Sell side risk management needs an overhaul that consolidates systems and incorporates the increased importance of margin into risk calculations, according to a new study by Acuiti study conducted in partnership with Sterling Trading Tech.
The findings highlight that not only are volatile conditions forcing market makers to be more vigilant about collecting margin calls, but also that upgrades to existing infrastructure are needed across much of the industry.
It said that the uncertainty of market movements this year coupled with the fallout from the Archegos blow-up, has thrown the issue of counterparty risk and monitoring margin into sharp relief.
However, the survey of 55 banks and broker-dealers across the world, shows that fragmented legacy risk systems are hampering firms’ ability to respond to increased volatility across global markets.
It notes that legacy infrastructure has often become so embedded in firms that even if they want to overhaul it, the operational challenges are too big.
This will require imaginative solutions, which can onboard new risk models while also avoiding costly and lengthy integration periods.
There is a high proportion – 86% of respondents – that continue to use more than one system to manage risk across their derivatives business.
Drilling down, 73% have between two and five risk systems while 64% take more than a week to implement risk and margin policy changes in their systems – timescales that are increasingly out of sync with fast changing market dynamics.
It also notes that risk committee changes to parameters lag the real time demands of current day markets.
In addition, 78% believe that a more dynamic risk and margin policy would provide a competitive edge.
“Legacy infrastructure has accumulated at sell-side firms over the years through acquisitions and siloed business lines,” says Ross Lancaster, head of research at Acuiti.
He adds, “This has led to costly and burdensome operations that often fail to keep pace with client demands for cross-assert trading strategies and miss the operational efficiencies of more consolidation and real time oversight.”
