Research Finds Front Office Risk Capabilities are Key to Navigating Regulatory Reforms

LONDON, UKDodd-Frank derivative reforms as well as Basel III are expected to individually cost between $150 million and $350 million per firm for tier 1 global banks, according to a study conducted by Celent, an international financial research and consulting firm. Over half of senior executives interviewed at tier one financial institutions believe that performance and risk measures must be brought into line with the front office in order to achieve better trading decisions, stronger controls and an accurate picture of profitability. 80 percent of tier one firms are looking to achieve tighter alignment with risk technology and operations in relation to front-office processes at an enterprise level.

Cubillas Ding, Research Director at Celent commented: “Firms are bracing for a complex risk and regulatory landscape in the coming years. Celent believes that if ‘legacy baggage’ within financial institutions is not properly addressed, it will become increasingly difficult to develop new capabilities given the growing pace, complexity and demands of regulations on the horizon.”

Based on interviews with senior executives from more than 15 tier one investment banks, the survey establishes that firms are responding by rightsizing the balance sheet and Risk Weighted Assets (RWA); systematically optimizing the use and placement of collateral on a firm wide basis; preparing systems and processes to move to a central clearing environment, and improving operational efficiencies to mitigate against erosions in margins and profitability.

According to the Celent research report, 70 percent of firms are struggling with operational complexities due to fragmentation of systems and trading risk data sources, while 60 per cent cannot yet achieve an aggregated view of risk across counterparty, desks, product and geographies. Over 40 percent of tier one firms are looking for the front office to possess and execute risk-aligned tools, analytics and metrics in an automated manner. The research findings confirm that trading desks need to invest in the tools that will be mandated for the front office.

“Senior executives are in a position to recognise the importance of how near-real time performance and risk measures are deployed and utilised, most importantly in the front office. The responsibility of the quality and analysis of the data should rest with the front office, allowing firms to facilitate the correct risk culture and behaviour within a firm’s trading environment,” said Stuart Grant, Financial Services Business Development Manager at SAP.

“With the advancing regulatory legislation, financial institutions are beginning to recognise the weight near-real time and accurate risk infrastructure holds within the front office. Allowing the trading desk to employ risk controls that are industry and regulatory compliant will require investments in technology, risk strategy, innovation and culture change”, Grant added.

Note to editors:

Report based on insights from Celent’s electronic trading, risk management, and financial technology study conducted with senior executives from tier 1 financial institutions.

This study focused on more than 15 tier 1 capital markets and wholesale banks, involving both qualitative interviews and quantitative surveys primarily across North America and Europe.

Tier 1 banks are those with assets greater than US$100 billion on their balance sheets.

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