The risk trinity: regulation, liquidity, counterparty risk

The post-crisis business environment poses new challenges for risk management. Buy-side firms are faced with a risk challenge trio – the emerging regulatory regimes and the interconnectedness of financial markets in the form of liquidity risk and counterparty risk. Recently we conducted our second annual global risk management survey with the Professional Risk Managers’ International Association (PRMIA). Compared to last year’s survey, the focus on risk regulation has increased and it is now top of risk managers’ priority list.

Firms know that they need to provide transparency to regulators and even through postponements and uncertainty they are taking measures to put this in place. They are realizing that no matter what, the new regulations will increase the cost of doing business as almost 1 in 2 (45%) of buy-side firms we polled say that regulation will increase the cost of doing business.

We also found that 30% of those surveyed admitted that their firms have wasted time assessing the potential impact of regulation that keeps changing. Over 1 in 6 also believe they wasted money by proactively assessing readiness for pending regulation and purchasing systems based on this deadlines which were subsequently postponed.

But it’s not all doom and gloom. More than 1 in 3 (36%) of respondents indicate that regulatory uncertainty has made their firms more risk aware, as  they have started looking at risk and data in new ways  in preparation for new regulation. More than 1 in 5 (22%) surveyed found that a review of processes in the context of changing regulation has led to improved processes.

What’s the silver lining then for facing the risk trinity? A head of risk for a large UK asset manager pointed out that thanks to UCITS IV, they have started measuring VaR and liquidity risk in a systematic and periodic way and more funds will be captured under AIFMD. A sign that getting the right processes in place is key to achieving much needed risk transparency.