Modernisation of Risk

Modernisation of Risk


July 27, 2021

During the early days of complex derivative trading, Delta, Gamma, Theta, Vega, Time Decay, and all the second order risks were the traditional trader-based portfolio management issues that were monitored by the front, middle, back offices, and compliance employees.

Now, with the advent of greater regulation, there has been a whole raft of additional risks to be managed including -

  • People risk (behavioural, criminal, succession, and stupidity).
  • Operational risk (functional issues, process definition, legal, and supply chain).
  • Systems risk (system design, regulatory compliance, monitoring, replacement, cyber-attack, and data accuracy).
  • Political and regulatory risk (ongoing and everchanging).
  • Credit risk.

The monitoring of these risks is currently an arduous and disparate process in every organisation, with very little oversight of the correlations between the different categories.

For example, if a front office trader can see that the CTO has to move the communications for an exchange on to the backup line and that the system will, therefore, have a delay of 500 milliseconds, then they need to have the ability to delay execution of a trade to ensure a contemporaneous delivery.

Having been exposed to a few examples of bad behaviour by individuals in my trading career, people risk would now be a major concern. Monitoring of IM chats and social network activity by an automated process with live flags to management may reveal possible criminal activity before it happens.

Monitoring of risk

Of course, joining all these disparate systems together is not trivial. A layer of communication has to be established; development of APIs and a common interface protocol is imperative. In addition, a unified, customisable interface has to be designed, tested and implemented.

Adoption of a cross silo, multi-asset strategy for risk functions should be regarded as business investment in Fintech innovation rather than an operational cost. It should also be noted that the savings in regulatory balance sheet costs would be a significant saving due to reduction in operational risk. Again, this means more cohesive planning to recognise the overarching, real business costs and savings - as well as potential avoidance of losses due to fraud and malfeasance.

Each user has different needs for the same data. The CEO wants overall health and PNL oversight, the trader wants micro risk and team monitoring, the back office wants payments and cash flow warnings, and so on. The correlations between all of these are managed centrally with automated notifications as necessary to each of the users. The indicators of health must be easily explained and viewed, as well as being consistent and justifiable.

The Risk Cockpit

The KRM22 Enterprise Risk Cockpit has many years of Operational Risk experience behind it, as well as front office and real-world exposures. Ask the team for a demo today to see how it could work for you.