Wall Street meltdown expected to drive risk management investments

Competition, regulation after crisis likely to increase interest in technology to manage risk

By Jaikumar Vijayan

http://www.computerworld.com/action/article.do?command=viewArticleBasic&taxonomyName=Compliance&articleId=9115920&taxonomyId=152&pageNumber=1Slashdot

 

September 30, 2008 (Computerworld)

The ongoing chaos on Wall Street could hold an upside for vendors of risk management technologies and practices, as well as sellers of compliance management products.

Analysts expect an increased interest in these products from financial companies for competitive reasons, and to comply with the new regulations that many predict are inevitable following the meltdown.

One area many agree is likely to see much greater interest is risk modeling and financial risk management.

There are some "core tenets" for effective risk management highlighted by the current crisis, said Dave Hoag, director of clearing technology at Chicago-based derivatives exchange CME Group.

The biggest of them: the need for fair and transparent visibility into the models, data and analytics that go into calculating the risk associated with different financial transactions, Hoag said. Expect to see greater investment in risk management technologies as companies seek, or are driven to, implement this greater transparency in their risk calculation processes, he said.

Even though the current problems on Wall Street have more to do with an absence of regulatory oversight than with faulty risk-management practices, expect to see a greater focus on accounting for risk at least for some time, said Glyn Holton, an independent financial risk management consultant based in Boston.

"Financial risk management makes a wonderful scapegoat [for the current crisis]," Holton said. "This is a cycle we go through when we have losses. We trot out the back-office risk management guys. There will be some more focus on strengthening risk management, some technology will be purchased, and probably monitoring will be increased."

Dennis Santiago, CEO of professional services firm Institutional Risk Analytics, said the Wall Street crisis has exposed some fundamental shortcomings in the risk-modeling technologies and analytics being used currently.

"We have been pretty much using the same tools now for a decade. One of the things that is clearly beginning to show itself at this stage is that the techniques that worked in the last business cycle for managing risk don't work as well anymore," Santiago said.