Are You Ready for the Convergence of Front and Middle Office Risk Management?

The world of risk is changing. Risk management was once a tick-box risk exercise but is now placed at the center of an asset manager’s investment process. Investment performance without risk management is like speeding without a seatbelt – something most would regard as unthinkable. Portfolio managers want to know the risk budget they are spending for each investment decision; regulators want to monitor risk usage; investors and managers want reassurance of a robust risk management process, as well as a good track record.

At the same time, risk-based regulations such as PRIIPS, MIFID 2, Basel III and Solvency II are driving an urgent need for proactive, comprehensive and firm-wide risk management that provides a holistic view of the organization – from front-to-back and top-to-bottom. Analyzing risk via multiple asset-class specific systems and legacy platforms presents a fragmented view of risk, correlation, stress testing and risk modelling that asset managers can no longer afford. If firms demand smarter, more timely risk analysis, they require an integrated, flexible and scalable solution. Cloud computing offers a timely solution for moving away from legacy hardware, installed software, challenging data management and inflexibility.

Front Office Risk: Position-aware in real time
As risk management bleeds into the front office, portfolio managers are looking for more than just data aggregation. They need tools that support risk budgeting and fund construction in order to factor in near-real-time risk calculations and make the most informed trading and hedging decisions.

These include:

  • Whether to hedge or not
  • Where to uncover the best sources of alpha generation
  • How to set limits and restrictions on investments

For both active and passive managers, the value of greater risk insight is understanding the best “bang for buck” in terms of potential return versus risk.

On a granular level, the front office view of risk centers around smarter position adjustment and forecasting capabilities. To this end, a truly valuable front office risk solution includes:

  • Risk, portfolio and order management systems with consistent risk and analytics
  • Passive trackers
  • Implementation of active alpha-generating bets within a risk-constrained framework
  • The ability to hedge excess or unwanted risk
  • Liquidity risk capabilities
  • A real-time link to trading desks

On a larger scale, the evolution of the risk management ecosystem means that front and middle offices are converging when it comes to generating risk and attribution data and will interact more and more. An integrated view of risk across all teams permits the front office to dialogue with – and challenge – risk operations.

Middle Office Risk: The revenue benefit of smarter risk operations
An over-all surge in the demand for timely, accurate risk data has placed hefty strain on the middle office. Beyond portfolio and fund managers, risk operations teams are constantly solicited by downstream consumers of risk output. In the background, piecemeal legacy platforms that are expensive to maintain, opaque, and difficult to track are often supplemented by manual processes and spreadsheets, dragging down the workflow and making it nearly impossible to automate. Today, the middle office is looking to the cloud for relief in unwinding inefficiencies in order to manage costs, enhance performance and better identify investment risk.

Reporting to the Chief Risk Officer or COO, middle office teams have grown significantly in stature since the financial crisis. Today, risk operations are more focused on enhancing processes and monitoring in order to fulfill complex mandates from a growing list of stakeholders, including:

  • External consumers of risk and analytics that expect a robust risk process and all-around high levels of performance
  • Regulatory bodies that are demanding separate, increasingly more risk-focused reports across multiple jurisdictions, asset classes and currencies
  • Investors who are requesting more granular client reporting on a more frequent basis

Additionally, the middle office maintains responsibility for challenging trade desks and portfolio and fund managers by investigating possible blow-up scenarios and highlighting unintended exposures with the potential to cause large losses.

A fundamentally new approach to risk management
In an environment of increasingly sophisticated regulation, an enterprise-wide view of risk has become compulsory. Axioma’s natively cloud-built, flexible risk solution, Axioma Risk, is an inherently anti-legacy approach to risk management, integrating the multi-asset class landscape of the middle office, the single asset class view of the front office and hybrid risk teams in a unified system for a truly top-down and bottom-up outlook.

Axioma Risk is built with a cloud- and API-first approach and has the ability to seamlessly scale up processing power in real-time as and when required. It frees clients from having to build and maintain massive infrastructures and complex data enrichment and reconciliation services.

The front office can leverage risk-aware portfolio construction tools linked to underlying asset pricers to tailor risk to their complex requirements. The middle office benefits from advanced risk calculation engines and risk capabilities like reverse stress testing, which are key to rapidly identifying and understanding risk, but are more data- and CPU-intensive than legacy, non-cloud-based risk systems can handle.

Axioma Risk generates multiple cost savings by replacing a patchwork of historically disjointed, costly risk tools and flexibility being able to handle future requirements without expensive upgrade or integration costs. And, most importantly, a single system ensures consistency in terms of market and classification data and risk analysis.

Let us know if you’d like to discuss how Axioma can help your firm gain an enterprise-wide view of risk.

Ian Lumb

Ian Lumb joined Axioma in December of 2017 as the Head of Risk Solutions. Lumb was previously Global Head of UBS Delta, the portfolio analysis and risk management system recently acquired by StatPro. In Lumb’s previous role, he helped navigate UBS Delta to a commercial vendor model, then through the sale of the business to StatPro in May 2017.