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Building A Bridge Between Risk Management & Regulation

Last week, I took part in a panel discussion at the EzeSoft Client Conference in Boston. The session was on “New Perspectives on Risk Management, Real-Time Valuation and Scenario Analysis” and focused on the impact of regulation and risk culture on enterprise risk. Having spent some time on the topic in preparation, I thought I would share my thoughts on regulation and its role in shaping current risk management practices. The onslaught of regulations since the credit crisis have done some good in terms on getting firms to focus on risk and the impact of risk on their businesses. That said, they’ve completely missed the boat when it comes to creating an analytics infrastructure that would truly support use of the risk analtyics in day-to-day decision making. If you’re in the middle of deciding what to do, you can’t wait for an overnight process to run. You can’t wait for a query to generate a .csv, which someone then can import into a spreadsheet and spend a few hours formatting in order to make the information usable. By the time you get that report, the markets may have moved, and the nature of the decision could have completely changed.

In the wake of the credit crisis, the rush to adhere to new regulations took over nearly all risk processes and solution creation efforts. As an industry, we focused on ensuring accurate and timely reports, but for audiences largely outside our day-to-day. It’s time to step back and think about how to truly reap the benefits of these investments for our own internal management of the business. The risk reporting and metrics we use benefit from a standard approach, but should not be prescriptive. This is especially true on the buy-side, where each firm, each fund even, might have a slightly different approach to managing its investments. Especially in the selection of relevant metrics or benchmarks, funds should have the flexibility to define the tools that help them meet the goals of their investors.

These businesses each have their own approach to investments, and therefore, their decision support tools (and their risk analytics) should also reflect their unique approaches. Flexibility, in addition to transparency and timeliness that allow actual decisions to be made using risk analytics, is critical. We continue to evolve the tools and responsiveness of the infrastructure we are building as an industry to ensure that we can keep up with the changes in the regulation, but also the changes in the ways decisions are made and how the markets themselves operate. I think this is one of the current challenges that we face.

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