Transparency and timeliness of risk analytics are near the top of investment firms' agendas amid regulatory and investor demands.
On the regulatory front, the move to centralized clearing of most standardized OTC derivatives has cast a spotlight on the processes that firms use to calculate their overnight positions and margin requirements.
Regulatory and compliance requirements will continue to pressure the capital markets to guarantee a new level of transparency with regard to risk analytics.
“Opacity in any form of calculation is being viewed as anathema to both internal and external stakeholders,” said Kirk Wylie, chief executive of OpenGamma, provider of an open source analytics and risk management platform. “Even internally, a lot of metrics used to judge the activities of the chief investment officer didn’t have the level of transparency needed for making reliable business decisions.”
The OpenGamma Platform offers a robust and flexible open-source alternative to traditional homegrown or proprietary analytics and risk management solutions, Wylie said.
Continued market uncertainty will force many firms to update legacy risk systems and introduce fast, real-time systems that can apply the correct metrics to changing market conditions as they occur.
“The thrust of the move to central clearing for OTC derivatives, as well open and transparent margin calculations for bilateral OTC derivatives, is about bringing transparency to the market as a whole,” Wylie said.
Buy-side firms are seeking greater consistency in their internal processes for calculating net asset value (NAV) and other barometers.
Asset Value Investors (AVI), long-only traditional asset management firm, has selected and implemented risk software from investment management technology provider Paladyne Systems to bring greater ownership and control to its internal operations.
London-based AVI, which runs a range of nine funds and managed accounts with assets under management of $2.1 billion, has implemented Paladyne Portfolio Master for trading, pre/post-trade compliance portfolio management and NAV generation, and Paladyne Analytics Master for data aggregation, warehousing, reporting and reconciliation.
“Given our range of fund vehicles and investors, we needed to tailor information quite specifically for different communication channels,” said Kimmberly Lau, company director at AVI, in a statement. “We felt if we owned that data and the systems, we could be far quicker in responding to changes both within the industry and within our own investor universe.”
Many firms still rely on overnight processing for risk and analytics, which is no longer acceptable given the new realities of the market.
The International Organization of Securities Commissions (Iosco), an umbrella group of global securities regulators, last year put out for consultation policy proposals for margin requirements for non-centrally-cleared, i.e., bilateral, OTC derivatives.
The proposals include mandating that appropriate margining practices be in place with respect to all derivative transactions that are not cleared by CCPs, and that counterparties must exchange initial and variation margin as appropriate to the risks posed by such transactions.
Iosco said that the intent is to move more OTC trading from bilateral to central clearing, which necessitates a shift from batch to real-time risk reporting.
“Overnight batch reports don’t work in a model where unpredictability could have a real impact on profitability,” said Wylie. “You need to monitor trading activities in real time because of the high probability that a decision you made on Thursday having a material impact on a margin call on Friday.”
