The Risk Battleground: A New Focus on Oversight and Aggregation

Risk management has always been crucial to the capital markets industry, but its importance was greatly magnified after the global financial crisis.  The crisis shed light on an underappreciated reality:  the complexity and interconnectedness of risk.  It forced firms to rethink and redesign their risk management processes and technology.  And expanding demands from regulators, boards, and clients have shown that this work is just beginning.

The risk management battle in the coming year will be fought on the fields of oversight and aggregation.  Although many firms are behind on achieving these realities, they are gearing up for major investment.  According to a recent CEB study, 50% of firms say they will be spending more on risk analytics in 2015.  This investment will grow at 9.1% per year until 2017.  Firms are spending with good reason – 81% of the surveyed firms say that risk analytics are critical to their firm’s strategy. To improve oversight, firms will invest in tools to capture risk data across the supply chain and provide it to those that need it.  The result is an enterprise view of risk — an ongoing but elusive yardstick for heads of risk.

Even with the right tools in place to manage individual risks, aggregating enterprise exposure is a different animal entirely.  Improving aggregation starts with data. First, by implementing an enterprise risk and data governance model, firms can shift focus to governance and stewardship best practice and away from tool configuration.  Second, firms should deliver ad-hoc reporting capabilities.  While most firms are awash in visualization tools, they’ve failed to put them to use for on-demand and user-friendly risk dashboards.  A survey from the Professional Risk Manager’s International Association shows that only 42% of firms have risk dashboards with firm-wide insight.  Furthermore, reporting tools tend to live in antiquated siloes, whereas they should cross operational systems.

Asset managers have had enormous difficulty with these oversight and aggregation mandates.  Not only is portfolio, credit, and market risk a constant concern — reflecting the drive toward alpha and AuM growth, but these firms also face greater regulatory and operational risks that are interconnected and difficult to control.  Industry leaders will be differentiated by their ability to juggle these risks simultaneously and provide an accurate, clear picture across different risks and asset-class siloes.

To do that, firms should build an enterprise model for oversight and aggregation, starting by inventorying and assessing weak areas.  Firms should investigate how effective technology, processes, and procedures are in governing each type of risk.  Then they should bring best practices to weak spots.  They do this by identifying interoperable technology components, building processes that suit the tools, implementing robust data management, and promoting an enterprise risk management culture.

As this enterprise risk model proliferates, firms should also look for ways to share the burden with others in the industry.  From data to processes, managed services and industry utilities will capitalize on increasingly standardized and scalable risk approaches.