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5 Key Questions to Ask When Upgrading Your Valuation and Risk System
By Rob Garfield | December 6, 2016

In this low interest-rate environment, many buy-side firms are looking to improve investment returns with more sophisticated trading strategies that call for modern valuation and risk systems. But, with numerous options in the marketplace, how do you know which system is best for your firm? This was the topic of our recent webinar, 5 Top Questions to Ask When Upgrading Your Valuation and Risk System.

Hosted by James Church, FINCAD VP and Head of Product Management and R&D, and David B. Weiss, Senior Analyst at Aite Group, the presentation covered key evaluation points for selecting the right valuation and risk system, with a focus on critical implementation, functionality and support considerations.

Weiss kicked off the webinar with background on market trends. One trend he covered was the increasing cost of capital on the sell-side, which has risen 2-3 times in the last couple of years. This phenomenon has driven much of the principal trading over to agency trading or brokering. As a result, inventory has shifted to the buy-side, and along with it many more responsibilities.

For example, buy-side firms once relied on the sell-side for things like pricing, risk and valuation, but now they need to do these things themselves. These added responsibilities require technology that buy-sides may or may not have. Buy-side firms are also coping with new compliance and regulatory responsibilities, which again require technology updates.

Weiss reviewed findings from an Aite survey that interviewed major market participants from both buy and sell side institutions throughout the world. The firms surveyed had a widespread range of trading methods and ways to manage risk. When asked if they had a real-time risk management system that aggregated everything, more than half said they did, while a quarter reported being on their way to doing it. This demonstrated that most firms realize they need to take on a sophisticated level of risk management.

Nearly 75% of firms also reported they are trading on a multi-asset basis across their trading desks. When questioned on top business objectives, a majority of participants said they needed the ability to connect to as many markets as possible in order to find alpha. 

Church then commented on how buy-side firms are increasingly turning to more complex trading strategies in their search for better returns. He reviewed statistics from FINCAD’s recent Capital Markets Survey 2016 that showed 97% of firms’ use of derivatives will either increase or stay the same going into 2017. This trend was also backed up in a recent article on Global Trading, “In From the Cold –The Buy-Side Use of Derivatives,” which discusses how over the last decade the state of the market has driven investment firms to expand into different product offerings. Whereas in the past, they managed mainly plain vanilla strategies, today’s tough environment has seen firms turning to more sophisticated strategies involving the use of derivatives.  

Church then dove into the 5 questions that a buy-side firm should ask when looking to implement a new valuation and risk system:

  1. Will it help improve my investment returns?  The increase in multi-asset trading is happening here and now. As such, you need the ability to quickly and easily gain access to these new markets that promise better yield opportunities. A system in which it is easy to make changes without coding can support your firm both currently and in the future. This will enable you to adapt to new investment opportunities as they arise with no downtime. 
  2. Is it easy for me to use? How well will the system help you manage complexity? How easy is it for you to make tweaks to customize it to your needs? Can the system help you understand your performance under different scenarios? All of these factors will help you make better business decisions that will enable you to improve returns. Flexible modeling is also becoming a necessity for meeting today’s and future requirements. You need a solution that can grow with you as your needs change.
  3. How much support will I receive? There is comfort in knowing the vendor you are dealing with is fully invested in making your solution work for you. One of the best indictors of this is the level of support the vendor is able to give clients. Therefore, consider a vendor that offers training tailored to your needs, and a dedicated customer support team – a team that is ready and willing to answer questions for you at all times, regardless of time zone. Also, consider working with a team that is knowledgeable not only about the software, but about current market practice as well.
  4. Will it be easy for me to implement? A strong level of implementation support will help ensure your success with a given valuation and risk solution. A provider with a strong methodology for client implementations, and established ways of implementing and integrating the system with existing systems are of key importance. Additionally, confirm with the vendor if they are able to advise you on the best way to model new markets and handle your portfolio.
  5. Will it streamline my workflow? Consider how the new technology will impact your business workflow or make it more efficient. Does it help you to consolidate or reduce the number of systems in your workflow? The technology should help you remove inefficient and error prone steps, such as manual reconciliations that require rekeying data. This in turn will give you more time to focus on running your business.

A key benefit that will come from a system that fits the above criteria, is the potential for improved investment returns. You’ll be able to enter the markets you need, when you need to enter them. You’ll also be able to improve risk management by being able to share consistent information across the front and middle office. Strong analytics will help you build better teamwork and foster collaboration. Staff will have more time to spend driving the business forward, instead of on manual tasks. All of this will help you inspire improved confidence in your investors, and give you a competitive advantage in a very tough environment. 

For more information, listen to our on-demand recording of this webinar