Buy-Side Risk Management Technology - Special Market Report
Posted: 14 February 2017 | Source: Chartis
Asset managers play an increasingly pivotal role in the financial system. They have assets under management (AUM) equal to 75% of global banking balance sheets, which makes them, in many ways, as systemically important as the banks.
Buy-side firms are continuing to face a rapidly changing operating environment in which key drivers and principles are contradictory and conflicting:
- A demanding search for yield and returns within a challenging and nonintuitive macroeconomic environment that needs performance to be measured more closely against risk appetite across a greater universe of assets.
- A continued need to comply with behavioural change and reporting requirements of multi-jurisdiction regulation, and market structure changes that will intrude more on the buy side as attention is turned towards it.
- A need for costs to be sustainably managed down to retain and win clients – who are now more insightful – and to satisfy shareholders.
- The buy side’s assumption of more sell-side asset ownership and, therefore, risk.
These drivers have a profound effect on risk management and its technology, which require:
- ‘On-demand’, nimble risk management software platforms or services that support all parts of the enterprise.
- Broad asset class coverage, extensive risk factor analyses, a choice of pricing and analytic source code or high-level scripted libraries.
- A focus on supporting and contributing to investment decision-making, portfolio management and optimisation through configurable dashboards for analytics, stress testing and scenario analyses.
- Comprehensive, best-practice data management.
- Cross-fertilisation of software and services that come not only from the sell side and other financial services areas, but also from other industries and businesses.
Several drivers of buy-side risk management have been identified – regulation, market structure changes and investor behaviour shifts. There has been little change in direction, and there have been increases in velocity and acceleration with some bumps along the way – but firms are still on the journey. What is clearer now is that the buy-side risk tools, while converging with the sell-side tools, will always remain somewhat different due to the exigencies of each group’s legacies, its inventory management, investor reporting, history of outsourcing and relative lack of skilled resources.