Ross Lancaster

Legacy infrastructure has accumulated at sell-side firms over the years through acquisitions and siloed business lines, according to Ross Lancaster, Head of research at Acuiti. 

Sell-side firms run fragmented risk systems with different internal processes for different asset classes, according to the findings from a recent Acuiti study, conducted in partnership with Sterling Trading Tech.

Moreover, as extreme volatility becomes the new normal and new asset classes like cryptocurrencies need to be incorporated into risk management models, “legacy systems are at risk of running behind changing conditions”.

“This has led to costly and burdensome operations that often fail to keep pace with client demands for cross-asset trading strategies and miss the operational efficiencies of more consolidation and real time oversight,” Lancaster said.

The survey “Risk and Margin in the New Era of Volatility” of 55 banks and broker-dealers across the world, shows that fragmented legacy risk systems are hampering firms’ ability to respond to increased volatility across global markets.

The two primary periods of extreme volatility in March 2020 and February 2022 resulted in massive margin calls from clearinghouses, which has shifted the spotlight onto margin methodologies used by CCPs, according to the report.

The uncertainty of market movements this year, as well as the fallout from the Archegos blow-up, has thrown the issue of counter-party risk and monitoring margin into sharp relief, the report said.

The findings show that not only are volatile conditions forcing market makers to be more vigilant about collecting margin calls, but also that upgrades to existing infrastructure are needed across much of the industry.

Survey data shows that 86% of respondents use more than one system to manage risk across their derivatives business.

Moreover, according to the report, 73% of respondents used between two and five risk systems, showing the burden and complexity of legacy infrastructure that firms have built up over the years.

In addition, 64% of respondents take more than a week to implement risk and margin policy changes in their systems, timescales that are increasingly out of sync with fast changing market dynamics.

The problem for many firms is the amount of time it takes to implement changes, Lancaster said.

“Risk and technology teams often view inputs very differently,” he said.

The report shows that there is the need for faster and more flexible, holistic systems that can accurately reflect the risk contained in current markets. 

“This doesn’t just apply to systems’ sensitivity to market movements. It also speaks to the need for speed in onboarding new systems and shortening the time to implementation,” Lancaster said.

Almost 80% of respondents said that risk and margining was potentially a competitive edge, allowing them to be more capital efficient and offer more flexibility to clients.

The findings reinforce the reality that in markets where real time risk management has become essential for managing counterparty exposure, systems often lag these demands. 

Legacy infrastructure has often become so embedded in firms that even if they want to overhaul it, the operational challenges are too big. 

“This will require imaginative solutions, that can onboard new risk models while also avoiding costly and drawn out integration periods,” Lancaster said.

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