Follow the Data When Tracking Systemic Risk
November 2, 2009
The details of an Obama Administration financial reform bill are still being ironed out. But Wall Street operations executives are taking notice of one core element-a proposal to create a systematic risk regulator.
"Such an initiative will mean that firms need a greater transparency into their decision-making process and an enterprise-wide view of their risk," one operations executive at a Wall Street bulge bracket firm told Securities Industry News last week. "Firms will need to understand the decision-making process and have a solid audit trail."
Unclear still is just who is to blame for the financial crisis. Quants, risk managers, chief executives and even regulators are all taking heat. But one thing is clear: firms didn't or couldn't pull together information that would allow their own executives to analyze risks across their various units. Or regulators to see a holistic view of what was going on.
Data-and the risk calculations they allow-were managed at the business line level. So boards of directors at many firms had an incomplete and misleading view of the aggregate market, credit, counterparty, liquidity and collateral risks they faced, among others.
"It's not simply about complying with legislation. Firms haven't solved the data issue yet, which is what hindered transparency in the past," says Michael Atkin, managing director of the Enterprise Data Management Council, a New York trade group specializing in promoting effective data management. "Firms will need to collect data across different parts of the business and ensure it's not only accurate, but consistent as well."
The EDM Council has teamed up with roughly 60 Wall Street executives, academics, financial analysts and former regulators to promote the creation of a National Institute of Finance. The institute would collect an array of data from the back-offices of major institutions as well as corporate and municipal issuers on a daily basis. The NIF would then perform "what-if analysis" to determine how the failure of one financial institution could affect the remainder of the financial system. Such an assessment would move up to the so-called systemic risk regulator.
So just what data is necessary and how can a firm keep track of it? Transactional and position data, for starters. That is, the types of securities a firm has traded, in what quantities, with whom and when. But this is just the tip of the iceberg. There is also descriptive and pricing information on financial instruments and information on counterparties-trading partners and customers, who owns them and who is responsible for paying off their obligations in the event they go bust.
Middle- and back-office systems will have to keep track of much of the position and reference data (see chart). Using front-end automated trading platforms and other compliance packages will definitely go a long way to providing easy access to transactional data, for instance.
Portware, a New York-based global multi-asset electronic trading platform, for one, says that its smart order-routing system provides a snapshot of all the market data from multiple liquidity pools needed before a trading decision is made and retains the data for auditing purposes.
In May, HedgeOp Compliance, a provider of compliance software and consulting services for asset managers, released Compliance Trak Adviser Platform, a tool designed to help small- and mid-sized registered investment advisers comply with any regulatory requirements. The software also keeps track of who bought what securities when and whether a user violated any trading guidelines.
