Solving system integration for front office risk

David Cassonnet |
August 5, 2021

Front office risk management is all about the combination of speed and precision. But when systems have been built up over time, the picture that management receives is too often piecemeal and fragmented. Everyone agrees on the solution – a fully integrated approach – but that is incredibly hard to achieve technically. David Cassonnet, Global Head of Business Development at ActiveViam, explains how it can be done.

The challenge of front office risk

Front office risk managers need to understand, as close to real-time as possible, the evolving nature of trading books during the trading day as well as the overall position that results from the combination of those books.

The three main types of information they monitor are:

  • PnL – mark-to-market profit and loss numbers explained
  • Sensitivity indicators (“the Greeks” e.g., delta, gamma etc.). These show how much the price of an instrument is changing for a given change in the price of the underlying
  • PnL vectors / VaR indicators

Understanding intra-day market change is complex because there are always multiple risk factors at play e.g., the underlying equity price, the FX rate and the price of the derivative. The combination of all those risk factors should give the overall PnL number for a trade. And if it doesn’t, there is clearly something else to be explained, which can take considerable time to resolve and delay definition of the overall picture.

Piecemeal solutions fail to deliver

Unfortunately, in most trading operations front office risk management has developed in a piecemeal fashion to tackle specific problems faced by individual trading desks and businesses. Banks have built up a collection of legacy systems over time to accommodate the specificities, large and small, of each desk or department. And over time those systems have often progressively diverged until they can no longer “talk” to each other.

The result is a patchwork of overlapping systems that do not connect automatically and can even require manual involvement to reconcile the bank’s overall PnL with the output of those systems. We see leading banks using more than 30 different software systems for PnL reporting – not a recipe for accurate or timely analysis!

However, we also find that trading senior managers increasingly recognize the weaknesses of that piecemeal approach. They realize that their front office risk management process is too often slow, inaccurate and expensive to maintain and upgrade, which leaves the bank vulnerable to risk and fraud.

Let us look at those problems in more detail:

Speed – to manage front office risk, speed is absolutely essential. When there are so many risk factors at play, even if you have huge computing power at your disposal it can take hours for the equity derivatives trading desk at a large bank to reprice its entire portfolio – after which the entire process has to start again. This means that management is always working with outdated information – like driving by only looking in the rear-view mirror. This is particularly dangerous for derivative instruments, because as the price of the underlying security gets closer to the option strike price, a change in the underlying has an accelerating impact on the option risk.

Accuracy – many banks have software solutions for individual trading desks, but then need to aggregate those results manually in order to get an overall position across multiple businesses. This can lead to the need to tweak the separate system output figures in order to achieve final reconciliation. This is not the route to precision. It is also often difficult for managers to drill down or through the data to find and fix the discrepancies.

Practicality – some banks have developed their own in-house solutions to deal with front office risk. These can be either specific to trading desks or an attempt to aggregate across multiple businesses. But in reality, only a handful of Tier 1 banks in the world genuinely have the capability to develop such a platform from scratch. Everyone else has to work with vendors, so the real challenge for the front office is to choose the right combination of technologies that will work well together and achieve the end-goal.

Ability to take risk and make a profit – the lack of accurate and timely information makes it impossible for management to take decisions in real-time. Instead, the information being used for decision making is always out of date. This can lead to risk avoidance (and a failure to seize opportunities and make profits). Alternatively, it can mean managers taking on unwanted levels of risk because they have not appreciated the full implications of the positions taken.

Protection against fraud – any structure that involves manual input and reconciliation, for example, across multiple software systems, inevitably increases opportunities for fraud within the organization.

How Atoti solves this problem

Atoti offers a way to tackle the fundamental challenge faced by front office risk managers, namely the technical integration of multiple systems. It is an analytics platform, powered by an incredibly fast aggregation engine designed to fix the problem. It delivers real-time risk figures to the front office where other solutions simply cannot.

Atoti can be applied across multiple businesses, which makes for faster, more efficient integration, and reduces the opportunities for error and fraud. Flexible dashboards allow users to create charts and graphics that are shareable across multiple business lines and geographies.

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About the author

Picture of David Cassonnet

David Cassonnet

Global Head of Business Development
David Cassonnet is Global Head of Business Development at ActiveViam, leading the creation of new solutions and use cases for the company. With over twenty years of experience in financial markets, David is an expert in both business development and solutions implementation. David also held several roles at Mysis and Summit Systems.

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