Counterparty risk tools don't measure up, says tech firm

Counterparty risk tools don't measure up, says tech firm

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Buy-side methods of measuring counterparty exposure aren’t up to the job, according to trading technology firm Fidessa.

Working out the risk of multiple trading partners is “beyond the capability” of most systems, the group argues, or “too-timing consuming” to be feasible.

Assessing counterparty credit risk became increasingly important following the financial crisis, which demonstrated that financial institutions, such as Lehman Brothers, can fail.

Post-crisis, regulators expect firms to aggregate their counterparty exposure across asset classes, including a myriad of additional holdings where the counterparty is in any way connected.

That’s a big change from the previous method, where a good credit rating was sufficient to establish a counterparty’s fitness.

It means counterparty risk is now in the same league as market and liquidity risk.

But technology being used by fund managers right now is under strain and fragmented processes are proving to be a headache when it comes to achieving the control that firms and regulators desire.

At some investment companies, for example, daily limits are still supplied manually in the morning.

Others extract trading data at the end of the day from multiple systems, put them into a different database, run a series of queries and then send results off to a risk team.

“This broadening and depending of complex manual systems is clearing unsustainable,” says Steven Strange, compliance product manager at Fidessa.

“It’s an additional source of frustration for risk and compliance managers that a fundamental  requirement for controlling and monitoring trading activity, i.e the trading data itself, is located within the trading system.”

Strange admits that there are some levers that forward-thinking asset managers have begun to pull which better protect the firm, its clients, and ease burdens for the back office.

Firstly, decision making has been transitioned from trading operations to a compliance or risk management group.

Secondly, single points of implementation and monitoring are being chosen and supported by removing manual processes in favour of automation.

“Obviously the solution requires technology” Strange continues. “Firms should closely look at the counterparty assessment capabilities of a system, which should provide the flexibility to add and alter rules, lists and calculations during business hours.”

“Forward-thinking asset managers are becoming counterparty ‘intuitive’ to everybody’s benefit. And this means that they not only run better operations, but also position themselves to win more business and maintain their competitive edge.”

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