Feb 7, 2013

Attention CROs: Do You Have All the Right Strategies in Place?

RISK EXECUTIVE SERIES: PART I

James J. Jockle, Chief Marketing Officer at Numerix, speaks out on the challenging issues facing today's CROs, in Part I of our newly launched "Risk Executive Series.”

In financial services we have a lot on our minds: Dodd-Frank rules, Basel III, Counterparty Credit Risk, the collateral crisis, and so on.  Not to mention other little things like generating revenue, cost management, huge IT projects and all the daily ins and outs of managing a business.

Over the past twenty-four months new terms have entered our daily conversation and we’ve rallied around them – ‘big data’ and ‘cloud’ to name just two.  Moreover, most institutions have instituted teams to address questions like, ‘what is our big data strategy?’.  In no way am I not advocating for a big data strategy - on the contrary, to address the challenges of market and play by the evolving rules of today – you need one.  But the key question is - have you implemented an analytics strategy?

Having read hundreds of analyst and industry reports on best practices in risk management, it is very interesting how analytics is simply passed over or just briefly mentioned in the dialogue.  Perhaps due to the quantitative depth in which analytics need to be addressed, it is easy to just assume that everyone is thinking about it, or to discuss what the analytics outputs we require to do our jobs should be.  Moreover, it’s easy to think about ‘big data’, because there is a ‘big cost’. Data is expensive in terms of sourcing, cleansing and storing.  Then once you run that data through massive calculation engines, the output is terabytes of more data.  Oh, and everyone wants to look at the data, the way they want, when they want and where they want (mobile strategy?).  But the ugly step-child to that wonderful big data problem is the analytics that will generate the output that everyone so desires. There is one thing to think about – if the calculation of the data (due to poor analytics) is inaccurate – the whole organization can be affected.

 

In thinking about this blog, I thought of a little back-of-the-napkin exercise to determine to what extent are people thinking about an analytics strategy, so I did the following series of searches on Amazon.com.

So are analytics an issue, or is this blog hyperbole?

JPMorgan Chase‘s chief executive, Jamie Dimon, indicates that the bank’s risk models are central to understanding the circumstances that led to its multibillion-dollar trading loss.

-- New York Times 6/13/12

Yes. It’s an issue.

Bringing it Home

In reality to implement an effective analytics strategy requires operational convergence of functions – e.g. front office, treasury, operations, legal and so on.

In a recent report by Celent, analyst Cubillas Ding highlighted the challenges around the issues of collateral optimization.

  CelentReportGraphic
Strength Under Fire in Risk Management: New Realities, Technology Imperatives, and Investment Spending  - February 2012

The key to achieve this optimization is in the centralization of the underpinning analytics throughout the organization down to the pricing model.  Without alignment, transparency and senior management approvals on the performance and limitations of models – at the most granular level – institutions’ can leave themselves with un-hedged positions, unintended risk exposure (market or counterparty), higher regulatory capital charges and losses.  Moreover, while we are moving to a more standardized world, there is a significant increase in the complexity required to effectively manage trading operations.  

The easy answer is to let each operation do what they do best and ‘charge back’ to the front office.  But best practice has shown significant disparities in outcomes when a traditional silo-ed approach is implemented. Achieving a holistic risk management approach is not easy, but it does allow the following questions to be answered – what is my real cost per trade and what is the real P&L of my trading operations?  Having an analytics strategy will be the differentiator.

Bio

Jim Jockle, Chief Marketing Officer at Numerix
Mr. Jockle leads the company’s global marketing efforts, spanning a diverse set of solutions and audiences. He oversees integrated marketing communications to customers in the largest global financial markets and to the Numerix partner network through the company's branding, electronic marketing, research, events, public relations, advertising and relationship marketing.

Prior to joining Numerix, he served as Managing Director of Global Marketing and Communications for Fitch Ratings. During his tenure at Fitch, Mr. Jockle built the firm’s public relations program, oversaw investor relations and led marketing and communications plans for several acquisitions. He also oversaw the brand development of a new company dedicated to the enhancement of credit derivative and structured-credit ratings, products and services. Prior to Fitch, Mr. Jockle was a member of the communications team at Moody's Investors Service.

Blog Post - Sep 22, 2011

“Real-time” Trading and Risk Demands Drive Cloud Innovation for Complex Derivatives

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