Importance of Risk Management

Terry Flanagan

As regulatory scrutiny continues to affect the markets, risk management has become more important than ever for market participants.

With the collapse of broker-dealer MF Global and the scandal at Pipeline Financial Group putting a black eye on the trading community, market participants are taking the initiative when it comes to bolstering risk management.

TMX Group recently announced that they have come to an agreement to acquire Sydney, Australia’s Razor Risk Technologies, which provides credit risk software to clearing houses, stock exchanges, financial institutions and brokerages.

“TMX Group has been interested in entering the risk management space for the last few years and we have evaluated various methods of entering the space, either through acquisitions or joint ventures,” Richard Simon, director of corporate development at TMX Group told Markets Media via email. “Razor was initially brought to our attention as we began evaluating companies to provide a risk solution for our clearing houses.”

With scandals still resonating within the markets, risk management has become key.

“Risk management is absolutely critical in today’s markets,” Simon said. “Exchanges that own clearing houses, like TMX Group, are the natural central point of risk management for a market place, and as such we are a keystone in supporting the risk checks and risk management requirements of our customers.”

Market observers called for tougher regulation and more transparency when MF Global collapse following a failed $6.3 bet on European sovereign debt. The brokerage did not properly separate its customer accounts and borrowed cash from those accounts to cover losses on its sovereign debt bet. The firm confirmed to regulators that over $700 million in customer funds had been misappropriated.

Following the scandal at Pipeline, the alternative trading system operator took steps to win back customer confidence, including replacing senior management and the divestiture of its Milstream Securities subsidiary, per the request of many clients. The unit was allegedly the counterparty on a majority of the trades matched by Pipeline, raising concerns that it was trading against its clients.

The acquisition of Pipeline is also the latest in a trend of exchanges looking for revenue streams outside the core business of matching trades.

“A key strategic focus for TMX Group over the last several years has been to diversify its revenue streams,” Simon said. “There has been an increased emphasis on exchanges leveraging their core capabilities as a provider of technology solutions to the capital markets. TMX Group has participated in this trend by providing the Boston Options Exchange and the London Stock Exchange Group’s Pan-European derivatives markets with technology solutions for their respective market places. We intend to grow this aspect of our business by continuing to invest in existing and new technological solutions.”

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