Taking an Analytical look at Analytics Tools and Tech: are you taking a risk not to?
It seems that in the world of performance measurement, investment risk and attribution, technology is on the tips of everyone’s tongues. However, is this all just techie talk, or is there a real need for better analytics tools and technologies?
If you look at the headlines over the past few months, there seems to be no shortage of news about the “latest and greatest” software and solutions to help the finance industry in this field – new software and upgrades, new bundles, new players. But it’s not just the tech companies at work; the banks themselves are getting in on it, too. In June, in response to a need to better measure risk and analyse performance, BNP Paribas launched a performance and risk management tool for the iPad. Diogo Malato Moura, responsible for risk and performance products, said: “Providing high end data on risk and performance is becoming crucial in today’s world. Existing and new clients are looking to opt directly for online risk and performance reporting, taking advantage of tablets. This trend is growing significantly and we anticipate 80% of asset managers active with institutional clients to replace paper reporting by delivery through online tablets by 2015.” This seems to make sense from a bank whose tagline is “the bank for a changing world”.
Admittedly, the iPad concept isn’t going to change the world, or even the industry. But in the US, something big is afoot that could potentially have global implications for this sector. Evalueserve, a company that provides custom professional research and analytics services, will invest more than US$5.9 million to establish a “Center of Excellence” in North Carolina, with plans to create 400 jobs by the end of 2017. The firm plans to open a data analytics and big data science centre, with a focus on financial services research and analytics. The range of solutions will include traditional research support such as; risk modelling, equity and fixed income research, and investment banking support, as well as emerging services such as media mix optimisation, digital attribution, and performance analytics.
But, is all this really necessary? Or is this just techie talk, making us think we need something that we really don’t? Well, according to the recent report The State of Next-Generation Market- and Credit-Risk Analytics (May 2013, IBM and UBM Tech), “As the world economy struggles to recover, financial firms are cautiously taking steps to cope with ongoing market uncertainty by investing in new risk management practices that will help them lighten new regulatory capital burdens and support strategies for increasing their return on capital.” And these steps apparently include the need for new technology “that can handle the accelerating pace at which information is generated, processed and acted upon, and adopting new analytics and approaches that can deliver higher quality risk insights – which would help firms qualify for reductions in regulatory capital requirements under the Basel III accord and regional legislation such as the Dodd-Frank Act and the European Market Infrastructure Regulation (EMIR).”
The report revealed that most of the financial organisations surveyed (180 capital markets banking and insurance professionals, including small and large firms, both buy-side and sell-side) were unable to run market and credit risk analytics as quickly as they wish they could across various segments, with many hoping to run them in real time or in less than an hour. They also would like to see their current analytics align with international standards, have better aggregation of data, and more secure control of data. Indeed, two years ago, most firms were struggling just to have enough computing power to perform various business analytics. According to the report, in 2010 approximately two-thirds of respondents lacked confidence that their current analytic platform would be able to keep up over time. Then, 20% of sell-side firms and 28% of buy-side firms said they never did liquidity risk analytics or only did them when asked. And 36% of buy-side respondents and 30% of sell-side firms ran counterparty risk analytics on an ad hoc basis or never ran them at all.
However, the good news is that firms today are generally better off than they were a few years ago. Although “[f]inancial firms were caught by surprise by the scale and scope of demand for analytics” (mainly due to a combination of volatile macroeconomic and geopolitical forces, in addition to increasing regulations, according to Celent, a research and consulting firm focused on the application of information technology in the global financial services industry), firms are aware of the need to improve their systems, with an estimated US$850 million being spent in 2012 on counterparty risk and CVA (credit valuation adjustment) management systems, which is expected to rise to US$1.1 billion in 2015.
Furthermore, the report says: “[R]esearch results show that more firms are undertaking more advanced analysis in shorter time frames.” Indeed, 26% of the survey respondents said they can run market and credit risk analytics in real time, with 42% running them overnight or longer, 20% running them within 24 hours, and 10% running them in under an hour.
“The ability to perform analytics quickly and in ways that will deliver high-quality, reliable and accurate information is critical to any risk management program [sic]. However, the data in some firms remains soiled, making it difficult for them to get a comprehensive view of customers and across all business units, and truly understand the nature and severity of their risk,” says the report. “It has become imperative for financial firms to strive to successfully mange counterparty credit risk, to satisfy regulators and remain competitive.” And the key to this seems to be in deploying the right tools and technologies. So, maybe the techies aren’t all talk. Maybe it’s time to take an analytical look at your tech platforms, because you may face a bigger risk if you don’t.
You can hear more details about these topics at the Summit for Performance, Risk & Attribution (SUPRA) being held on 25th September, London. For further details visit the SUPRA website or download the full programme below: