Oct 9, 2018

Why We're Putting Front-Office Risk Transformation Into Focus

By Satyam Kancharla, Chief Strategy Officer and Senior Vice President, Numerix

Some capital markets pundits say the biggest threat to banks is fintech. I disagree, and if I were to debate my point with one quick but forceful example, I would bring up the “London Whale.” You know, the former JPMorgan derivatives trader who is associated with a $6.2 billion trading loss in 2012. The underlying reasons for this gargantuan loss are complicated but one obvious contributing cause was the inadequate ability of the bank’s disparate legacy systems to inform the firm of the huge risks that were present in its CDS portfolio. Fintech, on the other hand, could have been the solution.

So, while new financial technologies ushered in by the fintech disruption are in some ways changing how financial institutions operate and conduct business, it is my contention that the biggest threat to capital market firms across the globe is not fintech, but outdated legacy systems. In fact, according to new research published by Chartis Research, this claim might be more than substantiated. In its report examining Front-Office Risk Management Technology, they state that banks can no longer put off upgrades to systems that were built for a different era. Moreover, consensus around the need for a flexible, cross-asset, dynamic front-office risk system outside of monolithic, book-of-record systems has emerged.

Think about how much rides on a company’s IT systems and the risks of not being able to keep pace with new client, market, regulatory and compliance demands? Fortunately, and this is true of most Tier 1 and some Tier 2 banks today, the conversation among senior managements is changing from “Why fix it” to “Must fix it”. While some of the largest banking organizations have built their now modern systems in house, others took the external route and purchased new technologies from vendors. Though some of these vendors have embraced the best of financial technology innovation, upgrading and integrating a new set of focused tools remains a challenge and, therefore, the battle with legacy technology systems is an ongoing concern for many banks.

Capital markets have changed radically over the last several years. When a bank is unable to change with it, it can become its own worst enemy. Few places exemplify the impacts of this change more than the disparate, cluttered and inefficient systems strung together to support front-office risk. In many cases, legacy systems are also manually operated (with the original creators of the systems most likely long gone), which means there is a far greater risk as they are prone to human error.

As I mentioned earlier, the approach of some banks—primarily those who have big budgets—is to upgrade their legacy systems by building proprietary trading and risk platforms. Other banks take a different approach and decide to replace their legacy systems and improve risk performance through partnerships with technology vendors.

In its new report, Chartis Research explores the evolution of front-office risk management vis-à-vis the increasing scale and complexity of trading. The report then observes how in recent years banks have increasingly recognized the need to upgrade, standardize, consolidate and externalize their risk systems. Change has been gradual, says Chartis Research, but it’s undoubtedly emerging in both build and buy scenarios.

The study also considers the challenges faced by vendors to adapt to meeting new demands as the front-office risk landscape transforms. To remain relevant to the transformative needs of banks, especially in the front-office, it is emphasized that vendors must adapt their strategies and build new technologies that prioritize openness and flexibility.

At Numerix, we have quickly embraced a modern, open architecture and financial institutions look to us to provide front-office risk support in a variety of ways, many of which will be discussed at NEXT 2018, our annual user conference. What we learned from our client experiences is that the winning technology strategy is not black and white. It’s highly diverse and continues to emerge.

In its Vendor Spotlight report, Chartis Research explains why Numerix is well positioned for the rapidly changing front-office risk management space. We encourage you to read the report and get an in-depth look at how both the supply and demand side of this new front-office risk management technology equation will play out.

Request your copy here.

Satyam Kancharla is Chief Strategy Officer and Senior Vice President at Numerix. He is responsible for corporate strategy and currently heads the Client Solutions Group. This group is responsible for Product Management and Financial Engineering. Before transferring to Numerix in New York City, he was the CTO for Numerix Japan LLC in Tokyo, heading the Pre-Sales and Financial Engineering teams for Asia. Prior to joining Numerix in 2003, Mr. Kancharla also worked with Merrill Lynch and GE Capital in Quantitative Finance and Product Development roles. He holds an MBA degree from New York University’s Stern School of Business, an MSc degree in Applied Statistics and Informatics from Indian Institute of Technology, Bombay and a BSc in Mathematics and Computers from the University of Mumbai. He is a CFA Charterholder and holds the FRM certification from GARP.

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