Juggling Risk Data Requirements

At an FS Club meeting in London in November, experts discussed one of the ongoing challenges the industry is facing at the moment: the need to juggle data, regulatory and risk management requirements while maintaining a long-term strategy.

London-based PJ Di Giammarino, chief executive at regulatory think-tank, JWG, and speaker at the meeting, said while alignment between the different needs is necessary, that alignment is not always there. “The question is: how do you align what regulators want us to do with risk management, with what the business is asking the middle and back office to do?” he said.

Following the financial crisis, regulatory discussions have become embedded in data management talks, but the requirements are not always the same as business requirements—or well-understood. There is still uncertainty around what data regulators will focus on, and what format they will be demanding it in.

Firms are now questioning how detailed the requirements will be, and how this will impact investment plans. London-based Scott Nygaard, global head, short-term markets and financing, FICC prime services, RBS, and speaker at the meeting, said: “I do not think regulators are trying to manage how we collect data or where it comes from...I think they should be and are more concerned about how we use it, how we manipulate and interpret it.” He added that regulatory bodies are focusing on the procedure and the model a firm is using to track certain types of key performance indicators and whether senior management are involved, for example.

New York-based John Avery, partner at SunGard Consulting Services, thinks firms preparing now for impeding regulatory reform have very much been focusing on fundamental issues. “Firms are focusing on data control, reconciliation, process and information management, basic enterprise information management strategies,” he says, and that firms appear to be using the regulatory topic to invest for the long haul in their data management infrastructure.

This approach can help firms juggle the requirements coming at them, as simply meeting regulatory requirements may of course not always be enough. “One of the challenges firms face revolves around the fact that having compliance methodologies and metrics in place is not enough if it serves no business purpose. Banks need to show the regulators the processes they have followed if the numbers being generated are questioned,” said RBS’s Nygaard, adding: “One of the problems we in the banking industry had going into the financial crisis was that too many institutions were depending on the minimum regulatory requirements to manage risk, and that is clearly not enough.”

Regulatory Uncertainty

Speakers also discussed whether it was fear or a commercial drive that was pushing risk data efforts forward. UK-based James Babicz, head of risk, pre-sales at SAS, and a speaker at the meeting, said: “Firms require an enterprise-wide view of risk, but the starting point is and ends with the data... how do I manage, control and ensure the quality of that data. If the data is not correct, no matter how innovative your measures are you are not going to be able to be fully compliant.” He added that he sees firms increasingly looking to, and having, a “single version of the truth to be used as a benchmark for risk calculations.”

The role regulators themselves will take, as well as the impact this may have on data management practices and risk models, was also discussed, while experts at the meeting agreed those focusing on short-term goals will inevitably struggle. Babicz asked: “Are they [regulators] supposed to come up with the rules and regulate, or are they supposed to supervise how firms operate?”

Meanwhile, the challenge remains of what strategy to adopt at a time of such uncertainty around the regulatory agenda. Speakers said one of the challenges firms face involves deciding what should be their short-term and their long-term focus. “There is a lot of uncertainty around the regulations...we are looking at a 10-year implementation phase, so what if we have a vision, execute that vision and down the line see we got it wrong—what is that going to cost such firms?” asked Babicz.

In fact, while regulation will always be part of the equation, compliance is not the only concern or aim. “Regulation will always be a key part of it, but risk data projects are also focused on the end-consumer’s understanding of how the firm calculates risk,” says London-based Stuart Plane, sales and marketing director at Cadis. He says firms have to handle not only the regulatory pressure, but also increasing pressure from their clients.

It seems firms will have to continue to juggle data requirements for some time to come. But one thing is for sure, while the regulatory agenda settles, drivers behind risk data intiatives remain strong.