Sponsored by
>>
Whitepaper
Developing a Unified
View of Risk
March 2016
Bridging the Divide Between the Front and Middle Office
Sell Side
Developing a Unified View of Risk
Contents
Executive Summary
....................................................................................................................................................
p 3
Introduction: Addressing Current Risk Management
Challenges
p4
...........................................................................................................................................................................................
How Regulation Has Affected Risk Management
......................
p5
Are Current Risk Systems Fit for Purpose?
................................................
p7
How Risk Managers Can Complete This Transaction p 8
.....
Tools to Support a More Unified Approach to Risk
Management
p 11
The Challenges Faced by Risk Managers
p 11
Conclusion: Completing the Transition to a Unified
View of Risk
......................................................................................................................................................................................
p 12
About FIS
.................................................................................................................................................................................................
p 13
..................................................................................................................................................................................
.......................................................
© This document is property of Incisive Risk Information Limited. Reproduction and distribution of this
publication in any form without prior written permission is forbidden.
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Bridging the Divide Between the Front and Middle Office
Executive Summary
The investment industry is in the process of developing a new approach to risk
management, but what will it take to make a full transition?
Investment firms have begun to recognize there is great value, beyond compliance,
in the vast amounts of data currently being collected for regulatory purposes. When
harnessed for internal use, this information can be used to improve investment
decision-making as well as to satisfy external requirements from regulators and
investors. While there is still a need for a separate risk control function, with the
right technology and risk management approach, the middle office can feed riskrelated data to the front office to support a more intuitive investment decisionmaking process. The realization of the benefits that a more integrated view of risk
can bring has had a major impact on investment organizations’ approaches to risk
management in recent years, but firms must do more to grasp this opportunity.
A survey conducted by FIS and WatersTechnology in early 2016 polled investment
and risk management professionals from organizations in the Americas, Europe, the
Middle East and Africa (EMEA) and Asia-Pacific (APAC) regions about the challenges
currently faced in these markets. Respondents discussed the current state of their
organizations’ risk management systems, future plans for change and the drivers
behind these plans, as well as any areas of need in relation to how systems are
currently structured.
Major findings from the survey include the following:
• Of those polled, 57.1 percent of respondents have risk systems in place that
enable some communication between the front and middle offices on risk
issues, but believe there is still room for improvement in this area.
• Of those planning to make changes to their risk management systems,
42.9 percent plan to do so within the next 18 months.
• More than half (53.6 percent) of survey respondents believe their risk systems
require at least some updates, and 15.2 percent believe that a complete overhaul
is in order.
• The main drivers behind organizations’ decisions to change their risk
management systems include: new regulations (62.5 percent); new technology
(56.3 percent); cutting-edge risk management strategies (45.8 percent); and an
expansion or change elsewhere in the business (45.8 percent).
• Half of the respondents prioritize “the ability to gain a comprehensive view of risk
that can be shared by the front and middle office” in relation to risk management
system capabilities, and a similar number think their own organization needs to
prioritize this issue. Managing risk data should also be a top priority according
to 21.4 percent, while 22.3 percent see this as an issue on which their own
organization needs to focus.
• Finally, the main barriers to change in this part of the business are identified as
being: legacy systems (31.3 percent); a lack of resources for new technology
(28.6 percent); and company culture (23.2 percent).
The survey reveals that many organizations have already started to transition
towards a new, enterprise-wide approach that will unify the front- and middle-office
view of risk. However, there is demand for more innovative tools and solutions that
will enable investment firms to take full advantage of this cutting-edge approach to
risk management.
WatersTechnology I whitepaper l sponsored by FIS
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Developing a Unified View of Risk
Introduction: Addressing Current Risk Management Challenges
As financial firms adapt in response to changing market conditions, there is
a growing need for business and risk management strategies that will enable
organizations to remain competitive, but also to develop robust, compliant risk
systems and processes. Many fund management firms are beginning to realize that
this need equates to an approach that will bridge the divide between the front- and
middle-office risk systems. By establishing a common language and strong lines of
communication between these two parts of the business, it is possible to create a
cutting-edge risk management strategy that will lead to more innovative and intuitive
investment strategies. But investment firms need the right tools to transform their
current risk management systems into next-generation solutions that provide a more
intuitive approach. Some firms have already identified this need and, as such, the
industry has begun to transition to this new approach. But what do firms need to
do to complete this transition? And how will this new approach to risk management
eventually benefit the organizations that are willing to make these changes?
A survey conducted by FIS and WatersTechnology in early 2016 polled investment
and risk professionals across the investment sector in the Americas, EMEA and
APAC regions. It examined the risk management challenges faced by financial firms
in today’s markets and how systems can and should adapt in response. The poll
garnered 148 responses and found that many organizations are currently on the
brink of a change in terms of how they approach risk management—mainly due to
the impact of new regulation and technology, but also because of emerging ideas
around the benefits that risk data can bring to the entire organization.
The development of a unified risk management system across the middle- and frontoffice functions provides a solid foundation for fund managers to fulfill clients’ needs
without compromising the firm’s overall risk management strategy. This approach
should be the next step in the evolution of risk management systems throughout the
industry, but organizations must figure out how to develop the necessary systems,
processes and tools to make this new approach a reality.
Figure 1: R
ate your organization’s risk system in terms of how it facilitates
communication between the front office and the middle office
System does not enable communication
or sharing of analytic tools/view of risk
20.5%
System enables useful discussion of risk
but improvements could be made
57.1%
System works well and does not
require any changes at present
Other
21.4%
0.9%
0%
4
10%
WatersTechnology I whitepaper l sponsored by FIS
20%
30%
40%
50%
60%
Bridging the Divide Between the Front and Middle Office
Figure 2: D
oes your organization plan to change or update its current risk
management systems in the next 18 months?
Yes
42.9%
No
51.8%
Other
5.4%
How Regulation Has Affected Risk Management
In response to the ongoing drumbeat of regulatory change that has characterized
risk management since the onset of the global economic crisis in 2008, investment
firms are making changes to risk management systems. The FIS/WatersTechnology
survey, Developing a unified view of risk, reveals 57.1 percent of respondents have
already developed systems that enable some communication between the front and
middle office on risk issues, but also acknowledge that improvements could be made
in this area (see Figure 1). Further to that, 42.9 percent plan to make changes to
their risk management systems within the next 18 months (see Figure 2). The survey
also shows that, while most respondents are generally happy with their current risk
management systems, more than half (53.6 percent) see the need for updates and
15.2 percent believe a complete overhaul is in order (see Figure 3). This illustrates
the transition that is currently under way in relation to risk management within the
investment sector. Initially driven by regulation, these changes are now being pushed
forward by organizations that wish to develop an enterprise-wide view of risk based
on the integration of front- and middle-office systems.
The transition began in the wake of the crisis in 2008, as regulators worldwide
drafted a new regulatory infrastructure for financial firms. By implementing rules in
areas such as transaction reporting, capital requirements and stress testing, the
regulators forced firms to re-examine how risk can and should be managed in order
to minimize market disruption and to remain competitive and profitable (see box:
Creating the current regulatory climate).
These new regulatory requirements have reshaped the middle office’s role into a
separate risk control function recently. Middle-office risk professionals must be able
to access solutions that can provide fully automated risk reporting in a timely manner
in order to satisfy regulators. The first generation of solutions developed after the
financial crisis successfully addressed the new regulatory era by helping firms to
WatersTechnology I whitepaper l sponsored by FIS
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Developing a Unified View of Risk
Figure 3: H
ow would you describe your organization’s current risk
management system?
26.8%
Addresses all current needs
Could benefit from some updates,
but overall is fit for purpose
53.6%
15.2%
Needs overhauling
4.5%
Other
0%
10%
20%
30%
40%
50%
60%
comply with stricter requirements in areas such as Value-at-Risk reporting. However,
many investment companies now understand that the data generated to satisfy
regulators is not only useful for compliance purposes, but can be exploited to improve
investment decision-making. Risk information originating in the front office should also
be analyzed and made available to external parties as investors increasingly expect
more detailed reporting because of the market turbulence that has persisted over the
past eight years. Fund managers must be able to access an enterprise-wide view of
>> Creating the current regulatory climate
Financial firms have been faced with a rapidly expanding mosaic of new standards
and regulations following the onset of the global financial crisis in 2008. In
September 2009, the Group of 20 leaders made a commitment to ensure reform
of the financial markets, particularly in areas such as over-the-counter derivatives
trading. Regulators from jurisdictions around the world set about redesigning
the financial regulation rulebook in response. By increasing transparency and
implementing measures to protect against systemic risk and prevent market abuse,
these regulators aimed to reshape the financial system so that it could absorb future
market disruptions and prevent a repeat of the credit crisis that had recently ravaged
the financial markets and the wider global economy.
The European response was to create the Markets in Financial Instruments
Directive II while the US passed the Dodd-Frank Wall Street Reform and Consumer
Protection Act. Other regimes and standards, such as those introduced by the Basel
Committee on Banking Supervision recently, have also come to bear on financial
firms in recent years. As a result, requirements in areas such as transaction reporting,
stress testing, and capital and margin requirements have ballooned, creating a need
for organisations to develop new systems to handle the influx of risk-related data that
must now be managed as a result.
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WatersTechnology I whitepaper l sponsored by FIS
Bridging the Divide Between the Front and Middle Office
risk, often across many asset classes, in order to support the investment decisionmaking process and provide investors with evidence of a robust and innovative
approach to risk management. This has fueled demand for further change to the risk
management systems and solutions that are currently on offer to investment firms.
The front and middle office require separate systems to meet their individual needs.
In particular, regulations dictate that firms must have a separate, independent risk
control function. The middle office needs a system that can provide rigorous risk
measures and generate analysis that is free from front-office influence. However,
this should also incorporate factors that are relevant to the front office in order to
foster communication and collaboration between these two areas of the business.
By developing a unified view of risk in this way, an organization can provide the
basis for a front- and middle-office collaboration that should enable it to access
new opportunities in today’s competitive markets.
Are Current Risk Systems Fit for Purpose?
Investment organizations need access to risk management systems and solutions
that allow the front and middle offices to collaborate more freely so that risk is not
only detected and managed, but also harnessed to gain competitive advantage.
As organizations grow in this new regulatory era, many market participants have
already acknowledged the potential opportunities that could arise from taking a more
integrated approach to risk management—one that emphasizes greater collaboration
and communication between the front and middle office. However, the industry’s
risk professionals remain in a transitional state and must implement further change
before this trend is fully realized. More than half of respondents (56.3 percent) believe
their organization’s risk system currently satisfies the needs of both the front and the
middle office, indicating that many financial firms have already made some progress
towards completing this transition. However, the fact that 43.8 percent answered
“no” (see Figure 4) proves that there is still some progress to be made before this
new way of managing risk becomes fully embedded throughout the industry.
Figure 4: D
oes your organization’s current risk system satisfy the needs of
both the front and middle offices?
Yes
56.3%
No
43.8%
WatersTechnology I whitepaper l sponsored by FIS
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Developing a Unified View of Risk
Figure 5: W
hat are the reasons your organization would be planning to
change or update its current risk management systems in the next
18 months?
62.5%
In response to new regulations
To integrate new technology
56.3%
Expansion or other business change
45.8%
To create a better system based on
cutting-edge risk management
45.8%
37.5%
To create cost efficiencies
To move to a cloud-based service
To move to an outsourced
managed service
0%
8.3%
4.2%
10% 20% 30% 40% 50% 60% 70%
Further evidence that this transition towards a more collaborative approach to
risk management is already under way can be seen in the fact that more than half
(57.1 percent) of the survey’s respondents say that, while improvements are needed,
their organization’s risk management system already enables a certain amount of
“useful discussion between the front and middle office”. One-fifth of respondents
believe the risk management system their organization currently uses “does not enable
the necessary level of communication” between these two parts of the business and
the lack of communication and collaboration in the form of analytical tools means the
front and middle office “do not share the same view of risk as a result” (see Figure 1).
How Risk Managers Can Complete this Transition
While nearly half of the participants in the survey have identified a need for further
change to current risk management systems and strategies, many organizations
already plan to make changes in this area in the near future. According to the survey,
42.9 percent of respondents work at organizations that have plans to change or
update current risk management systems over the next 18 months (see Figure 2).
Industry participants are well aware of the fact that new or updated regulations will
continue to roll out as the market evolves, driving the need for financial firms to
continue to adapt their risk management strategies. Similarly, new technology will
also continue to change the game for the investment industry. The survey reveals
that new regulations have already prompted 62.5 percent of organizations to plan
changes in risk management systems and processes, while 56.3 percent of survey
participants say any changes planned by their organizations in the near term would
be driven by new technology (see Figure 5).
“[Creating] a better system based on cutting-edge risk management strategies”
was identified as a major driver of change by 45.8 percent of respondents, and the
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Bridging the Divide Between the Front and Middle Office
>> U
nifying the risk view: the major drivers behind changing
risk systems
(62.5%) New regulations: In the post-financial crisis world, investment firms are
required to create a separate risk control function that is independent of the front
office. However, the wealth of data that firms now manage as a result of new financial
regulations can also provide a form of feedback to the front office for investment
strategy purposes—provided the risk systems in place can support collaboration
between these separate parts of the business.
(56.3%) Technology: By incorporating the latest technology into their risk
management systems, firms can transition from desktop platforms to web- and
cloud-based services. Such technology allows the middle office to generate timely
reports based on data from a range of sources to satisfy a variety of stakeholders.
(45.8%) Cutting-edge risk management techniques: Organisations currently
face greater pressure from regulators and investors than ever before to provide
robust risk management strategies based on quality data and expressed through
timely reports. The most innovative risk management techniques use tools such
as wide-field scenario analysis to provide in-depth market insight from which both
the front and middle office can derive great benefits. As investment firms attempt
to continue the transition to a more integrated, enterprise-wide approach to risk
management, there is a need to update their systems to include such innovative
tools and strategies.
Source: Survey results (figure 5)
same number say change to their company’s risk management system over the next
18 months will be driven by “an expansion or change elsewhere in the business”—a
new portfolio or investment approach, perhaps (see box: Unifying the risk view:
the major drivers behind changing risk systems).
Once organizations start to implement these programs of change in relation to their
risk management systems, the main priorities are clear. Half of the respondents
to the survey prioritize “the ability to gain a comprehensive view of risk that can
be shared by the front and middle office” in relation to risk management system
capabilities. A similar number believe this is something that their own organizations
need to prioritize when it comes to their next risk management system upgrade.
Managing risk data is the next most important element to consider in relation to risk
management systems in theory and in practice—21.4 percent of respondents rank
this as a top priority in general, and 22.3 percent believe their organization should
focus on data management the next time its risk systems are updated (see Figures
6 and 7).
Finally, while senior management support is not a direct driver according to the
survey, it can certainly help to smooth the way for the system changes that risk
professionals must put in place to benefit from cutting-edge strategies. The survey
reveals that more than 90 percent of respondents currently benefit from senior
management support for change in this area (see Figure 8).
WatersTechnology I whitepaper l sponsored by FIS
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Developing a Unified View of Risk
Figure 6: E
lements in terms of importance in relation to risk management
systems in general
Gaining a comprehensive
view of risk that can be shared
by front and middle office
50.0%
21.4%
Management of risk data
Underlying technology
18.8%
3.6%
26.8%
8.9%
Faster reporting capabilities,
timely analysis of current risks
12.5%
Scenario analysis drawing on
front- and middle-office views
of potential future events
12.5%
0%
12.5%
23.2%
30%
1st
6.3%
21.4%
17.0%
20%
3.6%
55.4%
29.5%
22.3%
9.8%
22.3%
19.6%
23.2%
10%
17.9%
26.8%
40%
2nd
13.4%
50%
3rd
60%
4th
21.4%
70%
80%
90%
100%
5th
Votes were cast in order of importance using a scale of 1–5, where 1 means that it is most important, and
5 means it is least important to the organization
Figure 7: W
hich elements does your organization need to prioritize the next
time it changes or upgrades its risk management systems?
Gaining a comprehensive
view of risk that can be shared
by front and middle office
49.1%
Management of risk data
17.9%
22.3%
Underlying technology 3.6%
Faster reporting capabilities,
timely analysis of current risks
31.3%
10.7%
17.9%
13.4%
Scenario analysis drawing on
front- and middle-office views
of potential future events
11.6%
0%
22.3%
19.6%
21.4%
30%
1st
40%
2nd
5.4%
6.3%
47.3%
25.9%
22.3%
20%
9.8%
20.5%
20.5%
17.9%
10%
17.9%
17.0%
24.1%
50%
60%
3rd
4th
24.1%
70%
80%
90%
5th
Votes were cast in order of importance using a scale of 1–5, where 1 means that it is most important in
terms of priority, and 5 means it is least important or not a priority to the organization
Figure 8: C
hallenges or barriers typically encountered when making these
system changes
Lack of resources
28.6%
Senior management
8.9%
Company culture
23.2%
Legacy systems
31.3%
Other
8.0%
0%
5% 10% 15% 20% 25% 30% 35%
10 WatersTechnology I whitepaper l sponsored by FIS
100%
Bridging the Divide Between the Front and Middle Office
Tools to Support a More Unified Approach to Risk Management
In order to develop a more integrated view of risk and benefit from the competitive
advantages that should arise as a result, risk managers have a greater role to play
in providing an enterprise-wide view of risk. The middle office should look for tools
and software solutions that will enable collaboration with the front office, as well
as supporting the organization in satisfying all of its compliance and reporting
responsibilities. Risk management systems should have the capability to provide the
front office with a broad view of macro and systemic risk using tools that cover areas
such as risk reporting, asset allocation tools and scenario analysis.
The latter, in particular, can be used to develop a more intuitive approach to risk
management by allowing organizations to assess complex scenarios based on
historical and anticipated market developments. For example, concerns about
emerging market weakness and how negative interest rates and Central Bank policy
may affect markets can be combined to create the kind of complex scenario that
risk professionals must examine to gain deeper insight into macro risks and help
managers to discern how their funds might be affected. To be at the forefront of risk
management, investment firms need the capability to perform “wide-field” scenario
analysis, which involves running more than 200 scenarios daily across all of the
firm’s portfolios. Risk managers can then discuss the results with fund managers
to identify the need for further stress testing of strategies. The information and
insight generated by such a scenario analysis tool can and should be translated into
investment strategies that allow organizations to hedge against the downsides to any
given event, but also to benefit from any upside.
The Challenges Faced by Risk Managers
There are some barriers for organizations that hope to achieve full integration
of front- and middle-office risk management systems, according to the survey.
Participants cite a lack of resources for new technology and company culture as
currently presenting problems for 28.6 percent and 23.2 percent of organizations,
respectively. The main challenge faced by financial firms that are attempting to
migrate to new risk management systems, however, arises from the existence
of legacy systems—nearly one-third (31.3 percent) of respondents say legacy
systems make changes too complex (see Figure 8). This is a common problem
in the industry, arising as firms continue to expand—both organically and through
mergers and acquisitions activity—thus necessitating new technology solutions that
are often layered on top of each other, resulting in a complex warren of systems.
Developing a unified approach to risk management will also benefit organizations
dealing with the difficult issue of complex legacy systems. However, it is important
to remember that eliminating the whole system in favour of an entirely new
infrastructure is not the answer. Organizations can identify the elements of the
system that work and that are necessary to provide a consistent picture of risk,
and then develop a new delivery mechanism that will help the organizations gain a
consistent, timely view of risk across the enterprise.
For example, FIS offers a solution that allows users to access models and reporting
capabilities—such as Monte Carlo simulation, scenario analysis and stress testing—
which have been widely used since 1986 and incrementally developed alongside
the evolving markets. But, by delivering these tools through a newly developed
WatersTechnology I whitepaper l sponsored by FIS 11
Developing a Unified View of Risk
technology platform called APT Enterprise, FIS offers users a faster, more efficient
way to gather and disseminate the necessary data. FIS has re-engineered the
delivery mechanism using such modern technology as HTML5 and web services, as
well as an analytic grid that delivers high-performance calculations across the cloud.
It also includes a powerful workflow and automation tool that will increase system
speed and push the necessary reports to an organization’s key decision-makers.
While the underlying technology is new—using cloud-based and web services-based
innovation—risk managers can still use models that are tried and trusted. As a result,
users can move away from a traditional desktop platform, which often does not
satisfy the needs of a modern organization that must address a range of stakeholders
simultaneously. By allowing an organization to harness the best parts of its legacy
systems, this approach ensures it can push its system capabilities forward into this
new risk management era.
With an industry-led reference data utility, market participants will have access to and
influence over the specific capabilities on offer. A degree of flexibility built into the
utility’s structure is imperative to ensure it can keep up with any market changes that
come about as a result of new products or services, regulatory updates or any other
important market changes. Mutualization also ensures users stay up to speed with
these changes, while still reducing costs.
By providing access to a simple solution to the complex problems associated with
data management, reference data utilities can help users cut costs while still gaining
access to the consistent, accurate and timely information that is a crucial element
for organizations operating in today’s financial markets. Flexibility and customized
support for individual users’ data governance standards are key elements of
this approach and should enable those using a reference data utility to increase
operational efficiencies while managing risks and still maintaining a competitive edge.
Conclusion: Completing the Transition to a Unified View of Risk
Organizations that develop this more holistic approach to risk management will be
able to monitor risks, analyze the impact on their funds and use that information to
make more informed decisions when it comes to investing. By absorbing any relevant
information relating to the macroeconomic picture and translating it into robust
investment strategies, this kind of collaboration can enable an organization to move
beyond compliance to provide access to new opportunities in the market. But frontand middle-office professionals need to develop common ground in order to make
this new approach work.
While a separate risk function is necessary to satisfy current regulations, integrating
risk management tools and solutions with investment decision-making structures is
quickly becoming a crucial step towards developing this cutting-edge form of risk
management. As such, organizations must develop systems that can support the
necessary level of collaboration between the front and middle offices. As the survey
shows, many organizations are already taking steps to develop such an approach,
but the industry is still only halfway through this transition. Organizations must stay
the course and complete the development of current risk management systems to
create an integrated approach. By bringing the front and middle offices together to
analyze risk, the investment decision-making process can benefit from a more intuitive
approach that encompasses an enterprise-wide, multi-asset class view of risk.
12 WatersTechnology I whitepaper l sponsored by FIS
Bridging the Divide Between the Front and Middle Office
About FIS
FIS is a global leader in financial services technology, with a focus on retail and
institutional banking, payments, asset and wealth management, risk and compliance,
consulting and outsourcing solutions. Through the depth and breadth of our solutions
portfolio, global capabilities and domain expertise, FIS serves more than 20,000
clients in over 130 countries. Headquartered in Jacksonville, Florida, FIS employs
more than 55,000 people worldwide and holds leadership positions in payment
processing, financial software and banking solutions. Providing software, services
and outsourcing of the technology that empowers the financial world, FIS is a
Fortune 500 company and is a member of Standard & Poor’s 500® Index.
FIS has acquired SunGard.
For additional information:
Web: www.fisglobal.com
Visit our investment risk web page
Twitter: @FISGlobal.
https://twitter.com/fisglobal.
Email: [email protected]
Sell Side
WatersTechnology’s portfolio incorporates the market-leading industry brands
serving financial trading firms in print, in person and online—through its series
of publications, website, email alerts, conferences, research, training, briefings,
webcasts, videos, awards, whitepaper lead generation, and special reports.
Our five financial-market technology titles: Inside Market Data, Inside Reference
Data, Buy-Side Technology, Sell-Side Technology, and Waters serve the financial
community with independent, expert journalism and have built their reputations
by providing analysis and news, covering all developments in this fast-moving
business in North America, the UK, Europe, and the Asia-Pacific region.
waterstechnology.com
WatersTechnology I whitepaper l sponsored by FIS 13