The document discusses risk management in the financial industry. It notes that risk management was identified as woefully inadequate following the recent financial crisis. While counterparty and liquidity risks were previously not major concerns, the failures of Lehman Brothers and Bear Stearns exposed deficiencies in how these risks were managed. The document argues that effective risk management going forward requires data to be clean, consistent, and processed in real time across business units and asset classes.

1. waterstechnology.com October 2010
trading technologies for financial-market professionals
Special Report
waterstechnology.com October2010
Risk & Compliance
Sponsored by:
Cover_WatersSR_Oct10.indd 2 14/10/10 18:07:27

2. SYBIEOM05301 CM_Blink_v4_Ad_WAT_OL.indd 1 10/7/10 10:48 AMUntitled-2 1 11/10/2010 15:59

3. O
f all the business processes exposed by the recent financial crisis as being
woefully inadequate, risk management is top-of-the-list. But before the
legions of risk mangers in buy-side and sell-side land take offense to this
assessment, I should add that pointing the finger of blame in their direction is as
senseless as it is unwarranted.
You see, prior to financial crisis—which for all intents and purposes is as close
to the perfect storm as the financial services industry is ever likely to get—issues
like counterparty risk and liquidity risk were anything but industry-wide concerns. In
fact, from a buy-side perspective, counterparty risk had historically always been a
broker-related, or sell-side, consideration, which goes a long way toward explaining
how and why significant numbers of hedge funds were forced to close their doors
when Lehman Brothers went belly-up, hot on the heels of Bear Stearns, which
failed in March 2008.
The sobering risk management lessons played out in the wake of the banks’
spectacular failures have already been sufficiently well-documented in the pages
of most financial journals, which means rehashing the recent past serves little pur-
pose. What’s far more useful to our industry is assessing current risk management
practices, focusing on developing the types of procedures that ensure that the
deficiencies of the past stay in the past.
In this respect, what has become patently obvious over the past 18 months
is the realization that, as buy- and sell-side firms overcome their inertia and start
moving toward managing their risk on a close-to-real-time basis across business
units, asset classes and geographical locations, data lies at the heart of the chal-
lenge. Managing risk in such a manner is the natural end point to which all risk
professionals should aspire. And, even though that end point is still a long way off,
it is nonetheless realistic and achievable.
But before we get carried away on a wave of pragmatism, even the most san-
guine risk manager will concede that unless you can guarantee that all the data
within your organization is clean, consistent and homogenized—and, perhaps most
importantly, it is processed in close to real time so as to reflect up-to-the-minute
changes in the market—aiming for that end point is an exercise in futility. ■
Editor-in-Chief Victor Anderson
victor.anderson@incisivemedia.com
tel: +44 (0) 20 7484 9799
Online and US Editor Rob Daly
rob.daly@incisivemedia.com
tel: +1 212 457 7781
News Editor Anthony Malakian
anthony.malakian@incisivemedia.com
Deputy Editor, Buy Side Stewart Eisenhart
stewart.eisenhart@incisivemedia.com
Deputy Editor, Sell Side Michael Shashoua
michael.shashoua@incisivemedia.com
European Reporter Sitanta Ni Mathghamhna
sitanta.mathghamhna@incisivemedia.com
Graduate European Reporter Faye Kilburn
faye.kilburn@incisivemedia.com
Head of Editorial Operations Elina Patler
elina.patler@incisivemedia.com
Contributors
Max Bowie, Editor, Inside Market Data
Tine Thoresen, Editor, Inside Reference Data
Jean-Paul Carbonnier, Deputy Editor, Inside Market Data
Publishing Director Lee Hartt
lee.hartt@incisivemedia.com
tel: +44 (0) 20 7484 9907
Commercial Director Jo Garvey
jo.garvey@incisivemedia.com
tel: +1 212 457 7745
European Commercial Manager Ashley Snell
ashley.snell@incisivemedia.com
US Business Development Manager Melissa Jao
melissa.jao@incisivemedia.com
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European Business Development Manager
Robert Alexander
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Sell Side
Victor Anderson, Editor-in-Chief
Waters (ISSN 1068-5863) is published monthly (12
times a year) by Incisive Media. Printed in the UK by
Wyndeham Grange, Southwick, West Sussex.
©Incisive Media Investments Limited, 2010. All
rights reserved. No part of this publication may be
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copyright owners.
A Study of Inadequacy
WatersSR_Oct10.indd 1 14/10/10 18:28:26

4. Special Report Risk & Compliance
In order to help asset managers comply with
the US Securities and Exchange Commission’s
(SEC) revised Rule 2a-7 requirements,
JPMorgan has enhanced its regulatory
reporting services for money market funds
(MMFs). The upgrade “features a suite of
stress tests, including: an increase in short-
term interest rates; an increase in shareholder
redemptions; a downgrade of, or default on,
portfolio securities; a widening or narrowing of
spreads between yields on an appropriate
benchmark selected by the fund for overnight
interest rates and commercial paper and other
types of securities held by the fund; and a
combination of events,” according to a
release. The firm says that it is also planning to
add futher stress-test scenarios for asset
managers to see “how adverse market
conditions can affect money market fund
performance.” ■
JPMorgan Enhances
Regulatory Reporting
Capabilities for MMFs
Pricing and risk management software
vendor Fincad has released its F3 analysis
product, for the first time combining its
Microsoft Excel interface and software
development kit (SDK) for integrating its
models into third-party or proprietary
applications, which provides deeper
coverage of over-the-counter (OTC)
derivatives than its existing analytics suite,
and allows end-users to create support for
new derivatives on the fly. F3 does not yet
contain the market data available in the
current suite, leaving users to choose their
own data sources, though the vendor will
make this available at some time in future. ■
Fincad Unveils F3 Analysis Offering
2 October 2010 waterstechnology.com
Indata Launches Performance
Monitoring Application
David Csiki
Indata
Information Mosaic
Launches Asset
Surveillance Tool
Post-trade automation solutions provider
Information Mosaic has launched its new
Asset Surveillance tool that provides a
consolidated view of network and
depository counterparty risk through a
single user interface. According to the
vendor, the product employs
visualization and presentation tools to
provide risk diagnostics and
assessment, and uses a flagging system
through SMS and/or email to alert users
to custom-set parameters. Information
Mosaic sells the product to custodians
and institutional asset managers looking
to provide risk transparency from
portfolios to individual trades.
“When Lehman Brothers collapsed, it
took many financial institutions not
days, not weeks, but months to unravel
their exposure to the failed bank,” says
John Byrne, CEO at Information Mosaic,
in a statement. “Our clients are looking
for new and innovative ways to help
provide increased portfolio visibility to
network managers, risk officers and
clients such as asset managers. It is this
deeper level of transparency that will
enable the markets to trade confidently
once again.” ■
John Byrne, Information Mosaic
Portfolio management
technology provider Indata has
rolled out a new performance-
monitoring capability, Indata
iPM Performance, during
the 2010 GIPS Conference
held in San Francisco. Part
of Indata’s software-as-a-
service (SaaS)-enabled iPM
Technology Platform, iPM
Performance provides rate-of-
return monitoring across levels
including total portfolio, asset
class, sector and composite.
The tool features real-time
alerting functions for more
efficient return validations and
corrective courses of action
in the event of data errors.
The new Indata offering also
checks for portfolio violations of
Global Investment Performance
Standards (GIPS) rules regarding
minimum asset levels and
cash flows; an interface is also
provided for users to check their
GIPS certification.
Sonya Thadhani, chief
investment officer at California-
based asset manager Bailard,
says in a statement her firm
uses iPM Performance for more
efficient and automated data
management. David Csiki, Indata
managing director, anticipates
greater client demand for
technologies such as iPM
Performance heading into 2011
in order to demonstrate sound
data management, compliance
and transparency to regulators
and investors. ■
WatersSR_Oct10.indd 2 14/10/10 18:29:15

5. News
Expanding its product set of financial
compliance and risk management
technology offerings, Wolters Kluwer
Financial Services has acquired
Brussels-based regulatory reporting
and risk management software
provider FRSGlobal. FRSGlobal’s
product focus includes centralized
multi-country risk and regulatory
reporting; the acquisition adds
coverage for operational and
compliance risk and reporting to
Wolters Kluwer’s product suite.
The vendor was previously owned
by The Carlyle Group and Kennet
Partners. Wolters Kluwer purchased
FRSGlobal for an undisclosed sum.
Wolters Kluwer claims the buyout
will create the world’s largest
compliance and risk management
technology provider targeting financial
services, with more than 15,000
banking, insurance and investment
management clients globally.
FRSGlobal CEO Steve Husk, along
with CFO and COO Serge Minne,
will join Wolters Kluwer and manage
FRSGlobal going forward. ■
Wolters
Kluwer Snags
FRSGlobalUK-based data and portfolio analytics
vendor StatPro is preparing to launch a
new cloud-based portfolio analytics
platform, dubbed Revolution, which will
enable users to analyze portfolio risk and
returns, generate reports, and publish
performance data
via a web-based
terminal to improve
management,
marketing and
regulatory
compliance
functions.
Revolution is
currently in beta
testing, ahead of a
launch scheduled
for early 2011,
targeted at all types of buy-side firms, as
well as custodian banks, administrators
and prime brokers, which can white-label
the solution to their clients.
“Portfolio analysis these days is as
important as accounting. If you want to
win business, report to your clients,
understand what you are doing and
comply with regulations, you need to
analyze your performance,” says StatPro
CEO Justin Wheatley.
StatPro will initially populate Revolution
with its own market data, covering half-a-
million global equities, bonds, mutual
funds and custom securities, and aims to
add data
from other
third-party
sources.
“We hope
to persuade
other data
suppliers to
provide
their data
on the
platform so
clients can choose which data provider
they want to use to price each asset. Our
partnership terms are heavily weighted
toward the partner to encourage them to
do it, and it will be a flat rate for everyone.
We take 20 percent, they take 80 percent
of the data fees and they can charge
whatever they want,” Wheatley says. ■
StatPro Readies Portfolio
Analytics ‘Revolution’
Platform Computing,
Sophis Team Up for
Portfolio, Risk Mangement
Portfolio and risk management
vendor Sophis is partnering with
cloud management software
provider Platform Computing.
Through the alliance, the
vendors have released a jointly
produced product that will allow
the banking, insurance and
investment management
sectors to distribute profit-and-
loss (P&L) calculations,
instrument pricing, risk
simulations and Value-at-Risk
(VaR), according to a statement.
The firms benchmarked their
solution at IBM’s Product and
Solution Support Center (PSSC)
in France and found that the test
ran an historical VaR calculation
on a multi-asset portfolio with
32,000 positions, which was
representative of a true portfolio.
The test, computing VaR
calculations with 270 historical
scenarios, took four hours using
fewer than 300 nodes and fewer
than 90 minutes using slightly
over 800 nodes with no
apparent limitation and linear
scalability. ■
3waterstechnology.com October 2010
SocGen Changes
Timeline for Valuations
Société Générale Securities
Servicing (SGSS) Asset
Servicing is changing the time
clients receive daily valuations,
as part of a project aimed at
ensuring the firm can deliver
data to the right user at the right
time, sibling publication Inside
Reference Data has learned.
Clients previously received
the valuation reports before
10 a.m., while going forward
the reports will be sent before
7 a.m. Paris-based Philippe
Rozental, head of asset
servicing at SGSS, says one
reason for the move was that
a European hedge fund
manager requested the
change to give it more time
internally evaluate risk. ■
Philippe Rozental, SGSS
“Portfolio analysis these days is as
important as accounting. If you want
to win business, report to your clients,
understand what you are doing and
comply with regulations, you need to
analyze your performance.”
Justin Wheatley, StatPro
WatersSR_Oct10.indd 3 14/10/10 18:29:25

6. William Neuberger,
Managing Director,
Global Co-head of
MORGAN STANLEY
Electronic Trading
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Untitled-2 1 15/10/2010 12:50

7. Open Platform
5waterstechnology.com October 2010
As a result of the credit crisis and the ensuing market downturn of
2008 and 2009, there has been fresh assessment of the efficacy
of previous financial innovations and the regulations governing
the global financial services industry. The questions at hand are:
What’s next? And how? By Sinan Baskan
C
learly, in the wake of the financial
crisis,themarketstructurehaschanged
fundamentally and the regulatory
supervision has grown less rigorous both by
design in terms of deregulation, and as a con-
sequence of reduced capacity and competence
of the regulatory agencies. As the industry
and policymakers look toward a new financial
systemwithmoreglobalreachandinterdepend-
ence, where systemic risks are to be managed
much more successfully, a number of primary
choices need to be understood and addressed
collaboratively by the major economies.
Before deregulation and product innova-
tion reshaped markets, investment, insurance
and banking products aimed at retail inves-
tors had separate universes and agencies with
matching jurisdiction of oversight. In restoring
the capacity to identify and manage systemic
risks, are we to restore these distinctions again?
In a room full of people mingling, we do not
want to see sharp objects. Hence, we should
remove them and make sure no one is hurt.
We would not securitize, for instance, zero-
down-payment loans at all.
Furthermore, the regulatory policy
needs to decide how to view the investing
public. Would the investor be regarded as a
consumer of financial services and products
and be accorded protection as such? Most
of the response to the crisis has been shaped
by concern for potential impact on the small
business and individual retail investor. Do we
deem investors competent decision-makers
who can be trusted to accept the consequences
of their choices? If we are to accept this as the
paradigm, then a “no bailout” policy should
inform regulatory reform.
Clear Positions
New practices in risk management would
need to be based on fundamental precepts
of regulatory philosophy that must have
clear positions on questions such as these.
Risk managers in an environment where
capital is priced efficiently would be able to
reliably measure risks to invested capital and
to the balance sheet; what has proved to be
difficult—in spite of advanced quantitative
techniques and computing capacity—is to
reliably quantify almost any dependency
there is in the underlying data. It has proven
to be especially difficult to separate noise in
the data when there is lot of new data. We
have always assumed that a free market would
generate enough information so the market
becomes an efficient pricing mechanism for
assets, including capital. When fiscal and
monetary policy for consideration other
than preservation of pricing efficiency leads
to distortions in the cost of capital, this shifts
capital-allocation decisions away from capi-
tal productivity and into arbitrage between
traded instruments, inevitably resulting in
rising volatility.
The financial markets serve the economy
by efficiently allocating capital to productive
uses for economic growth. The cost of credit
and real returns on capital invested in real assets
should remain in correlation. Under these cir-
cumstances, it is possible to manage portfolio
risks within assigned risk budgets—per asset
class, for instance—and place limits on traded
capital and controls on size and allocations.
The new risk management culture may
not need anything different than to return to
where quantitative risk analysis started, and
rely on the very basics of portfolio theory,
diversification strategies, and asset-allocation
models. What we may demand of a possible
new regulatory regime is either one of two
clear choices:
• Restore free capital markets that are free of
legislative or policy-driven distortions and
exceptions, and secure a market structure
where capital is priced transparently. We
would expect regulatory supervision to
ensure that a degree of pricing power rests
with investors, and the aggregation of
services for scale efficiencies, which guards
against high levels of concentration of capi-
tal and product advantages in a few select
institutions.
• Regulate institutions and products in dif-
ferent sectors—investment banking, asset
management, retail banking, insurance,
and so forth—separately with respect
to their relevant risk characteristics. We
would expect restrictions on securitizations
that might lead to the loss of correlation
between the value of the underlying assets
and traded instruments and accounting
rules that ensure transparency in valuations
and deal structure.
The answers at this point are not clear; the
political will of governments and the compe-
tency of regulatory agencies have not been
tested yet to frame a more stable macroeco-
nomic environment. The financial markets
and investors need a clear set of principles and
structure first before market dynamics can
become the driver for recovery. ■
Sinan Baskan is senior director, global finan-
cial services industry solutions, at Sybase, a
Dublin, Calif.-based provider of software for
managing and analyzing information using
relational databases, analytics and data
warehousing solutions.
A New Era of Risk Management
WatersSR_Oct10.indd 5 14/10/10 18:29:32

8. Special Report Risk & Compliance
6 October 2010 waterstechnology.com
Roundtable
Rethinking Risk Management
Of the all the business processes to have
undergone a radical rethink in the wake of the
financial crisis, risk management is the most
prominent. Prior to the credit crunch, both buy-
side and sell-side firms’ risk practices tended to
run along business, regional and asset-class lines,
and, in most cases, relied on overnight batch
processing. But all that has now changed.
WatersSR_Oct10.indd 6 14/10/10 18:30:27

9. Roundtable
7waterstechnology.com October 2010
What are the challenges facing financial institutions in
developing a cross-asset, firm-wide view of their risk
exposure?
Shaun Waters, product development, Bloomberg Sell-Side
Execution and Order Management System (SSEOMS):
A significant challenge to managing cross-asset risk exposure is
that firms have a tendency to manage different assets in different
systems. The quality of data is also important. Without a robust set
of market data being fed in, the model cannot achieve the goal of
assessing the risk through event processing and analyzing the effect
on the related exposure. You have to have a solution that will allow
you to model the risk across the asset classes in real-time so that
when a trade occurs, you can monitor and report on those positions
instantaneously.
John Burchenal, managing director, market growth,
Omgeo: The biggest challenge facing firms is bringing disparate
processes and systems together for a collective view of exposure
across asset classes. The data across the multiple risk systems,
trading desks, and collateral desks within organizations needs to be
standardized and normalized to produce meaningful and accurate
results. Even more importantly, cross-product, asset-class netting of
collateral is beyond the capability of most firms. Without transpar-
ency into your exposure across derivatives, foreign exchange (FX),
and securities-lending, collateral pools will not be used efficiently.
In this way, the industry has a long way to go to employ the mecha-
nisms to help firms make the most efficient use of capital across
the board. If you can’t identify in a timely manner an accurate
net exposure of all collateral, how can you expect to manage it
effectively on behalf of the end client?
Michael Levas, CIO
and managing member,
Olympian Capital
Management: Obviously,
there are going to be many
more controls. If they haven’t
already been implemented
they will be, in light of what’s
gone on in the last couple of
years. Everybody is concerned
now with internal risk,
counterparty risk, market
risk, systemic risk, and so
on. All of these issues are of
paramount importance, and if
those controls haven’t yet been
implemented, they will be
very soon.
JD Jayaraman, product development, Bloomberg Trade
Order Management System (TOMS): There are a number of
challenges that financial institutions face in developing a cross-asset,
firm-wide view of their risk. These include:
• Risk aggregation: Consistent risk models and calculations across
different asset classes are important for proper risk aggregation.
Large financial institutions have a wide variety of models employed
across various trading desks and risk departments, which makes it a
challenge to unify. Modeling the correlation and the interaction of
risk across various businesses and asset classes is a major challenge as
well.
• Data quality: Garbage in garbage out—the quality of data is critical
to the measurement and aggregation of risk. Data quality issues such
as missing and erroneous data arise due to different representations
of trades in different systems, necessitating complex fallback logic to
rectify them.
• System integration: In large financial institutions, data from
numerous front-office trading systems typically flows into a cen-
tral warehouse for the purpose of firm-wide risk measurement.
Integrating feeds in a reliable manner poses a major challenge.
Mat Newman, head of product management, SunGard
Adaptiv: First, there is the methodology of what you are trying to
do. What do you mean by a cross-asset, firm-wide view of exposures?
What most firms want to do when aiming to achieve this is to have
consistency of modeling and valuation across different areas of the
firm and be able to aggregate those to get an enterprise view of risk
in a consistent and valid way. It’s not just consistency of, for example,
scenario generation—it’s also consistency of how different products
are classified, how they’re grouped, and how they’re valued, because
it’s often the case that different areas of banks have different ways
of managing these processes, which evolve and change over time.
When you’re trying to get that firm-wide view of your risk you need
consistency, which relies on common assumptions that are understood
“There are a number of platforms out there catering
to real-time risk right now. There are compliance
firms specializing in this, and smaller managers
can outsource their compliance functions to these
providers. The larger firms are developing—or
already have in place—internal risk controls, and if
anything, are bringing people in from the technology
sector to help them improve these functions
according to specifications and what they are looking
for.” Michael Levas, Olympian Capital Management
Q
Michael Levas
Olympian Capital Management
WatersSR_Oct10.indd 7 14/10/10 18:32:04

10. it’s time to know what we don’t know.
A DTCC | Thomson Reuters Company
Business dynamics have changed. Pressures around greater transparency have increased.
And it is no longer an option not to know your counterparty risk exposure.
At Omgeo, we provide robust tools that enable firms to gain precise, timely insights
into their collateral needs, allowing them to accurately measure and respond
to risk while optimising capital. With Omgeo CrossCheck®
for portfolio reconciliation
and Omgeo ProtoColl®
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into your exposure, including OTC derivatives and beyond. The result?
Transparency across portfolios, efficient use of collateral
and confidence to make even better business decisions.
After all, knowing is everything.
Omgeo. All together now.
To learn more, please visit
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Untitled-2 1 15/10/2010 12:44

11. by all so that the information coming from different business units is
comparable and, therefore, can be aggregated. These elements start
to argue for pulling the data into a central system and then re-valuing
and analyzing it there, rather than having it decentralized and pushed
out to different business units, while leaving the final reporting and
aggregation step to the central enterprise risk function.
Bob Shea, product development, Bloomberg Asset and
Investment Manager (AIM): There are several challenges that a
financial institution faces in developing a cross-asset, firm-wide view
of their risk exposure. First, the majority of financial institutions
have multiple order management and trading systems, so accessing
risk across these platforms is no easy task. These firms typically rely
heavily on technology resources to build data integration across
the trading platforms, and then either build or buy enterprise-wide
risk systems to evaluate the exposure. Even if the firm is successful
in integrating the data, the quality of the data needs to be validated
before it can be relied upon. This process can take hours or days to
complete, so getting a true firm-wide, real-time view of the risk is
very difficult to achieve. A further complication would be for those
financial institutions that have a truly global presence. Measuring
their risk exposure at the global level is a tremendous challenge, due
to the complexity of local markets such as Brazil, India and China.
Eileen Dignen, managing director,
banking initiatives and accounts,
Swift: Often, organizations only have a
partial view of their cash. The chal-
lenges include branches’ or subsidiaries’
frequency of reporting balances, while
some accounts in the portfolio may not
be reported on, making it difficult to
generate a full view of cash available.
This impacts borrowing and increases
potential risk. To compound the
problem, organizations in this day and
age desire a dashboard to view all this information in one place.
However, the data underpinning the information is usually housed
in multiple systems across different balance sheets, giving a fractured
view of information and the overall firm-wide cash position.
Sinan Baskan, senior director, global financial services
industry solutions, Sybase: As the concept has matured over
the last 30 years, the systems supporting organizations’ risk func-
tions have typically either been slowly enhanced through increased
resources or implemented/replaced in a piecemeal fashion. The
result is a plethora of disparate systems that often don’t share
common data or analytical tools. As a result, firms face a demanding
yet crucial task to begin consolidating, normalizing and aggregating
the content and sources of risk information across the enterprise.
Many organizations today struggle with seemingly straight-forward
transformations such as common data definitions, formatting, and
timeliness of data collection and analysis. The complexity comes
from the disconnected way existing systems were implemented,
maintained and managed. Of course, while it’s important to begin
rationalizing these systems to provide a cross-asset, firm-wide
view, it’s also important to ensure the nuances needed to accurately
manage different types of risk on products with very different
characteristics from other asset classes is maintained. So, it’s not the
risk engines themselves that need to be a key point of focus, but
the data that feeds them.
Achieving one consistent,
timely and understood view
of data onto which any risk
discipline, business line or
geography can then apply
its specific brand of analyt-
ics and aggregation provides
a clear foundation for future
requirements and ensures
consistency of analysis and
reporting, removing many
of the inaccuracies that can
occur through the current disparate risk analytical systems that are
fed by their own local data silo.
To what extent are compliance functions within
financial services firms being driven by external
factors—e.g., regulators and investors—as opposed to
internal ones?
JD Jayaraman: Regulations such as Basel II and Basel III, and
increased scrutiny by regulators and investors have impacted
compliance functions directly by imposing rules such as market
abuse rules, and indirectly through board directives. Pressure from
regulators and stakeholders, and the increased focus on risk man-
agement after the credit crisis have mobilized boards to improve
risk management and compliance. Exposure and Value-at-Risk
Roundtable
“Financial firms and vendors are implementing tools
to proactively manage liquidity risk. The industry is
working together to provide information and develop
applications for firms to be more agile and effective
in this area, from implementing merged data models,
liquidity tools, dashboards and other reports, to
eliminating manual entry and spreadsheets as the
main tools for liquidity risk management.”
Eileen Dignen, Swift
9waterstechnology.com October 2010
Q
Eileen Dignen
Managing Director
Banking Initiatives & Accounts
Swift
Tel: +1 212 455 1800
www.swift.com
WatersSR_Oct10.indd 9 14/10/10 18:32:24

12. (VaR) limits are increasingly being set and monitored by compli-
ance officers, even at smaller financial institutions.
Sinan Baskan: The recent upheaval in regulatory and political focus
has undeniably had a significant impact on compliance functions by
increasing the cost of being in the business. However, this tends to
split the market into two camps: Camp A contains the large firms
with significant resources, able to carry the necessary cost of meeting
the external requirements while ensuring their internal requirements
are not only met but continually reviewed and improved in line with
senior management expectations. Camp B, unfortunately, consists of
smaller organizations forced to resort to external, pre-packaged solu-
tions to meet compliance requirements. This in turn reduces these
firms’ capacity to ensure that they are not only cost-effective, but also
limits their ability to construct specifically tailored internal policies to
protect their customers.
John Burchenal: Prior to the “Fall” of 2008, compliance was
primarily driven by internal factors. Financial firms created policies
and procedures to comply with the existing regulatory framework
and firm-specific rules. The compliance function was probably
understaffed and was likely not represented on the executive
leadership team. Then everything changed with the Bernie Madoff
scandal, the Allen Stanford fraud case, AIG’s liquidity crisis and
the collapse of Lehman Brothers, which combined to expose a
dangerous and potentially disastrous weakness in compliance at
many counterparty financial firms. The resulting Dodd–Frank Wall
Street Reform and Consumer Protection Act creates a host of new
compliance and regulatory requirements that will force financial
firms to adopt tools and technologies that will provide the control
and transparency now required in pre-trade, trade, and post-trade
operations. Institutional investors who have heretofore taken a
passive approach to these issues are now actively examining and
benchmarking these practices as part of regular due diligence.
Michael Levas: There is great emphasis now on compliance and
on appointing chief risk officers. I think there is going to be a mul-
titude of new procedures—I don’t want to say improvements—that
will be implemented across the board. I think you’ll see compliance
officers and chief risk officers in places you never did before.
Mat Newman: Risk departments are becoming very focused
on new regulations and complying with them, to the extent that
they are hiring people whose job it is to keep track of these vari-
ous new rules. The danger is that they are spending an increasing
amount of time, not on what would be considered classical risk
management, but in complying with new regulation. The “use
test” principle says a firm can’t use one set of models to calculate
regulatory capital and a different set of models when deciding
to grant a loan or conduct some business. That sounds sensible
because regulatory calculations shouldn’t be run in an ivory
tower. But the problem is, unlike five years ago when capital was
quite cheap and plentiful and firms weren’t constrained by the
levels of regulatory capital, now capital is scarcer and it’s being
made more expensive as firms need to hold more of it. Firms
are, therefore, finding considerably more pressure to optimize
their regulatory capital. And so, if there is this use test in place
that says the way I calculate my regulatory capital is the way I
run my business and now one of the main drivers is to optimize
regulatory capital, what do you do in a situation where there is a
conflict between what is good risk management and what is the
lowest use of regulatory capital? These sorts of tensions need to
be carefully managed.
Bob Shea: Over the past few years the level of scrutiny of
financial institutions by the regulators and investors with
regards to managing compliance risk is greater than ever. For
example, earlier this year in the US, the Securities and Exchange
Commission (SEC) imposed changes to rule 2a-7, which forced
money market fund managers to hold more liquid and higher-
quality assets. Globally, we’ve seen restrictions on short-selling
enforced by all the major regulatory bodies. Internally, a number
of firms have imposed trading limits and approval processes to
manage risk, but the majority of the growth we’ve seen in the
function of compliance has been driven by new regulations and
diligent investors. As seen most recently with the release of Ucits
IV in Europe and the Frank–Dodd Act in the US, we should
expect the regulatory environment to continue to be fluid.
Special Report Risk & Compliance
10 October 2010 waterstechnology.com
“What is meant here by real time is the sudden
need to look at things in a different light and be
able to do so in a fast and responsive way—it
may not be a couple of seconds but it will be
30 seconds rather than, say, 20 minutes.”
Mat Newman, SunGard Adaptiv
Mat Newman
Head of Product Management
SunGard Adaptiv
Tel: +44 (0)208 081 2000
www.sungard.com/adaptiv
WatersSR_Oct10.indd 10 14/10/10 18:32:55

13. Shaun Waters: In the sell-side equity space, the regulators have
been the primary driver of change. The SEC has been swift in its
proposals to bring transparency and efficiency into the markets
from the large trader reporting system (LTRS) proposal to the
consolidated audit trail proposal. The May 6 Flash Crash cre-
ated an environment where the regulators were forced to take
a hard look at the way orders and trades occur in the market.
The environment changed almost instantaneously after that,
with the exchanges rolling out their “trading pause” initiatives
within weeks of the event. On top of these unexpected events,
the industry was forced to comply with the SEC’s adoption of the
alternative uptick rule in November. This has forced brokers to
react to the rules on the one hand, and also consider implementing
measures to prevent these things from happening in the first place
before their hands are forced.
Eileen Dignen: Compliance functions within financial firms are
being driven by internal and external factors. External factors may
take priority such as pro-
posed regulations drawing
firms’ attention in terms of
complying with deadlines
and new rules. The
proposed Financial Crimes
Enforcement Network
(FinCEN) regulation is a
good example of external
factors impacting organi-
zational decisions where
firms need to prioritize
resources in order to
respond to the proposed
regulation. The resulting
guidance will result in changes that may impact financial institu-
tions. It is likely that new product development might be trumped
by the need to invest in system updates to comply with regulatory
guidance. However, internal compliance and audit departments
can assist in tempering a firm’s “internal monologue,” providing
guidance and implementing risk-adverse services that conform to
internal policies.
What technologies are available to firms trying to get
as close to a real-time view of their risk exposure as
possible?
Sinan Baskan: The technology on which many firms have
historically based their risk systems is now proving, in many
cases, to be a hindrance rather than a facilitator. This is in part
due to the reliance on batch data transfer and subsequent batch
analytical processes that dictate an often overnight schedule.
Today’s technologies such as complex-event processing (CEP) and
analytics-focused data management platforms such as Sybase RAP
enable firms to not only move data in real-time but also perform
analysis on the data as it moves, as opposed to the traditional
method of putting the data “at rest” before analyzing it. This in
turn means that organizations can now join multiple streams of
granular raw data at the transaction level and aggregate results
from existing systems without having to rip everything out and
start again. In addition, enterprise
architecture tools are leading the
way in helping organizations to
begin to understand the vast amount
of information they have within
their estate and ensure it is well
defined, linked and maintained,
regardless of source.
Eileen Dignen: Swift provides
messages for information reporting
including intra-day and end-of-day
cash movements, and confirmations
that can be integrated into risk
and treasury applications used for
liquidity management, forecasting/dashboards, business intel-
ligence/analytics reporting, and proactive risk monitoring.
Bob Shea: In order to achieve a real-time view of its risk
exposure, a firm needs to either consolidate to a single order
management system (OMS) for all assets or evolve to dynamic
cross-systems integration for risk, leveraging ever-improving
technologies, cloud computing, or complex-event processing.
The firm using an OMS that can support global asset coverage
and achieve real-time risk exposure across those assets will be at a
strategic advantage over its competitors.
Michael Levas: There are a number of platforms out there catering
to real-time risk right now. There are compliance firms specializing
in this, and smaller managers can outsource their compliance func-
tions to these providers. The larger firms are developing—or already
have in place—internal risk controls, and if anything, are bringing
Roundtable
“Achieving one consistent, timely and understood
view of data onto which any risk discipline, business
line or geography can then apply its specific brand of
analytics and aggregation provides a clear foundation
for future requirements and ensures consistency
of analysis and reporting, removing many of the
inaccuracies that can occur through the current
disparate risk analytical systems that are fed by their
own local data silo.” Sinan Baskan, Sybase
11waterstechnology.com October 2010
Q
Sinan Baskan
Senior Director, Global Financial Services
Industry Solutions
Sybase
Tel: +1 212 596 1150
sybase.com/capitalmarkets
Sinan Baskan
WatersSR_Oct10.indd 11 14/10/10 18:33:01

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TTMDWTGWTGID_ADA4-3.indd 1 10/9/10 15:48:
Untitled-2 1 15/10/2010 12:47

15. people in from the technology sector to help them improve these
functions according to specifications and what they are looking for. I
think the continued emphasis will be in this area, as well.
Mat Newman: Different people mean different things by “real
time,” so there are different cases to consider. For pre-deal check-
ing I need to assess the impact of a new deal in a few seconds,
and techniques such as Incremental Monte Carlo can be used to
achieve this. At other times it’s not so much a case of real-time
calculation as real-time responses to ad-hoc queries—something
happens in the market and suddenly a firm wants to look at things
in a different way. What they don’t want to have to do is re-run
a full calculation to generate the results, because that takes a long
time. So what is meant here by real time is the sudden need to
look at things in a different light and be able to do so in a fast and
responsive way—it may not be a couple of seconds but it will be
30 seconds rather than, say, 20 minutes.
JD Jayaraman: High-performance computing using graphi-
cal processing units (GPUs) is gaining momentum for financial
applications. Grid computing technologies using low-cost Linux
boxes have long been used to perform complex risk computations.
Other promising technologies that can be utilized to get as close
as possible to real-time risk are cloud computing, CEP and in-
memory databases. Apart from computer technologies, financial
engineering advances such as a stress-matrix pricing methodology
used by Bloomberg, greatly help in achieving near real-time risk
management.
John Burchenal: Timely access to information is critical.
Unfortunately, many firms do not have the systems in place to
provide this data, and often times it can take days if not weeks to
report net exposure to a counterparty. Proactive, cross-asset-class
position management is key. Firms are just starting to look at their
operations and are realizing that they have serious limitations by
utilizing a highly manual and disjointed process. However, in
some cases we are seeing firms proactively approach the issue by
opting for third-party providers or building in-house systems.
These collateral management and reconciliation systems can now
operate in near real-time. Through more regular reconciliation of
position data, costly errors can be addressed sooner in the lifecycle,
allowing the collateral management process to continue without
interruption. These systems can provide relative certainty when it
comes to exposure, counterparty risk and collateral availability.
Shaun Waters: Some interesting real-time technologies are
being explored, such as the use of hybrid CPU/GPUs. Multi-
core GPUs, traditionally used to manage video game graphics,
are being used to handle complex calculations and algorithms
simultaneously.
Liquidity risk has the potential to “kill” a firm faster
than any other risk challenge. How are the financial
institutions and third-party vendors addressing this
issue?
Bob Shea: The definition of liquidity is very qualitative,
which makes it difficult for financial institutions to measure. For
example, most firms will classify 144a and private placements
as illiquid, while in reality there is often enough value and
volume with those particular assets to be deemed liquid. For fund
managers, the measure of liquidity risk is typically driven by the
mandates imposed by the funds themselves. These mandates are
generally based on a number of determining factors regarding
their assets, such as days to maturity or market volume depending
on type. Third-party vendors such as Bloomberg, incorporating
market data with the Bloomberg OMS compliance platform, are
able to offer rule templates that monitor the firm’s liquidity risk at
a firm-wide or fund level.
Mat Newman: The interesting thing over and above looking
at liquidity as a risk in its own right, is how it’s integrated with
other risks the firm has. You can overlay where other sources
of liquidity requirements might come from—for example, a
Roundtable
“A significant challenge to managing cross-asset risk
exposure is that firms have a tendency to manage
different assets in different systems. The quality of
data is also important. Without a robust set of market
data being fed in, the model cannot achieve the goal
of assessing the risk through event processing and
analyzing the effect on the related exposure.”
Shaun Waters, Bloomberg
13waterstechnology.com October 2010
Shaun Waters
Product Management, Sell-Side Equity &
Order Management System (SSEOMS)
Bloomberg
Tel: +1 212 617 6812
www.bloomberg.com/solutions
Q
WatersSR_Oct10.indd 13 14/10/10 18:33:29

16. downgrade by a rating agency could trigger collateral calls from
your counterparties.
Eileen Dignen: Financial institutions and vendors are imple-
menting tools to proactively manage liquidity risk. The industry is
working together to provide information and develop applications
for firms to be more agile and effective in this area, from imple-
menting merged data models, liquidity tools, dashboards and other
reports, to eliminating manual entry and spreadsheets as the main
tools for liquidity risk management.
Michael Levas: It depends—from a trading point of view, head
traders will have to look at everybody on their desk and what
they’re doing and how they’re doing it. If they question some type
of position or strategy, there could be some in-depth dialogue
between head trader and junior trader about what’s going on.
We’re going to see more of that. Liquidity to me is of the utmost
importance, and being able to control that and effectively manage
that is one of the most critical issues facing a trader, portfolio
manager or hedge fund manager on a daily basis.
Shaun Waters: On the sell side, liquidity risk includes the need
to provide the liquidity by taking a position or the need to find
the liquidity to fill your customers’ orders across markets. On one
side, you have traders moving to dark pools or using flash orders
to reduce costs while finding liquidity. On the other side, the
exchange operators are pushing back against the use of stub quot-
ing by market-makers, who often sit away from the market and do
not really provide any liquidity to the market. So, the market is
currently wrestling with what is best for an efficient marketplace
and best execution.
John Burchenal: Liquidity risk is all about knowing
your positions and being able to respond quickly to market
conditions. Understanding what positions are collateralized,
where that collateral stands, and the firm’s counterparty exposure
are critical to mitigating liquidity risk. Where do you stand at any
given time, can you identify where your collateral is being used
for rehypothecation purposes, are you under or over collateral-
ized, and if so, by how much? It’s imperative in today’s market
that firms acknowledge their operational shortfalls—shortfalls
that have dire consequences if not remedied. In short, senior
management must upgrade their skill set to include firm-wide
counterparty risk management and take ownership and be
accountable. Technology vendors are responding to this need by
providing real-time risk exposure measurements and sophisticated
stress-testing capabilities.
Sinan Baskan: Unfortunately, due to a lack of a finalized and
considered approach to liquidity risk across regulatory boundaries,
many firms are waiting before implementing a full solution. Some
organizations have existing systems that they are attempting to
scale to meet new internal and external requirements, but most
are looking to a range of third-party offerings with a variety of
backgrounds for the answer. These third-party solutions quite
often are adaptations from other existing platforms such as asset
and liability management (ALM) and therefore don’t necessarily
provide the full confidence needed to future-proof against further
legislation and requirements.
The opportunity here, however, is huge. If properly imple-
mented at the right level of granularity (at the transaction and
product level) and with the right timeliness of data transfer
(real-time), firms can use the liquidity risk impetus to enhance
many areas of their business including other risk systems as well
as front-office quantitative analysis, improved pre-trade risk, and
even back-office settlement and valuation.
JD Jayaraman: Liquidity risk is a key consideration in
the Basel III regulation. A liquidity coverage ratio to address
short-term liquidity risk and a net stable funding ratio to address
long-term liquidity risk has been specified by Basel III. Financial
institutions are required to maintain these ratios at above 100
percent; moreover, they are also expected to perform liquidity
stress tests that incorporate shocks that cause adverse conditions
Special Report Risk & Compliance
14 October 2010 waterstechnology.com
“Recent events such as the Lehman Brothers’
collapse have brought counterparty risk management
to the forefront at buy-side firms. The reliance of
buy-side firms on their counterparties for valuations
and exposure calculations is decreasing. Collateral
remains the most used form of credit risk mitigation,
though larger firms are using the credit default swap
market as well.” JD Jayaraman, Bloomberg
JD Jayaraman
Product Development, Bloomberg Trade
Order Management System (TOMS)
Bloomberg
Tel: +1 212 617 2674
www.bloomberg.com/solutions
WatersSR_Oct10.indd 14 14/10/10 18:33:59

17. Q
for their business. Third-party vendors such as Bloomberg and
Algorithmics provide a framework for scenario analysis and stress
testing that specifically allow for stress-testing liquidity risk. Some
vendors also provide behavioral and simulation models of cash
flows to assess liquidity risk.
Counterparty risk was traditionally an issue that
only affected brokers prior to the recent market
meltdown. But, now it is a buy-side issue too. How is
the buy side managing its counterparty risk and what
technologies can be implemented to assist with this
challenge?
Michael Levas: As far as the technology aspect of it goes, you
want to look to the firm with the most cutting-edge offering and
that can deliver exactly what a manager needs. There’s a funda-
mental aspect to this you need to look at, and there’s credibility
and debt. All of these factors come into play when it comes to
counterparty risk situations, so you’ll need to be able to look at
this from various angles—whether they have a multi-asset trading
platform, what their exposure is in a certain sector or asset class:
Is it over or under? I think these are all issues you need to look
at and understand before going forward. That’s the most critical
challenge investment managers face regarding counterparty risk
going forward.
Eileen Dignen: Improved collateral management is an area that
buy-side institutions are looking at to better manage counterparty
risk. A big pain point for the buy side is the lack of standardization
around counterparty exchange information. Unlike the sell side,
buy-side institutions by nature have to deal with their trading
counterparts at the fund level. This, in return, results in sending
and receiving multiple margin calls in multiple formats to differ-
ent counterparties.
The exchange of information based on email and fax does
not provide the required audit trail and tracking capability that
the industry wishes to see. One way to resolve this problem is to
standardize the way the buy side communicates with multiple
counterparties. This can be done by electronic message exchange
based on industry standards and agreed upon by market partici-
pants. Electronic messaging solutions like the Swift offering based
on ISO 20022 standards not only comply with best practices
proposed by the International Swaps and Derivatives Association
(ISDA), but also provide a straight-through processing platform
linking margin-call negotiations and agreements on the underly-
ing collateral to the settlement activity. The industry needs a
solution that will complete the upstream communication in an
electronic format. This will allow buy-side and sell-side institu-
tions to easily track the complete business flow of a margin call
based on a unique identifier and stream of electronic messages,
which provide the flexibility to track the lifecycle of the activity
via a full audit trail.
Bob Shea: A buy-side firm typically manages its counterparty
risk by diversifying its investments across multiple counterparties
and by establishing exposure limits based on credit worthiness.
The method by which the exposure is determined is generally
a combination of the potential future exposure (PFE) as well as
the settlement risk with the counterparty. The PFE is a method
used to calculate the counterparty risk by determining the losses
that would incur if that counterparty defaulted. There are several
determining factors for the PFE. For example, a long-term credit
default swap (CDS) deal will contribute a greater amount of
counterparty exposure than a short-term deal because the default
risk is greater the longer the deal is open. Another complexity
revolves around the challenge that most firms face in aggregat-
ing the exposure associated with open orders and unsettled
transactions with the counterparty, along with the exposure
obtained through securities owned from that counterparty. This
is commonly referred to as measuring group exposure. Those
firms with the technology and systems in place for calculating
group exposure across multiple trading desks, while addressing
some of the challenges discussed, will obviously fare better than
those without.
Roundtable
“To achieve a real-time view of its risk exposure, a
firm must consolidate to a single OMS for all assets,
or evolve to dynamic cross-systems integration
for risk, leveraging ever-improving technologies,
cloud computing, or complex-event processing. The
firm using an OMS that can support global asset
coverage and achieve real-time risk exposure across
those assets will be at a strategic advantage over its
competitors.” Bob Shea, Bloomberg
15waterstechnology.com October 2010
Bob Shea
Bloomberg Asset & Investment Manager (AIM)
Bloomberg
Tel: +1 212 617 2496
www.bloomberg.com/solutions
WatersSR_Oct10.indd 15 14/10/10 18:34:25

18. Sinan Baskan: Buy-side organizations with sound research
functions are well-positioned to put in place in-depth and detailed
counterparty risk solutions. Some may choose to rely on their
asset-servicing providers; however, not being in control of a
function as critical to the business as counterparty analysis could
prove costly. As with other forms of risk management, the key is
to ensure the right data platform is in place to allow any data to
be analyzed at any time and therefore deliver the right analytics
for the business. Using fit-for-purpose technology where the
analytics can be moved to the data environment significantly
improves a firm’s ability to gain sub-second warning using the
same platform as it would for historical analysis. By ensuring these
data and analytics bases are adequately covered, firms can prevent
unwanted losses and anticipate unwanted exposure creating a
more agile business.
John Burchenal: Even with new regulations on the near-term
horizon, buy-side firms have largely not taken the collateral
management process out of the shadows. They’ve started to
acknowledge there is an issue but for the most part the infrastruc-
ture has not been implemented, aside from a select few firms. Two
things need to be recognized from the buy-side perspective if
there is to be any change. First, buy-side firms have traditionally
responded to brokers’ demands for collateral. Now, buy-side firms
are taking control and determining appropriate levels of collateral.
Second, buy-side firms need to acknowledge that efficient
collateral management is asset management. Asset managers are not
using collateral to its fullest potential on behalf of their clients; with
a collateral process/system in place, they then have the ability to
put it to its best use. As such, best-of-breed collateral management
systems have emerged to manage collateral at the enterprise-level,
across asset classes and provide a unified view into firms’ counter-
party risk and exposure.
Shaun Waters: The financial crisis has certainly pushed coun-
terparty risk management to the front of the line. The risk gaps
that the buy side seems to be trying to address are market risk,
counterparty risk, and liquidity risk, in no specific order. There
are many vendors that offer counterparty risk management that
cover exposure, tracking error, counterparty and VaR, allowing
firms to spend their resources on other business needs versus
building a suite of risk tools in-house.
JD Jayaraman: Recent events such as the Lehman Brothers
collapse have brought counterparty risk management to the
forefront at buy-side firms. The reliance of buy-side firms on
their counterparties for valuations and exposure calculations is
decreasing. Collateral remains the most used form of credit risk
mitigation, though larger firms are using the credit default swap
market as well. Buy-side firms are instituting various measures
such as counterparty limits, credit analysis involving legal and
compliance departments, and better collateral and exposure man-
agement. They are investing in collateral management systems and
risk management systems to better manage their counterparty risk.
The cost of building an in-house system for collateral and counter-
party risk management is very high and warrants a careful return on
investment (ROI) analysis. Several third-party vendor alternatives
are available for managing counterparty risk. These vendor systems
provide counterparty risk metrics such as current exposure, potential
future exposure, expected and unexpected loss, and credit VaR.
Mat Newman: It used to be a bit asymmetrical—funds deal-
ing with large broker-dealers took the view that they were the
ones that were the credit risk and not the brokers. But that’s all
changed. There are two main areas where the buy side is look-
ing to improve risk management and use sell-side techniques:
counterparty credit risk monitoring and collateral management.
However, it will be different in scope, because the buy side will
not need the same scale, breadth and speed of execution as the
sell side. But they will need the same sort of overall framework
in order to aggregate different types of business, to calculate their
potential exposures, and to check those against credit limits. In
collateral management we see a demand for optimizing collateral
usage across different silos. ■
Special Report Risk & Compliance
16 October 2010 waterstechnology.com
“The biggest challenge facing firms is bringing
disparate processes and systems together for a
collective view of exposure across asset classes. The
data across the multiple risk systems, trading desks,
and collateral desks within organizations needs to be
standardized and normalized to produce meaningful
and accurate results. Even more importantly, cross-
product asset-class netting of collateral is beyond the
capability of most firms.” John Burchenal, Omgeo
John Burchenal
Managing Director, Market Growth
Omgeo
Tel: +1 212 855 1614
www.omgeo.com
WatersSR_Oct10.indd 16 14/10/10 18:34:32

19. Bloomberg provides trading solutions designed
specifically to address the trading, sales, portfolio
and operations needs of buy-side and sell-side
firms. Bloomberg Trading Solutions connects you
to the world’s most extensive financial community,
is hosted on a secure platform fully integrated
with the BLOOMBERG PROFESSIONAL®
service and your proprietary systems, and delivers
global customer service at the local level.
For additional information type OMS <GO>
on the BLOOMBERG PROFESSIONAL®
service
or visit http://www.bloomberg.com/solutions/
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