How buy-side credit teams can effectively manage risk

Credit teams working for buy-side financial institutions can potentially encounter a great many challenges in their efforts to both attain compliance and effectively manage risk.

These professionals are struggling to overcome various pressures, including rising expenses and greater demands being placed on their crucial information. At the same time that their budgets are being reduced, many institutions are coping with expectations that they will make more robust use of benchmarks to evaluate performance.

In addition, these industry participants need to worry about the current compliance environment, which is a complex framework created by the several landmark reforms lawmakers and regulators have passed since the financial crisis.

Amid this challenging situation, a handful of market experts took a few minutes to provide some guidance for a recent WatersTechnology article.

Risk management: An art and a science
One individual, who serves as head of quantitative risk management for a Fortune 500 life insurer, has described risk management as being both an art and a science, the media outlet reported. He emphasized that while technology can be very helpful to those involved in assessing and managing risk, it only does part of the job for people. The market expert specifically spoke to some of the challenges that exist in the market for bilateral derivatives, or swaps.

“Technology can be your friend or enemy. But all the analytics in the world still won’t tell you the whole truth about risks embedded in your portfolio,” he told the news source. “You still need a lot of judgment to aim your focus, but what technology does is bring information forward in a timely fashion, especially as there will be potential fragility over the next couple years in some of these markets. If any one part of the swaps ecosystem fails, we just don’t know how that plays out.”

Reporting challenges
It is worth noting that while the quantitative risk management professional is referring to professionals using technology to provide actionable insights into existing data, industry participants must also keep up with reporting requirements that have been set forth by regimes such as the Dodd-Frank Act.

The head of quantitative risk management for the Fortune 500 life insurer emphasized that many regulators are looking for more in-depth information than they did previously, according to the media outlet.

“Another area of concern for us in the insurance world is accounting rules where we have statutory and International Accounting Standards Board conventions being adopted, with more intricate rating agency requests, and state regulators demanding high-resolution data down to the Cusip level because of the products we have, such as the embedded options in our variably annuity products,” the market expert told the news source.

The key role of data governance
Buy-side firms that want to overcome these pressures and manage the associated labor costs might benefit from working on their data governance framework. While some firms already have these policies and procedures in place, there is always room for improvement.

Institutions that fail to establish proper data governance might find that they have information that is either low-quality or stored in many different places.

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