Buy-Side Risk Management Technology - Market Update 2016

Changes in the buy-side marketplace continue to pose challenges for firms in the space, which now faces a convergence of pressures: a dynamic, fragmented and competitive sector, the search for returns in a macro environment beset by low interest rates, and increased attention from regulators. Increasingly, buy-side firms view risk management technology as a strategic capability that enhancestheir investment decisions and makes them stronger and more competitive. They are also increasingly taking an enterprise-wide approach to risk management, and now tend to emphasize processes that enhance investment strategies, diversify risk, and create a best-practice platform for analyzing markets, credit and liquidity risk management. This approach focuses on maximizing return while remaining aware of profit and loss (P&L) and risk attribution through stress testing.

Key trends in this latest update are:

Risk is increasingly being incorporated into the whole value chain. As buy-side firms realize the added value of risk analysis, the role of the Chief Risk Officer (CRO) has become more salient. As well as increasing value, the integration of risk analytics into the value chain also enables buy-side firms to better align investors with their desired risk appetite.

Risk technology continues to move toward a Risk as a Service (RaaS) model. Many buy-side firms, which are HR-light and operate on fee-based models, are unable to create in-house solutions, so seek out RaaS offerings instead. Many vendors have embraced RaaS, and it is now available in many forms, from cloud solutions to managed services offering full business process outsourcing.

Operational and market structures are changing. Firms view data not only as a regulatory requirement, but also as an effective tool in strategic management. The adoption of risk data aggregation is taking hold in buy-side firms. They are looking for new ways to implement risk management systems, and increasing their focus on enterprise-wide and hybrid approaches to adopting technology. But there is still a time lag between the point at which a buy-side firm takes on exposure and the point at which the risk management system reports it, so there is a continuing drive toward intraday reporting.

Pressure from regulators and investors is increasing. As regulatory and investor focus broadens to include buy-side firms, this remains a key driver with reference to the Alternative Investment Fund Managers Directive (AIFMD), Form PF and UCITS IV. For their part, investors have become much more demanding, and now expect a high level of transparency. Firms in the sector are also anticipating a drip-down effect of BCBS 239, as well as the need to prepare for increased risk data aggregation capabilities and a heightened focus on capital and liquidity, particularly for insurance firms.