Tough markets, the European debt crisis and ongoing layoffs are creating uncertainty about the levels of fin-tech spending for 2012. But middle and back office systems, particularly risk technology, could see increases, spurred on by the over-the-counter (OTC) market reforms—the unexpected silver lining in what are likely to be difficult times for IT budgeting.
Celent, the market research division of Oliver Wyman, Inc., foresees an upswing in spending for risk technology, citing uncertainty in the markets and asset prices as driving a risk management revamp to the top of the list for many buy-side firms.
The buy side “is looking to strengthen risk frameworks and systems to withstand future market turbulence,” according to a Celent report, “Derivatives and Investment Risk Solutions for the Buy Side,” released today. “Structural market, regulatory, and business trends are now placing direct demands on firms to strengthen operational and technology underpinnings,” according to the report, authored by analysts Cubillas Ding and Sreekrishna Sankar.
Crisis conditions, systemic disruptions, and regulatory changes are shifting the long-term dynamics for buy side firms, according to the Celent report. As a result, “many long-term investors have derisked their portfolios in response to regulatory and accounting changes, including a move toward mark-to-market accounting and stricter capital requirements, as well as a lower institutional tolerance for risk.” Buy-side firms have to consider taking a “highly cohesive approach” to integrating investment risk management processes into portfolio construction, trading, and enterprise risk architectures.
“There is a clear focus on enabling and enhancing risk systems to measure and monitor market, counterparty, liquidity, and credit risk on a total portfolio basis,” says Ding. The Celent study reviewed offerings from investment risk systems providers Algorithmics, Calypso, Misys Sophis, MSCI RiskMetrics, Murex, and SunGard APT, and has ranked them via its ABCD Vendor View system.
If middle and back office managers want innovations in addition to updated risk technology systems, then they may have an ally in the OTC regulatory mandates.
In fact, the regulatory mandate reminds me of the potential impacts of Y2K on securities firms. When I was covering the build-up to Y2K, it became clear that many IT projects were funded under the Y2K umbrella even if they were only tangentially related to the IT problems caused by the end of the 20th Century. Could this concept apply to middle and back office projects that are needed but lack a compelling mandate? I put this question to Sang Lee, a co-founder and the managing partner of market research and advisory firm Aite Group, based in Boston.
“Absolutely,” said Lee recently. “I mean there’s nothing better, in terms of pushing for new IT initiatives than a regulatory mandate. … At the highest level, it is all about minimizing risk, increasing transparency, and providing a better way of keeping track of enterprise risk assessment … Certainly from a middle office and back office standpoint, those things are incredibly important as potential drivers to push through a lot more innovation than ever before.”
Ironically, while the OTC regulatory mandate is a driver, it’s also a major inhibitor because many of the rules have yet to be finalized.
“I think that’s what’s keeping firms from committing more dollars to the middle office and back office in terms of overall spending,” Lee says. “I think once we have much better clarity in terms of what the final regulatory framework will look like, I do think you’ll see a massive push in terms of overall IT spending dollars committed to the middle and back office. I think that’s just inevitable. Like you said, there’s no better motivation than the potential for penalties, driven by regulatory reform in financial services IT work.”
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