Risk Management
Evolutionary Strides for Operational Risk Management | CROs Share Lessons Learned | Uneven Risk Management Progress in Asia | The Changing Face of Security | Learning to Share: Big Obstacles for ERM
Uneven Risk Management Progress in Asia
July 14, 2008
Spurred by integration of the world's capital markets and growing anxiety over effects of the U.S. subprime crisis, Asian firms are increasing their investment in risk management technology.
Financial firms in more-developed Asian countries are upgrading their systems because of potential exposure to the credit downturn in the U.S., or as a proactive step to avoid such problems in the future. In emerging countries, many firms are only now getting their hands on risk technology through partnerships with international players.
At Hong Kong-based CLSA Asia-Pacific Markets, a brokerage subsidiary of Credit Agricole Group, counterparty risk has been the focus of growing attention. "Any time a major hedge fund goes down, it raises a specter," said Fraser Howie, CLSA's head of structured products. "We say, that could have been my client.'"
Sydney-based hedge fund Basis Capital Fund Management, for example, suspended redemptions of its Basis Yield fund in July 2007 after losing more than 80 percent of its assets as a result of subprime exposure. "They were also investing in Asian stocks," said Howie, adding that many Asian firms have exposure to other markets. "And there's a domino effect. If they're using money in the U.S., it could have an effect in Asia as well."
CLSA has stepped up its risk monitoring procedures. "There's a greater focus on what terms we're extending to counterparties--are we monitoring that as best as we can?" said Howie. "In discussions we have with other houses, it's quite clear: The issue of credit is stricter now than it has been for some time."
Lessons From the West
Japan was the Asian country hit hardest by the subprime situation, according to Wade Deffenbaugh, head of the financial services practice in the Hong Kong office of Deloitte & Touche, which counts 18 of the 20 largest securities firms in Asia among its clients. "You've seen some of those banks [in Japan] take their lumps as much as anyone else," he said.
While risk management officers throughout the region are trying to "learn from what didn't work in the West as they shape their risk management" approaches, Deffenbaugh noted that developed markets like Japan already have access to sophisticated tools.
And foreign securities firms moving into younger Asian markets are bringing the latest risk management technologies and policies, often deploying the same platforms throughout all their locations. For those firms, better technology--and the larger variety of products the systems can support--is a competitive advantage against local firms that may not have the same expertise.
In countries like Malaysia, Indonesia and Vietnam, where the markets are just opening up, securities firms are often amenable to joint ventures or acquisitions in part because of the technology that international partners give them access to, said Deffenbaugh.
For foreign firms, there are often additional pressures to maintain high standards in Asian ventures. "You generally find that the international firms are more careful in applying certain rules than local firms would be," said CLSA's Howie. For example, "in Korea, the rules are more strictly enforced on foreigners than locals--or that's the perception. So the foreign firms tend to be more risk averse."
Though large brokerages in Korea and Japan have risk management systems in place, they are often a generation behind those of the biggest global firms, said Neil Katkov, head of Asia research at Boston-based Celent. Those firms tend to have "first-generation financial audit systems and perhaps risk management in some areas--for example, portfolio risk management in the capital markets--but not the types of second-generation risk management solutions that involve very sophisticated analytics and very thoroughgoing enterprisewide data feeds."
