The often overlooked back office can pull you through the battlefield of financial risk, providing sound information and data to help firms understand regulation
RISK MANAGEMENT IS a phrase that casts a shadow across the boardrooms of City firms vying to keep their revenues from nose-diving and their shareholders from bailing.
The announcement of a double dip recession at the end of Q2 2012 (the first since 1975) means that if you’re making a profit in the City then perhaps you need to take time out to thank your risk and compliance officers? Any good compliance officer will tell you that managing the problem through IT and C-level signatory processes alone exasperates the deal-makers and frustrates your clients. So what’s the alternative? Holistic risk management at leadership level is one way to avoid stagnating; or worse, losing out to your competitor.
Each cog in the wheel of the financial sector has its own risk to manage; traders manage their positions, asset/fund managers their portfolios, investment bankers their advisory services, and yet they all have one common need: the integrity of the financial data they use defines to a great extent the underlying value of the service they provide and, put crudely, their success or failure.
You can’t control the markets, but to help understand them you can control the quality of the information you receive from sources. This bottom up approach perpetuates through each process in your operation and, as so the old saying goes, you get out what you put in.
Practicality over purpose
You can get lost in the mass of regulation hitting the sector – often the practicalities of their implementation overshadows their purpose.
For example, MiFID (Markets in Financial Instruments Directive) champions transparency, but the reporting pressure put on organisations has been tremendous. So what happened? Fund managers and the like naturally had to connect to more and more trading venues – their own infrastructure has had to incorporate the relevant architectural improvements to guarantee them low latency and flexible processing services to report per instrument. Put simply, you can’t mitigate your risk by taking risk management one regulation at a time. Reporting requirements, instrument identification, venue identification, taxation and appropriateness tests all require more reference data – and that reference data needs to be accurate and consistent.
Thankfully, some in-roads have been made to normalise the landscape of reference data, making it easier for firms to capture and manage the scale of data through their systems. The Dodd-Frank Act was instrumental in shifting the industry towards establishing legal entity identifiers (LEI’s) via a central utility – DTCC and Swift are contenders for this function in the run up to the G-20 June summit in Mexico at which time further clarifications will be offered. This latter initiative will be welcome relief for some in that, if applied consistently across all market players, it will alleviate some of the risk associated with issuers of securities and their ultimate owners.
In addition to the regulatory environment, firms are obliged to comply with the national and international tax requirements (withholding tax and reporting). The FATCA (Foreign Account Tax Compliance Act) regulations as well as the Swiss Final Withholding Tax agreement (at present between Switzerland and Germany, UK and Austria) are examples of such regulations.
The back office, often dubbed the “poor relative” of financial deal-makers, may be a company’s best bet of guiding its safe passage through managing risk. A good financial information provider should be prioritising the quality and source integrity of its data. It also needs to provide you with the data and monitoring tools necessary to support your holistic risk management model, while at the same time helping you understand regulatory impacts on your business.
As Lord Byron once said: “The past is the best prophet of the future”, which is equally relevant for today’s risk management debate – looking back has never been such a good idea…
Elizabeth Coleman is a senior manager and company secretary at SIX Financial Information UK Ltd, a SIX Company, headquartered in Zurich.