05.17.2016
By Rob Daly

Regulating Away Spreadsheets

Financial regulators are doing their best to rid risk aggregation and risk reporting of spreadsheets via rules like the Basel Committee on Banking Supervision’s Regulation 239.

Although Regulation 239 addresses how specific systemically important sell-side firms should manage their risk aggregation and risk reporting, it might not be long before buy-side firms find themselves in the same position, according to Brian Sentance, CEO of Xenomorph Software.

“You just have to see what is happening at the banks to see what is coming down the road for the buy side,” he said. “BCBS 239 and some others of these regulations are very generic in their application to risk management. Not all, but quite a lot of them will come across as they develop.”

Brian Sentance, Xenomorph

Brian Sentance, Xenomorph

Those institutions that fall under the regulation’s umbrella should have “an appropriate balance between automated and manual systems,” according to Principle Three on accuracy and integrity of the regulation.

However, the regulation also states that manual intervention may be appropriate for some processes, but the regulators would prefer “a higher degree of automation” to reduce the risk of errors.

Xenomorph’s Sentance boils down the regulator’s intentions as no more risk aggregation or reporting calculations should be done within spreadsheets.

“Spreadsheets are fine as a user interface, but I don’t think the calculations should be done by one individual or you enter the realms of the J.P. Morgan ‘whale’ and the rest of them,” he said.

One large trading firm’s management already has instructed its quantitative trading developers not to use spreadsheets as the user interface for the trading platform, according to Sentance.

“Spreadsheets are the ideal environment for quantitative traders and they wanted to continue to work that way,” he added. “So, they built the platform but wrote a spreadsheet UI in Java and included it into their platform. It just was a way to get around it.”

More Risk Management stories:

Featured image by tomislavz

Related articles