processes, tools and data build to deliver a real-time, event-driven enterprise view of risk. Silo systems, particularly those cobbled together on spreadsheets or that are not integrated into the firms risk data lake, create cost and complexity. They limit the firm’s ability to effectively respond to events, manage risks associated with those events and exploit opportunities that emerge from events.