The Heart of Risk Management? Data
By Sophie Fletcher (Chicago)
At the heart of risk management is data management. This is according to three speakers at the Securities Information and Financial Markets Association’s (SIFMA) Technology Expo. Edward Hida, partner at Deloitte & Touche, Keith Sexton, the global director of the financial markets at IBM, and Chris Church, the CEO of SWIFT Americas were all given the opportunity to explain how their companies were tackling risk management.
Deloitte Surveys Market Participants For Answers
Deloitte & Touche interviewed regulators, securities broker-dealers, banks, insurance companies, hedge funds, and exchanges to find out how they defined and viewed systemic risk. They also set out to discover what information was needed from these financial institutions to identify, measure and monitor systemic risk.
What they came up with was a variety of approaches involving regulators, clearing houses and financial institutions that would help manage and measure a firm’s exposure to risk. The range of solutions involved regulators developing stress tests and financial institutions performing, analyzing and reporting the results as well as regulators developing a consistent standard for enterprise-wide risk reporting across the market.
Hida also described an approach that involved building a trade repository where firms would provide data and where regulators and clearing houses could measure and monitor that information in terms of risk exposure.
IBM Points Out The Pink Elephant
IBM is another company interested in risk management strategies for the financial industry. Keith Sexton, the global director of financial markets at IBM, spoke about how everyone was avoiding the pink elephant in the room.
“Most firms are not good at data management, even though they want to be,” said Sexton.
According to Sexton, data is at the heart of risk management strategies. He said it is important to note what data financial institutions are sharing, how it is being delivered and then, what the public is asking for.
He explained that IBM is promoting the art of what should be, not status quo. Further, he said that the financial industry should look outside to other industries to see how they operate. For example, new drugs at pharmaceutical companies are always documented however; banks and financial institutions don’t always share information about their products. He believed that documenting everything would be one approach to managing data and a way to avoid a failure of knowledge.
Another point Sexton brought up was the role industry participant’s play and what tools they use to share information.
“What better role could the DTCC and other industry firms play?” he asked.
What Is the DTCC Doing To Manage Risk?
In fact, the Depository Trust and Clearing Corporation (DTCC) has joined efforts with SWIFT, a standard communications platform, and XBRL US, a non profit consortium for XML business reporting, to provide the securities industry with a solution to managing data.
According to Stephen Letzler, the director of Corporate Communication at the DTCC, one of the problems in managing data is the large amount of people handling it. In terms of corporate action information, such as a press release or regulatory filing, these documents need to be read and understood by thousands of financial intermediaries like banks and brokerage firms. The problem is that these filings could be hundreds of pages long. There can be mistakes in interpreting and re-keying the data not to mention a time delay in going over the documents thoroughly.
The DTCC, along with their strategic partners, are proposing that XBRL (which stands for extensible Business Reporting Language) tag information in press releases and regulatory filings to make key data computer readable. This would allow financial intermediaries to quickly forward key information on to investors with little or no delay, as well as reduce cost and risk of misinterpretation.
Chris Church, the global head of securities and CEO of SWIFT in America, spoke about this new initiative at the SIFMA conference.
“This is happening in the States now and this is an initiative that will go global,” he said.
A Standard For Information Sharing
While the industry is experiencing a data explosion, experts are working on a standard for sharing, delivering and managing that data. However, a more serious problem lies beneath the surface and a gap exists between what is being reported and what the public wants to know.
