Are you a commodity risk manager who has been wondering whether your existing risk management system is really upto the mark and whether you should continue with that system or not? Here are 6 reasons why you should trash your existing Risk Management System:
Reason No. 1: Your system does not “talk” to its users
If you need to go deep into your system to figure out hot-spots / risk areas in your portfolio, then your system is not “talking” to its users. Technological advances have made it easier for systems to have an automated alerting mechanism in place, which will shoot an email to you the moment a pre-set limit is breached. Such alerts on emails / mobiles makes the system more pro-active in managing risks and the users have to spend that much lesser time in digging “what’s wrong” and gives them more time to analyze the cause and remedial measures for those risks.
Reason No. 2: It’s not flexible & scalable
Sometimes, old systems that are past their expiry dates are still run in organizations simply because of “we’ve been using it for so long now” or “it’s customized to our specific requirements” kind of arguments. What we sometimes fear asking ourselves is whether it is meeting our current requirements and can it be changed quickly to meet our changing business processes. More often than not, the answer for these questions is a simple “Not Really”! Your system was probably good once, met your requirements once, but now if your business processes and scale have grown / diverged significantly from earlier, its time to invest in a new system.
Reason No. 3: It cannot manage data well
Many Risk systems used for managing market and counterparty credit risks place the onus of data accuracy, reliability and management on the users, in effect turning themselves into a GIGO (Garbage-in-Garbage-out) system. It’s not very difficult to have some simple validations, checks and balances in place which ensure that your system is going through your data with a magnifying glass and bringing atleast the most obvious and most frequent errors to your notice. The data required for managing both market and credit risks is generally so huge (several price series, missing prices, unnatural jumps in prices, holidays, common data points, etc.) that if users have to do data management, a good amount of time and effort will be gone in doing just that…whereas it could have been automated!
Reason No. 4: It’s a spreadsheet based system
Research has shown that nearly 94% of the calculations built in spreadsheets have some errors! Now, apart from thinking about whether your spreadsheets are part of that group, you should also think about whether those tons of spreadsheets in your organization are being managed well, are updated and synced flawlessly and frequently, and are always accurate. Even if your answer for those questions is yes, there’s more bad news…Spreadsheet based systems do not help you in automating your processes, and are almost always not scalable. This is applicable to even those systems which are partially screen / UI-based, with several spreadsheet add-ins to calculate valuations and risks on your portfolio. The reason is it does not allow you to store your historical data (so you can’t create trends of risks for your portfolio / positions), it will slow down significantly (if its not already so) with larger data sets (so you wait more, just for results to turn up), and is generally geeky enough for top / senior management to neither understand nor appreciate. You are better off without such systems!
Reason No. 5: It does not enable automating processes and enhanced understanding of Risk
If your Risk management system does not send you end of the day risk / exposure reports automatically, or allow applying an adverse event directly on to your current portfolio for scenario analysis, it is not helping in automating your processes. Such automation must also include immediate messages to administrator if someone has modified the configuration settings, if some positions were rejected due to incorrect master data, or even if the price data points were statistically significant to calculate valuation / risk. These and several such automations like reconciliation with the source system (which is sending the positions) are crucial for the management to ensure that their risk team is actually spending most of their time in managing risks for the organization instead of filling gaps in automation from the current risk system.
Reason No. 6: It does not have flexible Reporting
How often do you have prepare a report in a new format which has come as an ad-hoc request from the management? If your system does not have flexible reporting framework, the answer would be closer to “often enough”. Creating those reports till late in the night when it had to be delivered by that end-of-day, is really more prevalent in practice than you’d think. The cost of such systems goes up with every request for incorporating a new report, which will be used for a few weeks, before everyone moves on to the next way of looking at data…and the cycle keeping rolling.
If your existing risk management system has even some of the above characteristics, you’re better off trashing that system since, despite all your efforts, it is and will not add any value to taking risk management initiative in your company to take it to the next level of sophistication. What’s more, it’ll give the entire organization a false sense of security that comes from having a cutting edge risk management solution…so just trash it…and give a fresh start to Risk Management in your organization.
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