Quartet FS Helps Financial Risk Management Move To Real Time

15 january 2013

Risk, regulation and business growth will be a challenging combination for major banks, but the best will find ways to make them work together, even with tight budgets.

Georges Bory, managing director and co-founder of Quartet FS, an in-memory analytics vendor largely focused on financial services, said clients are looking at the risk they see in everyday business and also are looking for the risks they don’t see, such as rogue traders like those who have cost SocGen (now a Quartet FS client)  and UBS so much.

Clients are investing in risk management to understand and control their business to see if traders are following defined processes that have been put in place. They are also mining data looking for potentially risky activity below the surface.

The analytical approach that Quartet FS uses are not unlike those used by intelligence agencies; some risk management firms work in both government and finance, especially in areas like fraud detection. Bory said the Quartet FS analytics apply techniques like looking for correlations.

“Whether it’s Homeland Security or fraud detection or operational risk or control in a trading room, you are trying to apply statistics to a huge amounts of data.”

Like many financial software vendors, Quartet FS is a beneficiary of changing regulations which in effect require that banks beef up their operations.

“We see a lot of regulatory pressure to make sure there are enhanced risk management processes put in place,” said Bory. “Some of them are relatively new, such as counter-party credit risk and everything that goes with it like collateral and evaluating a trade by CVA (credit value adjustment). Liquidity risk goes hand in hand with the whole move of OTC trades into exchanges.”

Banks are facing tough regulation on risk management at the same time they have to grow their capital buffers. (Chartis, a UK consultancy, looks at some of these conflicting demands and the way banks are responding in a study that I will cover once it is released in early January.)

Regulatory pressure to combine P&L with risk management could help banks eliminate some redundancy.

“Before, you would have one division controlling the P&L of the traders and another division would manage risk and report VaR (value at risk) to shareholders and regulators,” Bory said. “Now we see clients merging the divisions. They are trying to bring P&L analytics together with risk analytics so that the controllers of the business can report to the head of the business information that covers both risk and P&L from a single unique group.”

Regulators want banks to look at profit and risk together, he added.

Risk management has been moving to near real-time or real-time for some years, but the shift of OTC trades to exchanges will accelerate it, Bory added, because participants will be subject to margin calls.

“That has direct impact on the market and the way banks behave. They need to look at intraday liquidity risk. You see this pressure to make the business more secure going down to very basic operational offices of the banks such as optimizing collateral and  looking at liquidity.”

Quartet FS has a large project with CME on monitoring members during the day, he added. Firms and clearing houses need to look at their complete counterparty risk, and the only way to do that is in real-time.

“Five years ago P&L was real-time. Now you are looking at risk being real-time for credit  risk, market risk, intraday VaR.” Banks under budget pressure are looking at internal clouds as a way to deliver results they need while controlling costs.

“A lot of our clients are asking how they can deploy our technology on private clouds. Maybe this year those projects will go into production in earnest,” said Bory.

“The drive of the business by regulatory pressure is not going to change in the coming years. Banks are still reacting to this pressure; the emphasis on risk is very strong today.”