The uncertainty of market movements this year, as well as the fallout from the Archegos blow-up, has thrown the issue of counterparty risk and monitoring margin into sharp relief.
The findings show that not only are volatile conditions forcing market makers to be more vigilant about collecting margin calls, but also that upgrades to existing infrastructure are needed across much of the industry.
Survey data shows that 86 per cent of respondents use more than one system to manage risk across their derivatives business.
The survey also reveals that regulatory and market pressure is growing to monitor risk and margin on a real time basis. It finds that 73 per cent of respondents used between two and five risk systems, showing the burden and complexity of legacy infrastructure that firms have built up over the years.
Additionally, the survey finds that 64 per cent of respondents take more than a week to implement risk and margin policy changes in their systems. These are timescales that are increasingly out of line with fast changing market dynamics.
Often changes proposed by risk committees to a firm’s risk parameters lag the real-time demands of current day markets, with 78 per cent of respondents believing that a more dynamic risk and margin policy would provide a competitive edge.
The findings reinforce the reality that in markets where real time risk management has become essential for managing counterparty exposure, systems often lag these demands.
The findings also suggest that legacy infrastructure has often become so embedded in firms that, even when they want to overhaul it, the operational challenges are too big. This may require imaginative solutions that can onboard new risk models, while also avoiding costly and drawn out integration periods.
Ross Lancaster, head of research at Acuiti, says: “Legacy infrastructure has accumulated at sell-side firms over the years through acquisitions and siloed business lines. This has led to costly and burdensome operations that often fail to keep pace with client demands for cross-asset trading strategies and miss the operational efficiencies of more consolidation and real time oversight.”
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