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DO RISK PROFESSIONALS WEAR FITBITS?

Banks and investment firms are narrowing the bands of risk, and bringing market
and credit risk management closer to the front office, writes Alan Kelly, Global
Head of Risk Product at Torstone Technology. He likens risk at firms today to
the Fitbit, as its users know their health metrics in real-time.

New technology is changing the way we analyse risk – both as individuals and as
an industry. For example, a Fitbit watch can help an elderly person monitor a
health condition or support a younger person’s increasing fitness by counting
how many steps they take and tracking their heart rate throughout each day; both
would struggle to get that data any other way.

Commercially this can make a real difference. In the kitchen, professional chefs
take the adage, ‘if you play with fire, you get burned’ very seriously.
Temperature and timing affect the risks of wastage, food poisoning and injury,
which carry a material cost to the business.

In 1970 it was reasonable to use a combination of the chef’s senses to supply a
feedback loop of risk exposure and health and safety regulations to determine
acceptable boundaries of heat – and therefore risk. In 2021, technology exists
to support more sophisticated measurement and control of heat – or risk.

For capital markets firms, it is no different. They use technology to get more
efficient, gaining detailed feedback. That would include monitoring ongoing
exposure to a range of risk types, assessing new risk exposures pre-emptively
and working out which trade and which counterparty makes capital sense for the
organisation. Building a risk system that supports the three lines of defence –
including regulatory objectives as well as internal checks – is fundamental to
most operations.

The growing volume and complexity of regulation places a strain on these
systems. As firms seek to buy or sell more complex products, risk must also be
managed in more sophisticated ways. If legacy methods of measuring risk are
maintained well beyond their lifespan, these operational challenges can lead to
failures of risk management.

Risk Today

Like the Fitbit, a risk system in 2021 should be able to monitor a firm’s health
in real time and provide an understanding of what constitutes ‘healthy’. The
device also characterises the ‘client’ model of services today, with its
apparent size and simplicity masking the power of the technology that sits
behind it.

As banks and investment firms embrace the use of cloud-based data and adopt the
‘as-a-service’ model, they can likewise access specific functions when needed
without having to carry more hardware.

SaaS allows platforms to be accessed by more than one user or client with data
separated and secured, to enable scale without duplication. Power is delivered
at the backend, with additional computational resources being added dynamically,
and in some cases, automatically. This makes the deployment and development of
services easy and relatively low cost.

However, where risk in health is typically avoided, finance – like cooking –
needs a little heat to make it work. Keeping a fryer within one degree of the
right temperature by using a CPU to control it allows a chef to create food that
would be impossible with a fryer that might otherwise have a range of +/- 10
degrees.

Risk technology is equally part of the solution that capital markets firms
offer. Keeping a capital buffer or collateral at exactly the right level –
rather than padding it out – gives a bank more assets to use in order to
generate returns, bringing front-office pre-trade analysis and risk management
closer together. These feedback loops become part of the trading process.

The Real Risk

If a business maintains manual processes and box ticking for risk management
rules when more sophisticated technology is available, they are weakened when
compared with their peers.

Errors will occur increasing in frequency and size. The capacity to recover from
errors will be more limited. The ability to learn from errors will be more
limited. Compliance failures will lead to punishment by regulators.

As a result, the firm with less sophisticated or less transparent risk
management systems will gradually lose customers, reputation and capital.

Service quality levels will be driven by firms that are capable, while incapable
firms will struggle, adding greater pressure on their strained processes.

To embrace more sophisticated and transparent feedback loops, which reinforce
business goals, financial firms need access to systems that enable them to
self-moderate within their risk management functions, keeping compliant and
giving them a competitive edge.

Alan Kelly is Global Head of Risk Product at Torstone Technology
(https://www.torstonetechnology.com/)

Article originally published on:
https://tabbforum.com/opinions/do-risk-professionals-wear-fitbits/


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Published Date

February 15, 2021

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ALAN KELLY

Global Head of Risk Product, Torstone Technology




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