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vice president, risk solutions, SunGard's capital markets business

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4 RISK MANAGEMENT QUESTIONS TO ASK NOW [WEBINAR]

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In the regulatory reform book Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, by NYU Stern faculty, there is a focus on four pillars of an effective regulatory regime. The book maintains that a good regulatory framework should:

  1. Encourage innovation and efficiency.
  2. Provide transparency.
  3. Ensure safety and soundness.
  4. Provide competitiveness with global markets.

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These pillars strike me as being exactly the same as those for an effective enterprise risk management system. In many ways, the role of the CRO is to be custodian of these central tenets. Taken in turn, senior risk professionals ought to be asking four key questions:

  • Does the enterprise risk system actively contribute towards a culture of innovation? The system should be able to quickly handle new financial products and their attendant risk factors in such a way that their true impact on firm-wide market and credit risk can be swiftly assessed. Where this is not the case, institutions are left unable to either effectively compete in new markets or properly understand the added risks.
  • Is the system transparent to all stakeholders? Regulators, senior management, and risk takers should all have sight of the risk topology and their place within it. This allows risk appetites to be set and monitored, and it creates a risk culture where there is a language that is common throughout the firm and part of standard communication within that firm. This, in many ways, is the overriding aim of the risk system.
  • Does the system ensure the safety of the firm? This is far more difficult to quantify and should really be modified to ask whether the relative safety of the firm is ensured by the system. Risk taking is central to the business, but it is also a basic requirement that excessive risk taking can be quickly identified and that the risk profile is in line with risk appetite. In the current environment, external stakeholders, from equity and bond holders to counterparties and regulators, are looking for evidence of this.
  • Does the system promote competitiveness? Heavily related to the first point, it is vital that risk takers can utilize the system strategically to understand and operate risk profiles within markets and with regards to new product decisions. The speed of arbitrage in the current world is such that it is very easy to be out of position from either a profit-making or a risk-taking perspective. The risk system needs to be a strategic tool, not an afterthought.

Global regulatory reforms are running at an incredible pace. At the same time, those reforms are based around systemic risk and safeguarding the system from individual failures. The same rigor is required internally, and it has to start with guiding principles. The four pillars identified in NYU Stern’s book are sound guiding principles and provide a great starting point on the way to robust and credible risk architecture.

While you’re here…

deputy head of strategy, SunGard’s capital markets business

“A DAUNTING TASK” – REGULATORY READINESS: THE DATA MANAGEMENT CHALLENGE WEBINAR RECAP

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Author: Tony Scianna, executive vice president, SunGard

I recently participated in a webinar with DerivSource that tackled the topic “Regulatory Readiness: The Data Management Challenge.” You can now hear the playback on the DerivSource website, and I thought I would provide a brief recap to highlight some of the key points I discussed with Anshuman Jaswal, senior analyst in the Securities and Investments Group at Celent, and Norman Brower, executive director at Morgan Stanley.

If you were listening live, you’ll know that we covered a lot during this webinar, which was moderated by DerivSource’s Julia Schieffer. From my perspective, here are some of the top takeaways:

  • We are just at the tip of the iceberg here. We still don’t know exactly what the regulatory requirements are going to look like, and there are plenty of questions that can’t be answered yet.
  • Regulatory risk is a critical concern for firms, even more than operational risk or counterparty risk today. Every firm knows it has a lot of work to do.
  • I boiled down the data management challenge to this: Firms must be able to capture their data in as close to real time as possible, standardize, normalize, and cross-reference that data then have the ability to access it. Financial services firms have grown up with multiple silos, and breaking them down is a complicated, “daunting” process.
  • Find ways to influence and shape the regulations. We had some questions about how to get involved, and the panel mentioned industry groups like the EDM Council, working groups such as the SIFMA Technology Work Group, and conferences like those put on by the Financial Information Management Association. Also a great resource: requests from regulators and responses from the industry groups, such as SIFMA and the FIA, which you can find on sites such as the SEC and CFTC.

Did you attend this webinar? Do you have any questions about the data management challenge that you haven’t been able to ask? Continue asking your questions and offering your perspective in the comments below.

deputy head of strategy, SunGard’s capital markets business

WEBINAR: REGULATORY READINESS: THE DATA MANAGEMENT CHALLENGE

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Author: Tony Scianna, executive vice president, SunGard

When it comes to the Dodd-Frank Wall Street Reform and Consumer Protection Act, there continues to be a lot of discussion about new requirements and challenges, with an emphasis on data and risk management.  But even before Dodd-Frank was a household word, we had been discussing the need for a real-time, enterprise-wide data management infrastructure. Today the story is just more urgent.

As everyone tries to understand the new data and reporting requirements under Dodd-Frank, I will be joining Anshuman Jaswal, senior analyst in the Securities and Investments Group at Celent, and Norman Brower, executive director at Morgan Stanley, in an interactive webinar with DerivSource titled Regulatory Readiness: The Data Management Challenge.

During this webinar, we will discuss the requirements of the Dodd-Frank rules, including new data and reporting requirements, how operations and technology can help improve compliance with the new regulations, and how to prepare for regulations that will soon be introduced by other jurisdictions, including in Europe and Asia.

It’s a big topic and undoubtedly one that will continue to be a top priority for financial firms throughout the year. Some of the specific questions we are going to cover include:

  • What are the implications of the new real-time reporting requirements?
  • What are the OCR and the OFR?
  • How can firms build a ‘future proof’ data management infrastructure that is capable of meeting current and future regulatory requirements across the globe?

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WEBINAR: Regulatory Readiness: The Data Management Challenge
DATE: Wednesday, March 2, 2011
TIME: 10:00 a.m. EST / 3:00 p.m. GMT

I hope you will join Anshuman, Norman and me for this timely webinar. As part of registering for the webinar, you will also receive a copy of our latest whitepaper, Managing Risk and Exposure in the New Regulatory Environment. Please bring your questions and ideas to the webinar on Wednesday – I look forward to this important discussion.

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WEBINAR: ARE YOU OVERPAYING ON EXCHANGE AND CLEARING FEES?

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Author: Rich Hulit, executive vice president, SunGard’s brokerage & clearance business

A few months ago on this blog, I asked FCMs the following question: do you know if, where, and how much you are overpaying in brokerage and exchange fees? For many, this question is a difficult one to answer. Futures commission merchants are facing multiple challenges around exchange fees, clearing fees, and brokerage claims, including increasingly complex fee schedules, frequent modifications of fee rates and levels, and shorter deadlines for claiming rebates.

In our upcoming Professional Services Perspectives Webinar, my colleague Mark Connelly, who runs our Professional Services fee and commission review practice area, will talk through these questions and challenges and cover how to avoid overpaying on fees and commissions.

  • Do you know whether you are up to date with the latest fee schedules and rates?
  • Do you have a fee review procedure?
  • Do you manage fees on an enterprise-wide basis?
  • Do you always send in your rebate requests before the time window closes?

Many of the challenges FCMs face when it comes to managing fees can be overcome with the right internal policies, processes, and procedures to prevent miscalculations and miscommunication, as well as detect errors and ensure that fee rate updates are reflected in existing accounts.

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WEBINAR: Are You Paying Too Much in Exchange and Clearing Fees?
DATE: Thursday, July 29, 2010
TIME: 11:00 a.m. ET/ 4:00 p.m. BST

I look forward to you joining us on Thursday, July 29 for this discussion of how you can more efficiently manage fees. Register by using the link above, and as always, feel free to leave a comment for me and my team below.

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WEBINAR: ARE YOU TURNING COST BASIS INTO AN ADVANTAGE?

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Author: Rich Hulit, executive vice president, SunGard’s brokerage & clearance business

Beginning Jan. 1, 2011, cost basis reporting will be mandatory for all brokers executing transactions that involve publicly traded securities. This may prove to be easier said than done.

You must address technology and data issues now if you are to ensure future compliance with the regulations. But cost basis is not just about tax systems or even compliance. If it is approached the right way, this challenge may actually help increase efficiency, strengthen customer service and foster transparency.

That’s why our next Professional Services Perspectives Webinar will delve into the cost basis challenge – and how you can turn it into an advantage. My colleague David Elichman, who runs our Professional Services tax practice area, will lead the discussion.

  • Are you up to date on the regulations?
  • How does workflow play a part?
  • What are the technology challenges?
  • How are you approaching cost basis system integration?
  • What are your training and resourcing strategies?

Be part of the discussion – join the latest installment of our Professional Services Perspectives Webinar series and receive a free copy of our new white paper: “Cost Basis – Turning compliance into an opportunity to improve your business.”

REGISTER HERE
WEBINAR: Turning cost basis into an advantage
DATE: Thursday, June 10, 2010
TIME: 1:00 p.m. EST

I look forward to you joining us on Thursday, June 10 for this important discussion of how you can turn cost basis into an advantage. Register today to make sure you are part of the conversation.

deputy head of strategy, SunGard’s capital markets business

WEBINAR: WHAT DO THE CHALLENGES FACING THE LISTED DERIVATIVES INDUSTRY MEAN FOR YOUR BUSINESS?

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Author: Tony Scianna, executive vice president, SunGard’s brokerage & clearance business

On May 3, we launched Cliq, a Web-based service that provides standardized electronic communication and collaboration for all parties involved in global, post-trade processing of listed derivatives.

You may have seen some buzz about this new service over the past few weeks, but perhaps you’d still like to learn more about the ins and outs of Cliq, what it can do, and why it matters so much right now.

With this in mind, I invite you to join me for a free Webinar on Tuesday, May 25 at 10:00 am ET/ 3:00 pm BST to delve into the issues that Cliq is responding to and to view a live demo of the service. Since the launch earlier this month, my colleagues and I have been eager to tell you all about Cliq, but now I’d like the opportunity to show you Cliq.

During the Webinar, you will also hear expert insights from esteemed industry analyst Stephen Bruel, research director for TowerGroup’s Securities & Investments practice, regarding the critical issues facing derivatives processing.

Some of the topics Stephen and I will address include:

  • Alleviating the pain points around communication between the buy and sell sides
  • Understanding how the proposed regulatory changes could affect your business
  • Streamlining the listed derivatives post-trade process
  • Increasing transparency and efficiency
  • Decreasing counterparty risk and exposure

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WEBINAR: What do the challenges facing the listed derivatives industry mean for your business?
DATE: May 25, 2010
TIME: 10:00 am ET/ 3:00 pm BST

I look forward to you joining us on Tuesday, May 25 for this timely discussion about critical industry issues and how SunGard’s Cliq fits into the mix.

If you would like someone from SunGard to contact you about Cliq, please click here.

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FRONT-OFFICE RISK MANAGEMENT: CLOSE TO THE EDGE

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The need for speed is arguably pushing the boundaries of front-office risk management far more than potential regulation

Financial markets have always been adaptable and as they have also shown since the start of the subprime crisis, they are surprisingly resilient. But as a recent panel discussion on front-office risk management at the SunGard City Day in London showed, this is not down to pure chance. Sometimes a huge amount of thinking is required behind the scenes to ensure that they do keep functioning as most participants and also regulators require.

The panel, which was moderated by Bob McDowall, research director at TowerGroup, was always likely to draw a large audience given its topicality. And this was boosted by the fact that it followed straight on from Europe’s first ever public discussion on the difference between sponsored and direct market access (DMA). This had highlighted many of the issues which are really pushing the boundaries of front-office risk management*.

As Leslie Sutphen, global head of eSolutions at Newedge, pointed out, global regulators may well be trying to instigate and implement more pre-trade risk management, but most firms are able to cope with this relatively well. “Our general position as a broker is that we’re already concerned about our credit and our balance sheet…I don’t feel strongly that regulators and exchanges should be telling us how to protect our own balance sheet,” she said, adding: “That said, I’ve been working with my colleagues from firms such as JP Morgan, under the auspices of industry associations, to encourage exchanges to give us the tools to protect our balance sheets.”

Advances in trading technology and the push to reduce latency appear bigger issues. “We at Newedge do require pre-trade risk management for clients trading DMA with us and we also require it for our sponsored direct access clients: we use mechanisms to ensure that they have it (pre-trade risk management) in place,” Sutphen pointed out.

“That said, pre-trade risk management can be quite crude at the trading platform level. It’s generally things like fat finger and order size limits, or crude position limits which don’t aggregate across asset classes and platforms. But we still believe there should be some kind of break in place….we do a lot of work and invest a lot of money in this and we would very much like our partners in the business, including the exchanges and vendors, to work with us to make this more efficient and standardized,” she added.

Beware the technology gap
According to Stephane Leroy, global head of sales and marketing at QuantHouse, a provider of end-to-end systematic trading solutions, there is potentially a technology gap between banks and brokers and what he termed ‘silicon traders’. “I’m not sure the technology is there yet to cope with the silicon traders. It will certainly need some extensive discussion between brokers, exchanges and the clients,” he said, before supporting Sutphen’s claim that some front-office risk management is basic. “A lot of the existing (risk management) tools are considered as ‘old age’ by silicon traders,” he claimed.

Antonio Reyes, managing director of electronic client solutions at JP Morgan, believes that the supposed risks around high frequency trading may have been a little overstated. “High frequency is one of the latest packaged products we’ve launched….from a risk management point of view, I think our pre-trade process starts in the KYC (know your client) process. You really have to know your customer, irrespective of whether they are using black boxes or putting trades through a screen and doing a couple of trades a day, you need to understand what they are up to and what your real credit exposure is,” he claimed.

Reyes questioned how much a pre-trade filter could protect any broker, but added that, especially with regard to sponsored access, the exchanges were perhaps not delivering the tools brokers need to comply with their regulations.

Give us the tools
“If they (the exchanges) want us to comply with rules, they need to make it possible for us to see their (the clients’) working orders, see their trades and to intervene electronically if something is going wrong. It is not adequate in this high-frequency world to have to call the exchange and ask them to cut of a client…we’re not asking for more regulation, but more tools so we can protect ourselves,” he argued.

“You cannot be in a situation where you have a specific liquidity venue telling members ‘you must pre-trade risk manage’ which is in parallel selling collocation data centre space to non-members to access the venue directly,” he continued.

Reyes takes the view that the quest to reduce latency has been pushed too far, which has compromised risk management. “If it takes two minutes to manage risk pre-trade, then that has to be built into models. If you take the extreme example – cash equity markets – some of our clients could send 1,000 orders a second. If you don’t manage risk pre-trade, the first time you find out about a defective order, it’s too late. By the time you react – it could take you at the very least two minutes to dig out the phone number, call the exchange and tell them to pull the plug – 1,000 orders times two minutes times thousand shares per order is a lot of exposure in two minutes. Some people may be comfortable with that, but JP Morgan isn’t.”

If we could get rid of it….we would
Sutphen agreed with the view that firms, such as Newedge and JP Morgan, were almost being pushed into providing a service, sponsored access, that they did not want to offer. “Exchanges and liquidity providers have marketed that type of access directly to our clients, and some of our clients feel that they need it in order to be competitive. It used to be that the type of client who wanted that type of access was a small market-making operation, and we would generally say no or make sure they were housed within our premises. But now it’s not just small market-making firms; it’s large hedge funds, large pension funds, it’s generally almost everyone out there who feels they need to have low-latency access to the markets. If we could get rid of it, I think we would,” she contended.

Not surprisingly, Reyes agreed. “The challenge we have is that we’re not on a level playing field. It depends on your appetite for risk how far you will go. In the US cash equity market, we feel cornered. It’s becoming a client retention issue,” he said, before asking the audience if it knew which firm was responsible for one of the greatest number of trades on the New York Stock Exchange and NASDAQ in 2008. It was a regional broker specialized in correspondent clearing services for the hedge fund/broker dealer community. That’s not what you’d expect. I would guess that up to 80% of their flow is sponsored access. You find out what’s been done from the exchanges’ drop copies. I’m sorry, but that’s a level of risk that firms like JP Morgan and Newedge can’t take.”

It is clear that there are some very real fears around sponsored access and it may be that the regulators do not fully understand what is going on. “The regulators could do with going out and hiring as consultants the most profitable high-frequency traders on the street…they need to understand them to regulate them. How are you going to limit high-frequency traders: by limiting CPUs on machines?” asked Reyes.

Sutphen again agreed: “What is required is meaningful dialogue. I think the regulators are behind where they need to be in understanding what’s going on,” she concluded.

*Since the SunGard City Day in London on September 24th, SEC, the US regulator has published several bans or proposals regarding flash trading, the regulation of dark pools as well as sponsored access and co-location, confirming the high profile this issue currently has.

 

FREE WEBINAR: Delivering integrated risk management to the trading desk

Join Bob McDowall, research director Tower Group, and David Morgan, marketing director trading & client connectivity for SunGard, on November 25th or 26th as they discuss the business and regulatory momentum driving the trend, and the key challenges involved in integrating risk management into trading functions.

register now