Given the credit market turmoil causing top firms to report multi-billion dollar losses, it's not surprising that risk management was a major theme at the SIFMA Fixed Income Technology and e-Trading Conference last Thursday in New York. "Risk is much more important and front and center in our minds," said Dexter Senft, managing director at Lehman Brothers, in his introductory remarks to the conference.In looking at what impact the sub-prime mortgage mess is having on IT needs in the fixed income arena, Andy Nybo, senior analyst at TABB Group predicted that, "Real-time risk management is going to become a reality on the trading desks for a lot of firms, though some firms aren't there yet."
But end-of-day risk measurement does not cut it, he says. Nybo also said the spotlight will be on pricing and valuations. "There's a crisis in the space now. No one believes the prices," said Nybo referring to the difficulty major brokerage houses are having in pricing collateralized debt obligations and mortgage pools backed by sub-prime paper. "They were wrong in August. They were wrong a month ago. They are theoretical," said Nybo, referring to the prices that are marked to model. "How do you value a security when no one wants to buy it? the analyst asked.
Today a Goldman Sachs analysts told investors to sell shares in Citigroup, based on the prediction that the large bank will report as much as $15 billion in write downs due to credit market losses over the next two quarters.
Meanwhile, the New York Times reported today that Goldman Sachs is raking in profits and that CEO Lloyd Blankfein will earn at least $65 million this year. In stark contrast to Merrill Lynch, UBS and other brokerage houses that are reeling from losses due to sub-prime debt, Goldman Sachs knew how to manage its risks, reports today's New York Times. The firm's CFO reportedly called "a mortgage meeting late" last year to reduce its exposure to mortgage-related securities and to protect its exposure against further losses by purchasing expensive hedges.
Bulge bracket firms are not trying to fix what's wrong, but are looking to understand what went wrong, according to Brian Decker, senior solutions specialist at Reuters America, who spoke on a SIFMA panel about technology trends in fixed income. "This is leading firms to put out fires, appease the regulators and address their own financial reporting requirements," said Decker. "The reliance on mark-to-model vs. mark-to-market only models and the underlying assumptions have never been challenged," he said.
Going forward, TABB Group's Nybo said, "Regulators are going to be knocking on doors asking where did you get the prices. They will ask, "Are they theoretical, are they your marks, are they your models," he said. Real-time market data will be critical as well as reference data, Nybo told attendees. "Valuation sources come from real time prices," Nybo said. TABB Group predicts that $10.3 billion in total will be spent on market data by 2010.
On the risk management side, the analyst noted firms run into trouble when they don't listen to advice from their risk managers and when they don't listen to what the risk management system is telling them. As the dust settles from the sub-prime debacle, proactive monitoring of risk processes will become more active, said Nybo. However, this won't eliminate the pitfalls associated with risk management, he warned. "You can't predict those market storms; risk management can perhaps warn you of those storms," advised Nybo.
All the focus on risk means there is going to be more investment in risk management systems. TABB Group estimates that spending totals $256 million in the North American risk management market for 2007. It projects the market risk management spend will be $1.3 billion by 2010.Given the credit market turmoil, it's not surprising that risk management was a major theme at the SIFMA Fixed Income Technology and e-Trading Conference last Thursday in New York. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio