Post-Trade Risk: Striking the Right Balance
Post-trade risk assessment is poised to grow in importance and deserves the attention of traders as clearing information becomes more available, according to panelists who spoke at the North American Trading Architecture Summit this week in New York.
With clearing at the front of many financial minds today, pre-trade risk has taken center stage in the broader conversation about risk management—particularly as it relates to credit extenders like futures commissions merchants (FCMs) and to custody of contracts.
Yet attendees of the North American Trading Architecture Summit focused on the other end of the trade lifecycle, post-trade risk—assessment of which became much more important after the 2008 crisis exposed the complexity and poorly understood implications of particular financial products. It remains an evolving and critical element in trade execution processes, and continues to creep its way from firms’ back offices to traders’ desks, themselves.
Better and more consistently assessing post-trade risk requires further improvement on both the human side and in technology implementation. To the latter aspect, large execution and clearing institutions continue to provide new solutions—for example, in February, both NYSE Technologies and the Depository Trust and Clearing Corp. (DTCC) announced their own post-trade risk management services for equities trading, providing their members a continuously updated, or real-time, view of all equities that have cleared intra-day, to allow traders to properly mitigate excessive exposure to a particular stock. Other asset classes will likely follow suit as centralized clearing becomes more popular with firms, and in the case of swaps, mandated by regulators.
Jay Sarkar, vice president of sales, electronic trading products at Citi, says that firms also need to take a wider view of post-trade risk, as well, reflecting the reality that better monitoring and information provision is not sufficient on its own.
Firms need to do more to train their own traders to take stock of post-trade risk before moving on to the next trade’s profit-and-loss (P&L) proposition, he says—and when valuing post-trade risk, they should do more to track closely the “opportunity risk” incumbent in those trades that were not executed within the broader context of audit trails, enterprise and market risk, and reputational considerations.
While that suggestion sounds far from “real-time,” and more behavioral than technological, it neatly fits what the panel concluded overall: that, in Sarkar’s words, risk needs to be managed as a “living, breathing document”—both constrained and enabled by technology, but lived out through the eyes of traders.
This article was first published on waterstechnology