Kristin Moyer

(from Peter Redshaw) — A series of intriguing industry panels at the recent SunGard City Day in London provided lots of analysis on where we all went wrong in the past in the Financial Services industry and – more importantly – a few hints on what might be needed to put it all right again. The regulator in the UK, the Financial Service Authority (FSA), didn’t exactly cover itself in glory during the crisis so it took some guts for Colin Lawrence (director of prudential risk at the FSA) to stand up there in an opening session on risk management and outline some of its plans for what is needed next. All of this has been extensively trailed in the press already so what he said shouldn’t come as too much of a surprise to IT managers tasked with improving risk management, performance measurement and regulatory reporting. Even so, they must now start planning the investments to support initiatives such as stronger capital buffers and dynamic provisioning (i.e. a variable mechanism so that more capital is stored up in good times) and better management of liquidity (being able to reconcile data across whole organization). For example, Gartner has already analyzed some of the impact here in a recent report, Technology Implications of Providing the U.S. Government With Tools to Effectively Manage Financial Crises.

In a subsequent session, Leonard Matz, an expert in liquidity risk management (LRM), made some pertinent points about having to distinguish between tactical LRM and strategic LRM and how the current focus on cash flows doesn’t solve the basic problem that no bank can ever hold enough liquidity for stressed (low probability, high impact) situations. As he put it, “Not enough liquidity kills you quickly; too much liquidity kills you slowly.” One of Matz’s suggestions was that banks of all sizes need to put a lot more effort into constructing and monitoring alternative business scenarios (something that Gartner has already suggested earlier this year in The Financial Crisis: The Need for Scenario Planning) with associated KPIs to help spot when unusual situations are about to arise and then arrange immediate secondary funding. Forecasting the “Buffer Life” and how soon it’s likely to run out is useful but, more importantly, how vulnerable is the bank if/when it runs out? What contingency plans are in place for when that happens and how is secondary funding obtained?

Finally, in one of the closing sessions, a panel drawn from BNP Paribas, Investec, EuroCCP, Kas bank and SunGard looked at post-trade, cross-border processing in the post-MiFID world. A lot has already been written about the emergence of the new MTFs in Europe (see MiFID and the New Trading Venues) but much of the focus here was on the implications for CCPs and CSDs in the search for best execution. Lower prices have not always translated into lower overall costs as the users struggle with connecting to multiple venues and the lack of interoperability between clearing and settlement organizations. Trevor Gatfield of Investec suggested that the automation of trading and smaller trade sizes have had a bigger impact on cost than the proliferation of MTFs and Dark Pools. Laurens Vis of Kas Bank reinforced that point by stating that his firm would like to pick only the winners but right now it has to pick them all: “Today it is less like the United States of Europe than the Competing States of Europe.” For things to improve, he said, exchanges must abandon closed relationships and open up to multiple CCPs. The market needs Smart Clearing as well as Smart Order Routing.