Buy-side should leverage Dodd Frank as a catalyst for change
Almost a third of executives from 50 buy-side firms across North America have admitted they presently cannot estimate the P/L of a potential default of the companies they are exposed to in a timely fashion.
The firms admitted it would take them days or weeks to measure their exposure across all holdings, in a survey conducted by Simcorp, a provider of investment and portfolio management tools.
The poll was conducted in anticipation of Dodd-Frank regulations, which outlines that credit exposures need to be measured across all transactions and holdings to limit the ripple effects of company defaults.
In addressing the Dodd-Frank reforms for managing credit exposure, Simcorp’s new white paper, ‘Credit risk exposure: Leveraging Dodd-Frank as a catalyst for change’ examines these exposures and how firms can leverage Dodd-Frank to assess their readiness for credit risk reforms and implement comprehensive risk management.
Firms must prepare for a new market structure founded in central clearing of certain OTC instruments through CCPs. They will need to accommodate new models and analytics that will be implemented which have not yet been finalised.
The white paper outlines eight qualities of an effective credit default risk solution: consolidate position-keeping across all holdings for an accurate view of exposure; identify exposures for all issuer and counterparty risks; show underlying issuer risks derived from the underlying assets of derivatives and funds; include collateral to view mitigated counterparty risk exposures; aggregate all of the above to gain a complete view of exposure in case of a default; set limits on the company exposures – depending on the firm’s credit risk assessment; and group related companies and measure domino default effects
and; do all of the above in a timely fashion – i.e. during trading hours
"While OTC derivatives have come under fire for being risky products, they can also provide great returns if managed with a 360 degree view into both exposure and performance,” said David Kubersky, managing director for SimCorp North America. “Many of our clients who chose to leverage technology to facilitate transparency in the trade lifecycle were among those least impacted by the 2008 financial crisis.”
In assessing their credit reform readiness for their credit default management as outlined in Dodd Frank, the survey underscored the continued reliance on inadequate systems and the inability to view complete exposures in a timely manner.
– 67.4% of respondents admitted that significant effort is involved in reconciling data between disparate systems and sources.
– Over 40% are not confident that the data they are receiving from disparate systems (e.g. order management, accounting, risk management, performance measurement, etc.) is consistent and of high quality, even though this is the very data on which investment decisions are based.
Reporting by Janet du Chenne, Global Custodian, an Asset International publication