Advances in technology, but how do we achieve the right results?

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26 November 2012
Cubillas Ding
I am working on a series of future oriented research related to the future of risk management and speaking to a number of firms: from financial institutions stakeholders at the forefront of risk management challenges; to new risk technology startups, as well as investment and private equity firms interested in opportunities that the evolution in risk management is bringing. When speaking with firms, the challenges of (what I term as) operational orchestration often comes up in one form or another. Here, one critical factor for success in achieving the right degree of orchestration entails developing and implementing the technology and operational infrastructure to deliver and embed requirements in day-to-day workflows. Nevertheless, in our experience, this area is where risk appetite and strategic objectives/measures get lost in translation, and where big picture ambitions are misaligned with the right execution in front line functions. The conundrums are typically characterized as follows, in particular:
  • Ensuring proactive and timely capture, monitoring and escalation of risk before they inflict material damage. There is a need to “right speed” latency of risk information delivery, in accordance with the velocity of risk in different parts of the firm’s portfolio and under different market conditions (e.g., lending/ banking book transactions may require significantly less latency compared to the trading book; normal vs. stressed conditions will exhibit different risk characteristics).
  • Accelerating go-to-market time for risk management initiatives, yet reducing project risks associated with the pace and pressures of regulatory driven risk projects. For example, we observe forward-thinking firms actively expanding the use of quality management, rapid development methodologies and tools which enable IT architects, business analysts and testing teams to better achieve the precise mapping and modeling of changes within the firm. Here, as the financial industry evolves to become what I term as "ultra regulated" (for instance, akin to the utilities and nuclear industry where critical risk incidents result in significant catastrophes and loss of lives), IT planning and delivery functions will need to raise their game (note: not only to the expectations of regulators).
  • Finding cost effective ways of delivering risk technology capabilities. In a situation where changes are fast-paced, complex and expensive to execute, firms would be wise to explore answers to the following questions: How can we maintain strategic flexibility and explore alternative technology options to go-to-market faster e.g. open source analytics, cloud deployments, joint R&D arrangements, venture capital, etc.? What technology ‘bets’ should a firm be placing, and when? How much should you wager? What is the right mix of short-term and long-term 'bets'?
As an analyst, I am perhaps fortunate to be sitting at the intersection of end users, solution providers and the financial facilitators of future changes in how risk management is architected and executed. Between this nexus of supply, demand and facilitation, I believe the financial industry is at an "inflection point" where the pieces of technology required to achieve the above-mentioned capabilities are available and reaching a fair degree of maturity. For example, there are a broad spectrum of technologies available to "right speed" risk detection and apply braking mechanisms - through the use of event-driven architectures/messaging, in-memory databases and analytics and other low latency infrastructures, etc. The key is how intelligently it is deployed. There are opportunities for real change if firms are smart in the exploitation of emerging next generation technologies. The rest of the puzzle, however, is related to the non-technology factors - for example, the political will (and the willingness) of firms to address long-haul organizational, compensation and data quality challenges to make the management of risk deliver the level of efficacy that it should, at a time when uncertainty is at an all-time high. Therein lies the rub.

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Asia-Pacific, EMEA, LATAM, North America