Students in years to come will be asked to assess why so many firms struggled to understand the impact of entirely foreseeable market events on their business? A closer examination of the risk management operations of some of the casualties, and the rapid-fire chain of events that crippled them, suggests that it ultimately comes down to a failure by many financial institutions to properly appreciate the scope of their exposure and the level of potential risk they faced.
One of the significant reasons for this lack of true transparency and insight into their business, and therefore, their failure to understand the risks to which they were exposed, is the absence of a cohesive data management strategy. As the unprecedented events of the last few months of 2008 unfolded, organisations around the globe found themselves in the difficult position of having to quickly and unexpectedly track down their exposure to various institutions. When Lehman Brothers filed for bankruptcy in September, it took some buy-side firms weeks to establish their exposure. These investors had to work out their exposure from numerous disparate systems - a slow process with a potentially significant margin for error. For many, this proved a very challenging task, especially in Asian markets where data management strategies are not a common practice. Whereas those firms with a centralised data management system integrated with their accounting system(s) were able to determine their exposure in a matter of hours.
As many firms have learned, technology systems are only as good as the underlying data. Yet, there is a tendency for firms to think that just by implementing a risk or performance system, they are gaining control and visibility. However, this is not the case if they fail to have control over the data that feeds these systems. By not implementing a clear data management strategy, Chief Investment Officers and Heads of IT could be putting their companies’ competitive advantage at risk because they lack a clear understanding of their full exposure and true investment performance.
So why do some organisations lack priority around data management? One reason for this gap is that data management doesn’t always make it to the top of the pile in terms of funding for new technology. Unfortunately, it is typically a crisis situation that causes firms to reassess their current strategies and look for ways to improve quality and prepare for other unforeseen obstacles.
As a result of today’s market conditions we’re seeing leading financial institutions placing considerable attention on data management as a central component of their risk management strategy. This is also true in Asia, where traditionally we haven’t seen much focus on data management projects. For many, a data-centric model is being employed that centralises all their securities, accounting, analytic and performance data in order to accurately gauge the current state of their business.
What is notably different about 2009 is that there is now a tangible demand for risk strategies around portfolios and in investment structures. As more and more companies invest in data management systems and implement processes to improve transparency, we should start to see a gradual restoration of confidence in the global market. The industry needs to be assured that internal processes and controls are robust in terms of independent valuation and oversight, and that data and systems infrastructure exist to effectively support this. The good news is that the understanding of data management amongst financial organisations around the world is now rapidly changing. Everyone is becoming more risk focused and compliance orientated. Previously regarded as a ‘nice to have’ it is now escalating up the priority list to become ‘business critical’. This can only be a good thing for the industry as a whole.