The financial industry is planning significant, forward-looking technology investments for the first time since the dark days of 2008, but the emphases have shifted from those of earlier growth phases. Risk-related analytics and regulatory compliance have displaced relationship management and other client-focused spending on financial firms’ priority lists.
Speaking at the Securities Industry and Financial Markets Association (SIFMA) Technology Expo in New York, IBM Corp. senior vice president and software group executive Steve Mills dubbed the trend “new intelligence for smarter financial services.” According to an IBM survey unveiled at the conference of some 250 Wall Street executives and information technology professionals, 55 percent said systemic risk would be the No. 1 driver of IT investments. In the analytics category, the top tech opportunity was risk analytics, at 37 percent. “Client relationship management” ranked last of 17 categories, at only 2 percent, well behind trading, portfolio management and risk management.
More than 90 percent expected to increase their investment analytics expenditures over the next year. And indicating that the industry is emerging from short-term-oriented crisis mode, almost half the respondents said 20 to 30 percent of their IT budgets would go toward “transformational initiatives” in 2010 and 2011.
In a statement with the June 23 release of the data, SIFMA managing director Tom Price noted that forthcoming systemic risk regulation will require “a significant increase in technology resources” – a realization that the IBM results suggest is already sinking in among IT managers. “Having the right technology in place is more essential than ever in efforts to monitor risk across firms and ensure regulators can identify and address potential problems before they escalate,” Price said.
In the same, systemic risk vein, SIFMA and consulting firm Deloitte & Touche released an 86-page study based on interviews with top officials of 22 regulatory and private-sector financial organizations, offering guidance on how systemic risk regulation could evolve and the information and analytical requirements likely to accompany it.
SIFMA president and CEO Timothy Ryan wrote in the foreword of the report: “Monitoring and managing these risks is critically important in ensuring that our capital markets are a safe and reliable vehicle to drive growth in the broader economy.... Regardless of the structure of new regulation, its effectiveness will be driven in no small part by the specific ways that information is tracked, shared, analyzed, and reported. Monitoring systemic risk is not just an extension of reporting for compliance or enforcement purposes – looking beyond the actions of individual firms to the stability of the broader market will require asking different questions and looking at information in new ways.”
In a presentation at the SIFMA event, Deloitte partner Edward Hida walked through eight potential systemic regulatory approaches delineated in the study, each with varying blends of stress and risk-sensitivity testing, each with its own characteristics and complexity in data aggregation and analysis – and all deemed costly. “A lot of information can be a good thing,” Hida said, but too much of it in the wrong places can be counterproductive. One conclusion of the study was that in all systemic risk approaches “there are gaps in the infrastructure necessary for financial institutions and regulators [and] the potential information needed by the systemic risk regulator.”
Whether “transformative” or regulation- and compliance-driven, a positive tech spending outlook is welcomed by suppliers, not least IBM, which used SIFMA’s Expo to introduce its Financial Markets Framework, a software platform for capital markets operations, trading and risk management. Mills said IBM has formed partnerships with providers that bring complementary services to the platform such as messaging, order processing and back-office accounting. These include Fixnetix for market connectivity; exchange company Deutsche Borse; Chi-X Global Technology, which is the services arm of Chi-X Global, another markets operator; Depository Trust and Clearing Corp.; and Interactive Data Corp.
Mills characterized the offering as “an analytics and stream processing platform” designed for “managing real time risk – above all, counterparty risk exposure.”
On a similar theme, Allen Whipple, managing director of QuartetFS, a developer of capital markets systems that combine business intelligence and complex event processing, said the company is working on enabling inputs and monitoring of risk exposures in sub-second timeframes.
David Polen, director of sell-side product marketing for trading technology purveyor Fidessa, has published a white paper, “Pre-Trade Risk: Consolidation in a Fragmented World,” covering the Securities and Exchange Commission’s responses to market-structure issues and various policy options as it considers new trading regulations. Much of the discussion about pre-trade risk has centered on high-frequency, “no-touch” trading, he noted, adding, “The reality is that the requirement to manage pre-trade risk is universal, whatever the trading strategies being offered and regardless of the level of automation involved.”
Maureen Nevin Duffy is a freelance financial journalist based in New Jersey. Jeffrey Kutler contributed to this article.
