Buy Side Adopts Holistic Risk Management Approach

Terry Flanagan

Buy-side institutions are being forced to adopt more sophisticated risk management as a result of the growing interconnectedness of the financial ecosystem.

A tide of new regulation requires asset owners to report on risk at a more granular level and this detail will need to come from their asset managers and servicers.

“Looking forward, the challenge will be not only be enterprise risk management, but managing risk across the whole value chain that makes up the buy side,” said Dr Andrew Aziz, executive vice-president of buy-side risk solutions at Algorithmics, a risk management software provider.

Sean Culbert, partner at Capco, a global business and technology consultancy, added: “In light of impending regulations, organizations are creating a portfolio approach to project management, understanding and identifying touch points between streams at a technology and personal level.”

To help manage the streams—at least 85—they are logically grouped into five areas: execution, transparency, client communications, capital and clearing & execution, said Culbert.

Regulatory drivers of risk management include Solvency II, Ucits, MiFID, AIFMD and Dodd-Frank. These and other regulations are producing a domino effect in the buy side, whereby asset owners, such as pension and other institutional asset managers, are becoming increasingly reliant on external asset managers to expose their risk positions. These asset managers are then passing this responsibility on to their asset servicers, according to a white paper by Algorithmics.

“For asset owners, aggregating risk across multiple portfolios, handled by multiple external managers, presents a growing recognition of the interconnected nature of relationships between buy-side institutions,” said Aziz at Algorithmics.

Technology can be an enabler in this respect. Risk factor attribution, stress testing, optimization and consistent firm-wide aggregation leads to better understanding of risk.

“Heat mapping has helped to identify the points of greatest impact within the organization,” said Culbert at Capco. “Specifically, it identifies the ability of organizations to comply on time as well as recognizes that if they cannot, they’ll need to look for extensions and exemptions.”

A movement away from a ‘silo’ approach towards a more consistent view of risk across the entire balance sheet has made asset liability management a growth area.

“Buy side institutions in the vanguard already have vast amounts of data on where risk lies within their various divisions,” said Gordon Burnes, director of marketing for risk analytics at IBM, a technology and consulting firm.

“The next five years is going to see them figure out how to use that data not just to satisfy the regulators but to help grow the business,” said Burnes.

Buy-side institutions, especially asset managers, need to be cognizant of the domino effect created by the interconnectivity of risk.

“Just because regulation is not directed specifically at them, it does not mean that they are immune to its effects,” said Aziz. “Potentially, the knock-on effect of demands from the regulator, to the asset owner, to the asset manager and to the asset servicer will present both challenges and opportunities.”

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