Tug of War: Bulls Wrestle Bears on Risk Management Spending
Research studies predict a boom in spending on systems to monitor and mitigate risk. But vendors say they aren't seeing it yet-and that wholesale upgrades are not likely.
August 17, 2009
On the heels of the global credit crisis, it's only natural that financial services firms would focus on beefing up the systems they use to manage risk. In fact, there is no shortage of studies predicting a boom in spending on risk management technology by the securities industry.
In June, for example, Boston-based research firm Celent projected that risk-related spending by financial institutions on governance, operational and compliance activities will grow at a compound annual rate of 6.6 percent, rising from $1.4 billion globally in 2008 to $1.7 billion in 2011. The bulk of the growth will come from software and services, Celent said.
According to another recent study from Aite Group, "Risk is Not Just a Four-Letter Word," the market for buy-side risk analytics alone is expected to grow from $1.25 billion in 2008 to $2.2 billion by 2013 ( see chart).
The report says volatility in all asset classes has shown a "pressing need" for comprehensive risk analytics, meaning systems which can analyze risks across different asset classes, from equities to debt to alternative investments, plus the ability to use VAR techniques (value at risk), measure sensitivities to different market events and exposures that result. The systems also should be able to stress test the effects of catastrophic events, such as a sudden 10-percent drop in market prices or a repeat of 9-11.
Denise Valentine, senior analyst specializing in securities and investments at Aite, says risk analytics is taking on a new urgency: "Risk managers are realizing that they need a toolkit, and it needs to be reviewed all the time."
Yet another study, released in July by consulting firm Accenture, surveyed 260 Chief Financial Officers, Chief Risk Officers and others with risk-related responsibilities, and found that 40 percent said their firms have increased or will increase their investments in risk management in the next six months.
Manna for Vendors
According to Aite, in the critical area of buy-side risk analytics, there are five leading providers poised to profit from growth in risk management spending: SunGard (product: APT), Algorithmics (Algo Risk), RiskMetrics (Risk Manager) MSCI Barra (BarraOne), and Blackrock Solutions (Green Package). "Robust buy-side risk analytics are needed now more than ever," says Aite.
Such optimistic projections are manna to IT vendors in the risk management space. And in fact, there are service providers who say they are seeing spending that matches the bullish numbers.
David Merrill, CEO of New York City-based portfolio analytics software provider FinAnalytica, says sales at his firm are up 200 percent for the first six months of 2009, compared to full year 2008. While Merrill said he did not have permission to mention any client names, he said they were buying the firm's Cognity software risk analytics suite. "A lot of systems are based on normal distributions. Ours is based on a fat tail distribution. We have a different approach," he said. The "fat tail" approach accounts for extreme market movements like an oil shock.
Still, Merrill believes that Europe is ahead of the U.S. in its deployment of risk management systems. "In Europe, the risk teams are larger and have more power," he says. "The regulatory regimes are built in. U.S. firms will need to step up to make sure they do not lose competitive advantage. There is pressure on the buy side to demonstrate expertise in [risk management] processes."