Key Trends in Buy Side Risk Management Report

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Key Trends in Buy-side Risk Management

Q1 2015: Report of Survey results
March 2015
About Chartis
Chartis is the leading provider of research and analysis covering the global market for risk
management technology. Our goal is to support enterprises seeking to optimize business performance
through better risk management, corporate governance and compliance. We help clients make
informed technology and business decisions by providing in-depth analysis and actionable advice on
the broad spectrum of risk and compliance technology offerings. Areas of expertise include:

Credit risk
Operational risk and governance, risk and compliance (GRC)
Market risk
Asset and liability management (ALM) and liquidity risk
Energy and commodity trading risk
Financial crime including trader surveillance, anti-fraud and anti-money laundering
Insurance risk
Regulatory requirements including Basel 2, Basel 3, Dodd-Frank, EMIR and Solvency II
Chartis is solely focused on risk and compliance technology giving it significant advantage over
generic market analysts.
Chartis has brought together a leading team of analysts and advisors from the risk management and
financial services industries. This team has hands-on experience of implementing and developing risk
management systems and programs for Fortune 500 companies and leading consulting houses.
Chartis Research is authorized and regulated in the United Kingdom by the Financial Conduct
Authority (FCA) to provide investment advice.
Visit www.chartis-research.com for more information.

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About SunGard Financial Systems

SunGard Financial Systems provides mission-critical software and IT services to institutions in
virtually every segment of the financial services industry. The primary purpose of these systems is to
automate the many detailed processes associated with trading, managing investment portfolios and
accounting for investment assets. These solutions address the processing requirements of a broad
range of users within financial services, including asset managers, traders, custodians, compliance
officers, treasurers, insurers, risk managers, hedge fund managers, plan administrators and clearing
agents. In addition, we also provide professional services that focus on application implementation
and integration of these solutions and on custom software development.
SunGards APT
SunGards APT provides award-winning investment technology for multi-asset class risk management,
analytics and risk reporting, serving buy-side institutions globally. APT models market risk, liquidity
risk, and counterparty risk across both liquid and illiquid asset classes, supporting regulatory reporting,
portfolio optimization and performance analysis. The solution can be delivered as an installed or cloudhosted offering, with a managed service component for clients who wish to outsource risk-based business
processes. APTs customers include institutional asset managers, pension funds, hedge funds, private
banks, wealth managers and sovereign wealth funds.
Table of contents
1- Executive summary............................................................................................................................. 6
2- Survey demographics.......................................................................................................................... 8
3- Key findings......................................................................................................................................... 9
4- Chartis viewpoint............................................................................................................................... 20
5- Appendix A Survey demographics................................................................................................. 26
6- How to use research and services from Chartis................................................................................. 29
7- Further reading.................................................................................................................................. 31
List of figures and tables

Figure 1: The role of risk management9
Figure 2: Top challenges in the risk management area10
Figure 3: Number of risk systems11
Figure 4: Asset types and/or investment strategies causing the most concern12
Figure 5: Important attributes of a multi-asset class risk platform13
Figure 6: The priority of different types of risk models13
Figure 7: Data challenges from the perspective of building a risk system14
Figure 8: Job utilization in different operational activities15
Figure 9: Which regulations (and self-regulatory initiatives) are likely
to have the most effect?16
Figure 10: The impact of OTC derivatives clearing and related market structure reform17
Figure 11: Independent risk systems18
Figure 12: The organization and categorization of risk systems19
Figure 13: Location of surveyed organizations26
Figure 14: Type of organization27
Figure 15: Size of organization (assets under management: AuM)27
Figure 16: Job function of survey respondents28
Figure 17: Primary investment strategies28
1- Executive summary
Responsive risk management is especially important at the moment. The financial markets are
encountering new frontiers that have both positive investment opportunities as well as displaying
volatile, non-intuitive behavior. Central Banks and regulators are very proactive which is leading to
intended and unintended consequences. This report will focus on the buy-side impact of these trends
and what they mean for buy-side risk management.
The Key Trends in Buy-side Risk Management 2015 survey from Chartis, sponsored by SunGard,
found that 89% of respondents view risk management as an integral and crucial component of
investment strategy. However, a large disparity exists between participants understanding the
importance of risk and the reality of day-to-day execution within their firms.
The top three areas of concern and where firms would benefit most if improved were:

Better transparency and interactivity of risk analytics for portfolio managers (90%)
Improved data granularity and on-demand frequency of risk reporting (87%)
Multi-asset class risk systems (79%)
Data management continues to gain in importance. The following were rated as crucial:

Data quality (91%)
Risk data aggregation (87%)
Data coverage (81%)
The top three specific types of risk were:

Market risk (78%)
Liquidity risk (62%)
Credit risk (49%)
Asset types that provided the most concerns were:

Fixed income (57%)
OTC derivatives (57%)
Structured products (52%)
Impacts of OTC market structure changes:

Majority of small and medium sized asset managers saw as minor or irrelevant
Tier 1 asset managers saw the structural changes as being important and significant
Operational risk and operations practices (79%)
Trading and pricing issues (73%)
Counterparty concentration risk (72%)
Collateral availability (72%)
Compliance

Compliance was only a concern for half of the respondents almost half said it wasnt
relevant or would only have a minor impact.
2- Survey demographics
The Key Trends in Buy-side Risk Management 2015 report from Chartis has been compiled based on a
survey of 196 respondents from 32 different countries across the key regions of Europe, Middle-East
and Africa (EMEA, 45%); the Americas (38%); and Asia-Pacific (17%).
The research was carried out in January and February 2015. It was sourced via a mixture of faceto-face interviews, online and in-depth phone conversations. CEOs, CFOs, CROs and other C-level
executives comprised 33% of the 196 sample size, with portfolio managers constituting the next
largest segment at 27%. Firms typically had fewer than 5,000 employees (79%) and a selection
of wealth managers (19%); private banks (16%); hedge (13%) and pension funds (12%) were
interviewed, alongside institutional asset managers (48%).
A wide-range of Assets under Management (AuM) was evident in the survey sample with 30% of
firms in EMEA stating more than $100bn, while this was 13% in the Americas and 17% in AsiaPacific. The majority of respondents fell into the $1bn to $10bn range.
The most popular investment strategy being pursued was equities (75%) but most respondents had
multi-asset strategies so other results included fixed income (67%); active managed products (34%);
OTC derivatives (20%); private equity (19%), etc.
See the Surveys demographics tables in Appendix A.
3- Key findings
3.1. The risk function: the view from the buy-side
Figure 1: The role of risk management
An integral and critical component of
investment strategy
60%
An aspect of investment strategy and

portfolio management (driven by fund
managers and analysts)
29%
33%
57%
32%
response to investor requirements
10%
29%
39%
24%
32%
response to regulatory requirements
11%
44%
A reporting activity largely driven by outsourcer

(prime broker, custodial bank, fund administrator
18%
investment strategy or portfolio management

0%
10%
26%
20%
30%
56%
40%
investment strategies
50%
60%
70%
80%
90%
100%
Would not accurately

describe the role of risk
management in any part of
Source: Chartis Research, Key Trends in Buy-side Risk Management 2015
The function of buy-side risk management is seen as an integral and critical component of investment
strategy by 89% of asset managers, fund managers and other buy-side respondents. However, 90%
also saw risk as an individually driven aspect of portfolio management with each investment strategy
driven by the person in charge. There is necessarily some overlap in the above findings as survey
respondents shared what they saw as the company view and their own view.
Risk analytics is seen as a way to assess market opportunities and simulation tools as a way to stress
test scenarios and investment ideas. Middle office risk measurement reporting is essential because of
increasing regulation and client demands. But as figure 1 shows a majority of respondents said this
reporting-driven viewpoint did not accurately describe the role of risk management.
A buy-side market participants risk procedures and technology tools must contribute to a firms
policies, strategy, compliance, clearing and operate as an investment decision-making aid. It is no
longer acceptable to view buy-side risk management as a siloed middle office function or tick-box
exercise.
3.2. Top challenges for the buy-side

challenges in the risk management area?
Figure 2: Top challenges in the risk management area

Providing better transparency
and interactivity of risk analytics
for portfolio managers
50%
Multi-asset-class
risk analytics
49%
Improving the granularity or

frequency of risk reporting
for internal stakeholders
40%
Multi asset class risk

platform implementation
38%
Integrating disparate
risk systems
30%
Reducing costs
29%
Improving the granularity

or frequency of risk
reporting for clients
0%
High priority
40%
30%
21%
47%
13%
36%
26%
35%
35%
44%
25%
10%
10%
27%
39%
20%
30%
40%
Medium priority
50%
36%
60%
70%
80%
90%
100%
Low priority
The difficulty in generating investment returns in a low interest rate environment has triggered a
search for yield that requires a larger multi-asset capability on the buy-side. This can be seen in
the demand for more interactive risk analytics technology to help portfolio managers, with 50% of
respondents identifying this as a high priority. Similarly, 49% think such analytics must be crossasset enabled and 40% want improved granularity. In an era of increased volatility the buy-side must
have the tools to actively seek out returns, especially tier 1 players with $100bn+ of assets under
management (AuM).
10
Tier 2 or 3 buy-side firms with under $10bn AuM or between $10bn-100bn AuM, may still seek out
multi-asset technology in the search for yield and improved investment performance but they are more
likely to do so under a Software-as-a-Service (SaaS) scalable cloud-based implementation approach
targeting granularity and transparency as immediate aims. This also helps them meet US Dodd-Frank
and European EMIR rules and reporting requirements.
In interviews it was mentioned that next day batch reporting risk management systems were not
or soon would not be acceptable to support a risk-aware culture, investment performance and the
management of credit, collateral and liquidity management.
Reducing costs is seen as a high priority by only 29% of survey respondents, suggesting that it isnt
as important as on-demand risk reporting and asset class coverage, which require investment in new
technology. It is notable that Asia is the keenest to increase expenditure (64%) while Europe is keener
to keep expenditure the same or decrease (62%).
Most survey respondents operate in a multi-vendor environment. When questioned about the number
of independent risk systems they have, only 24% said they have a single system; 39% have two
independent systems; and 28% have 3 or more technology systems. These are mainly legacy issues
based on asset-specific siloed risk systems, mergers and acquisition activities; the use of many interim
reconciliation and tactical aggregation hubs, failed enterprise architectural initiatives and entropy.
How many independent risk systems does your firm support?
Figure 3: Number of risk systems

9%
None
24%
One
39%
Two
Three
14%
Four or more
14%
0%
5%
10%
15%
20%
25%
30%
35%
40%
11
3.3. Asset types, risk model concerns and investment strategies
Which asset types and/or investment strategies do you

see as providing the most concerns/challenges going
forward instrategies
terms of risk
modeling?
Figure 4: Asset types and/or investment
causing
the most concern
OTC derivatives
27%
Structured products
24%
Private equity, venture capital

and other pooled assets
18%
Fixed income
16%
Active management products
9%
FX overlay
9%
Low latency strategies 3%

0%
14%
26%
17%
20%
28%
30%
7%
24%
39%
20%
40%
5%
39%
13%
7%
10%
23%
9%
29%
Important challenge
9%
8%
31%
30%
20%
37%
31%
23%
10%
32%
3%
26%
17%
11%
23%
22%
30%
16%
4%
5%
43%
26%
7%
Index products 4%
11%
28%
11%
Commodities
16%
28%
12%
Equities
Global Macro
30%
31%
59%
50%
Minor challenge
60%
70%
No real challenge
80%
90%
100%
Not relevant
Fixed income is still rated as a significant or important concern by 59% of survey respondents because
of the drying up of liquidity, the need for transparency and independent pricing as well as greater
risk awareness. Being able to validate or understand a Bloomberg or brokers price was described as
important.
Over-the-counter (OTC) derivatives are seen as significant or important as the mandatory market
structure changes come into play region by region with the US leading and Europe following closely.
Alternative investments, such as venture capital, private equity, property and infrastructure are
significant or important say 46% of respondents with many commenting that they constitute the
most significant challenge from a modeling perspective. They are increasingly popular in the search
for yield and investment performance, especially as deflation stalks the Eurozone and emerging
economies. Some buy-side firms have entered the commercial lending business as the banks have
retreated. In the survey equities and indices constitute the least challenging asset classes. But
some interviews suggest that indices and ETFs might present more risk management and analytic
challenges.
12
How would you describe the importance of

the following attributes of a multi-asset class
risk platform?
Figure 5: Important attributes of a multi-asset class risk platform

Asset coverage from a portfolio analytics perspective
43%
Asset coverage from a performance analytics perspective
50%
35%
Data coverage (e.g. credit curves, indexes etc.)
53%
34%
Asset coverage from a pricing perspective
25%
55%
Performance of application environment
25%
52%
17%
14%
0%
10%
20%
Critical
30%
5%
10%
4%
12%
8%
14%
9%
50%
27%
6%
54%
24%
8%
40%
Important
2%
13%
57%
Delivery model and cost of delivery
Hedge analytics
10%
48%
29%
Index analytics
5% 2%
50%
60%
Not important
70%
80%
90%
100%
Don't know
Multi-asset coverage is a critical and important attribute of portfolio analytics for 93% of respondents
and for 87% to augment performance analytics. The importance of integrating risk management with
performance management is reinforced by 81% valuing common data coverage for rates, curves,
surfaces etc. This also reinforces the previously mentioned significance of data management.
Figure 6: The priority of different types of risk models
78%
Market risk
62%
Liquidity risk
Performance attribution
44%
Stress testing
41%
Fundamentals and macro analysis
24%
Market impact
22%
10%
10%
42%
14%
44%
15%
52%
16%
53%
23%
58%
20%
High priority
3%
41%
32%
Counterparty risk
1%
35%
49%
Credit risk
0%
21%
30%
40%
50%
Medium priority
20%
60%
70%
80%
90%
100%
Low priority
13
Large, medium and small companies similarly expressed the importance of market (78%) and
liquidity (62%) risk. Improving market risk analytics availability, sophistication and transparency
was a common theme in interviews but what was most surprising was the increased focus on liquidity
risk for more than just redemption forecasting. It is also being used to reduce recently enlarged credit
lines and mitigate bond illiquidity. Liquidity Risk is regarded as a high priority by a larger number of
respondents in Europe (72%), UK (68%) and Asia (63%) compared to the N. Americas (54%). Tier 1
firms talked of making extensive use of sell-side credit and liquidity simulation tools.
Stress testing is a high priority for more respondents in Asia (44%) than those in the US (31%) and
UK (21%).
3.4. Data challenges faced

buy-side
when building
a risk
system
Howby
would
you characterize
the following
data
challenges from
the perspective of building a risk system in your organization?
Figure 7: Data challenges from the perspective of building a risk system

47%
Data quality of risk data

36%
Risk data aggregation

Pooled and structured securities data management
14%
Fixed income data management
13%
Credit curves
12%
32%
46%
41%
Significant challenge
11%
30%
11%
40%
42%
29%
30%
Important challenge
13%
21%
24%
25%
20%
30%
37%
42%
10%
30%
35%
30%
Index data management 5%
0%
24%
34%
Real-time low latency tick data 4%
13%
46%
8%
Commodities data management 6%
9%
51%
11%
Securities reference data

Legal Entity Identifiers
44%
40%
50%
Minor challenge
11%
42%
60%
70%
80%
90%
Not relevant
14
100%
Data is central to an effective buy-side risk management strategy. Data quality (91%), coverage
(81%) and risk data aggregation (87%) stand out as the most important requirements highlighted by
respondents.
What would be the best estimate of FTE (full time equivalent)
utilization in the following operational/support activities?
Figure 8: Job utilization in different operational activities

39%
Regulatory report generation

Model validation/Calibration
30%
Position reconciliation with portfolio management

and trading system
29%
Data validation data management
26%
Risk report generation
26%
IT support
26%
Other operational processes
24%
Quantitative analytics development and support
24%
0%
<1 person
10%
48%
8% 5%
55%
12% 3%
52%
14%
59%
7%
63%
22%
46%
13%
13%
17%
61%
30%
1-5 people
40%
50%
60%
5-10 people
8%
6% 5%
39%
20%
5%
10% 5%
70%
80%
90%
100%
>10 people
Unsurprisingly IT and Operations staff form the largest group of staff full time equivalents (FTEs)
in our job function graph. The fastest growing group of staff are involved with data management and
reconciliation to support portfolio investment, risk and regulatory reporting related activities. Their
roles often overlap into each others departments and functions.
15
3.5. Regulatory challenges
Which regulations (and self-regulatory initiatives) are

most likely to affect your organization the most?
Figure 9: Which regulations (and self-regulatory initiatives) are likely to have the most effect?
23%
UCITS
27%
24%
26%
Dodd-Frank
20%
28%
24%
28%
AIFMD
20%
26%
24%
30%
29%
27%
MiFID
18%
EMIR
16%
Solvency II
11%
REMIT 4%
24%
26%
20%
10%
Significant impact
34%
30%
14%
39%
34%
OPERA 1% 16%
0%
26%
48%
37%
20%
30%
Important
40%
46%
50%
60%
70%
Minor impact
80%
90%
100%
Not relevant
Received wisdom is that regulation and compliance are highly challenging and important, however,
the survey does not reflect this. Only 50% of respondents described UCITS as significant or
important. The majority of respondents said Dodd-Frank, AIFMD, MiFID and EMIR were now
having a minor impact or less. It is the sell-side that is getting the focus of regulatory attention and has
the more onerous burden.
Similarly, the operational risk and operations practices of the mandatory OTC derivatives clearing and
related market structure changes (see figure 10) were only of concern to half of the respondents; with
most viewing it as primarily a sell-side issue for now.
Also evident was a touch of hype fatigue after 2014s deluge of warnings to be ready for the market
structure changes when much is still to be defined and regional conflicts are still to be resolved.
Only 20% of the buy side respondents use OTC derivatives. The majority use exchange traded
derivatives (ETDs) for exposure management, yield, hedging and conviction.
16
How would you characterize the impact of OTC derivatives

clearing and related market structure reform on your firm?
Figure 10: The impact of OTC derivatives clearing and related market structure reform
47%
Changes in the relationship with the sell-side Tier 1

Tier 2
Tier 3
30%
3%
21%
44%
Tier 2
43%
Tier 3
23%
Tier 3
30%
24%
33%
14%
11%
30%
22%
8%
11%
Structural shifts in liquidity Tier 1

Tier 2
35%
10%
20%
Important
40%
9%
18%
29%
12%
24%
9%
30%
12%
30%
19%
38%
11%
30%
26%
32%
55%
24%
32%
50%
Minor impact
9%
22%
9%
42%
18%
27%
63%
Tier 2
9%
25%
9%
38%
19%
32%
64%
33%
25%
19%
14%
9%
24%
9%
8%
28%
13%
31%
41%
9%
27%
13%
14%
Collateral availability Tier 1
Significant impact
16%
63%
Tier 3
0%
19%
36%
24%
Trade/pricing issues Tier 1
Tier 3
27%
28%
14%
30%
Tier 2
10%
24%
28%
27%
Tier 2
Tier 3
26%
66%
Counterparty concentration risk Tier 1
Tier 3
31%
41%
11%
Operational risk and operations practices Tier 1

Tier 2
3%
9%
Regulatory interfaces Tier 1
38%
6%
46%
22%
9%
39%
58%
Tier 2
41%
30%
9%
Analytical methodology support Tier 1
Tier 3
3%
60%
26%
70%
80%
90%
100%
Not relevant
17
However, tier 1 asset managers and large hedge funds have a different view of the new OTC
derivatives clearing and market structure changes from the small and medium sized asset managers
who see these as minor or irrelevant.
Tier 1 asset managers saw the structural changes as being important and significant from several
perspectives:

Operational risk and operations practices (79%)
Trading and pricing issues (73%)
Counterparty concentration risk (72%)
Collateral availability (72%)
Investment has started on improved pricing, collateral/cross margining/choice of clearing venue

optimization, funds segregation, central counterparty clearinghouse (CCP) credit risk and liquidity
management.
3.6. Prevalence of independent risk systems & asset-class orientation

How many independent risk systems does your firm support?
Figure 11: Independent risk systems

9%
None
24%
One
39%
Two
Three
14%
Four or more
14%
0%
5%
10%
15%
20%
25%
30%
35%
40%
18
67% of survey respondents have two or more independent IT risk systems installed at their firm. This
suggests that there is still considerable room for implementing single integrated solutions at buy-side
firms or an on-going silo technology issue that is only overcome by various standalone linking and
connectivity patches.
In regard to how risk systems are organized asset class is still the predominant category (39%)
which explains the earlier mentioned need for multi-asset functionality to both get rid of the risk
management silo effects and enable easier risk aggregation. Low distribution by risk measures (24%),
department (13%) and risk category (11%) make movement to a single platform a low project risk
(see figure 12).
are the risk systems
organized and categorized?
Figure 12: The How
organization
and categorization
of risk systems
39%
By asset class
24%
By risk measure
13%
Business unit / investment strategy
11%
Risk category
9%
Combination of the above

Execution style
2%
Regulatory jurisdiction
2%
0%
5%
10%
15%
20%
25%
30%
35%
40%
19
4- Chartis viewpoint
The results of the survey and qualitative interviews show that the role and function of risk
management is changing. The emphasis is shifting away from a middle office regulatory obligation
or periodic client reporting towards a more dynamic, intraday, cross asset, investment supporting
function closely observed by regulators. There is a more challenging, volatile and non-intuitive
politico-economic-legal environment to perform within.
The aspiration to an integrated, enterprise-wide approach has been hampered over the last few years
by license to operate issues to implement Dodd-Frank, EMIR, AIFMD, MiFID etc. rules and
worrying about new market structures without much budget or resource left over.
Now there has been added highly unusual politico-economic conditions, disruptive changes in market
competitiveness, new business models and continuing IT innovation.
4.1 Establish a firm wide risk strategy

Best practice risk management success factors that were identified can be summarized as follows:
(i) Establish a strategy with clear objectives.
(ii) Define and shape the strategy with short and long term goals.
(iii) Achieve it by implementing supporting processes and controls.
(iv) Measure and manage by establishing a nimble integrated risk infrastructure.
(v) Set up independent governance metrics and oversight procedures.
(vi) Support the establishment of a sustainable company-wide risk culture.
Different companies are at different stages along these best practice pathways. Most had only
successfully executed departmentally or as a light touch company-wide project. There is patchy best
practice in, for example, dedicated front office risk oversight, clear policies, process improvements,
education and technology support. Senior management determination and risk technology support
seem to be the key influencers.
Some CROs have led a multi-year, intense company-wide, risk culture transformation program. They
are relying on a managed service risk reporting provider to upgrade their technology to catch up
and deliver on-demand requirements to a newly refreshed risk aware organization. The best way of
keeping the regulator at bay is to have a strategic company-wide role for risk management its an
essential part of a cultural change program, said one respondent.
Other CROs and participants in the report have been more hands-on implementing, upgrading and
customizing company-wide risk technology platform or services architecture themselves with a range
of plug and play technology options, some with Software-as-a-Service (SaaS) options.
Larger firms have focused on the risk cultural transformation path because their IT risk infrastructures
are often complex and sclerotic, while smaller organizations have emphasized technology platform
change. Both have suffered from inadequate personnel resources and progam leadership.
20
4.2 A firm-wide risk culture supported by a risk platform

Risk awareness, the new financial services mindfulness, should be encouraged as part of the
corporate psychology of a best practice buy-side firm.
It was a common theme among respondents that the same accurate, responsive risk management
analytics and reporting systems and procedures should be shared across all departments. Risk
management is for everyone.
Investment decision-making tools have rarely integrated with middle office risk managers analytic
and reporting tools in the past. Risk dashboards should be shared between departments such as
portfolio management, risk management, compliance and senior management, but are usually
retrospective or ex-post as they simulate too clumsily for quick investment decision-making. Risk
management personnel usually participate in investment decisions but their software and information
platforms do not.
Portfolio managers use, or now aspire to use, shared ex-ante and ex-post risk management software,
analytics data, reporting and resources integrated with their investment management decision-making
infrastructure and tools.
This paradigm can be applied throughout the enterprise to other departments such as operations,
collateral management, treasury and client relationship management.
The majority of respondents had a clear appetite to invest in this through either increased budgets or
by re-allocating costs through savings and efficiencies.
4.3 On-demand: The need for speed and nimbleness

Having on-demand information is an essential characteristic identified by survey respondents for
both tactical investment decision-making and portfolio risk management.
The need for more processing power was particularly highlighted by portfolio managers and risk
managers in medium and large institutional asset managers, hedge funds, pension funds and sovereign
wealth funds who vividly described recent politico-economic uncertainties and the new frontier
conditions associated with quantitative easing being switched on and off. We also have negative
interest rates; non-intuitive inflation, stagflation and deflation threats; and energy price extremes
to contend with. This correlated to a need to service clients and senior management with relevant
information about performance and modify risk appetites in a faster moving investment environment.
On-demand simulation, scenario management and stress testing are essential.
There is much debate and confusion about what the term on-demand actually means in the buyand sell-sides. Interpretations vary in the financial services food chain about how quick you need to
be. It can be interpreted to mean the real-time almost instant speeds usually found in high volume,
high frequency trading strategies that are measured in milliseconds. Then there are event-driven
exposures and analytic data that usually operate in seconds or minutes depending on the size of
portfolio, asset class, analytic tool, model and IT infrastructure installed. Finally, there is the phrase
on-demand which describes a time scale of a few minutes or a few hours, depending on the earlier
mentioned dependencies.
21
On demand is now the minimum aspired performance level for a buy-side integrated risk
management platform. Most of the buy-side respondents surveyed and interviewed for this report that
do not have this now want to move to this level of responsiveness within the next few years.
On-demand performance can still result in a daily or weekly report being produced, depending on
the investment style, economic environment events and cost sensitivity considerations of the firm.
Risk management software vendors focused on SaaS or managed services factor these options into
their commercial propositions.
4.4 Integration: Joining it all up

Achieving such a responsive risk managed enterprise demands perpetual joined up thinking.
Improving one area is no good if a problem is simply moved downstream creating a bottleneck
elsewhere.
There are tight interdependencies between investment policy, performance, pricing, risk management,
benchmarking, client mandates, limits, collateral management and treasury. Available risk information
needs to reflect market data, up-to-date portfolios and multiple simulations, ideally on an integrated
technology architecture.
Chartis has already alluded to the need for strategic objective setting; to set up a strong risk
culture; good governance; process management and license to operate regulatory and compliance
procedures. Pre-requisites are:

Multiple asset class coverage
Risk data aggregation and reporting
Multiple risk categories and measurement capabilities.
Multiple asset classes: As riskier investment strategies are pursued trickier instruments are used.
Firms need greater asset class coverage and more diversity of instruments within asset class. There
is now a greater use or aspired use of alternative investments, property, infrastructure or commercial
lending, requiring synthetic instruments and integrated sub-systems to model and measure complex
waterfall and optional structures.
More buy-side companies, and not just the more innovative hedge funds and exotic boutiques, are
filling in the gaps left over by the sell-side retreat from their traditional investment and financing
activities. These additional investment strategies require new hires, additional technology and process
changes as well as additional risk measures. Interestingly most of the new people, process and
technology are coming from the sell-side. This was particularly noticeable when talking to Middle
East respondents who were making sell-side hires as well as increasing lending and infrastructure
portfolios. The recent energy price downturns were encouraging more predictive modeling but this
was being reluctantly resourced externally.
22
Risk data aggregation: It is easier, but less flexible, for the majority of the buy-side to aggregate risk
measures using an integrated one-stop-shop multi-asset platform whether as on-premise software
(in-house or vendor sourced), SaaS or managed service. An alternative is to aggregate normalized
sensitivities-based, profit and loss (P&L) vectors from different source sub-systems to an independent
data aggregation engine. This often requires a disproportionate investment of costs and resource.
However, large and upper-middle sized sell-side companies, large hedge funds and institutional asset
managers have the size and economies-of-scale to absorb these implementation, technology and
maintenance costs.
Multiple risk measures and metrics: If a buy-side firm pursues new investment strategies, new asset
classes and new instruments in existing asset classes it will need additional metrics and measurement
procedures. Many of these are delivered by specialist, external agencies, new software packages and
internally developed sub-systems often written in high level languages like Mathlab, Python and R or
Excel. These all need a resilient risk platform architecture to ensure operational integrity, otherwise
there will be more regret than reward.
4.5 All Risk categories and more risk factors

The survey results describe clearly how most buy-side firms are raising their game to cover all risk
categories and measure more risk factors. This continues the trends evident over the last few years
when individual risk categories and their factor measurement became necessary and fashionable for
investment mandates such as credit risk, credit valuation adjustment (CVA), and more detailed stress
testing and performance attribution.
Market risk: What stands out from the Chartis research is the increasing importance the buy-side
places on more sophisticated market risk measurements, and their willingness to invest more money
and time in them. This is reflected in improvements in valuation of illiquid instruments, more
sophisticated stress testing, more scenario analyses, decomposition of volatility and tracking error
and more rigorous back testing. Value at risk (VAR) is seen more as a client or senior management
reporting comfort food or is being enhanced and replaced with conditional value at risk (CVAR) or
expected shortfall stress testing (ES and ESS).
These trends are also influenced by regulation or their anticipated demands and the cross-over effects
from the sell-side.
Liquidity risk: Another strong trend exhibited by the survey and interviews was the increasing
importance of measuring and managing liquidity risk and its close correlation with market risk, credit
risk and P&L. Liquidity risk reporting is required for AIFMD, Form PF and UCITS IV regulations
and, by most accounts, is not demanding. Traditionally, large asset managers and particularly highly
leveraged, volatile big hedge funds with significant Exchange Traded Derivative (ETD) clearing
obligations would simulate cash, liquidity, margin and redemption forecasts.
Most asset managers and their treasuries used to be more relaxed, apart from redemption simulation,
about liquidity risk often using, for example, cash for collateral where cheaper to deliver instruments
were available. Market conditions and sentiment have changed with the rapidly increased reduction of
market liquidity in fixed income for example. Dealer-brokers have reduced inventories because of the
slimming down of available economic and regulatory capital. Market participants face the prospect
of increased and more frequent margin and collateral calls which, at the least, will increase costs.
Some asset management and insurance firms have increased their lines of credit significantly and
are therefore facing potentially higher debt servicing costs, causing them to improve their liquidity
buffer simulations and counter-balancing. This is perceived as one of the areas where regulators might
become more intrusive in buy-side firms in the near future.
23
4.6 Fixed income

The fixed income segment is interesting because there was frequent mention during interviews
of wanting to improve the availability of fixed income analytics. There is a general movement to
simulate a more complex and broader universe of bonds, assess the impact of illiquidity and all
bond events. There is also a strong desire to validate and understand broker or Bloomberg prices and
analytics which are not always transparent.
This tendency will grow as automated fixed income trading initiatives mature and all market
participants seek to reduce costs. Bond liquidity pressures will also increase as broker-dealers
continue to reduce their inventories because of regulatory capital constraints, central banks
quantitative easing and increasing calls for qualifying collateral.
It is interesting to note that several Asian respondents emphasized their concern about low yields and
potentially lower liquidity in less risky Fixed Income products. Several mentioned their preference for
increased usage of ETFs which was encouraging more transparency and instrument look through in
risk management systems by clients and internal risk management.
4.7 OTC market structure changes

The over-the-counter (OTC) market structure changes that satisfy the post-crash G20 commitments
made in Pittsburgh back in 2009 have so far only really imposed bureaucratic derivative reporting
demands on the buy-side. The implementation pain has largely been absorbed by US and European
asset managers and therefore it has been a manageable overhead. Some regions pointed out that
the regulatory and OTC market structure reform impacts on them were very low such as in
South Africa and New Zealand. Central counterparty clearing houses (CCPs) and sell-side swaps
execution facilities (SEFs), plus systematic internalizers (SIs) and organized trading facilities (OTFs)
basically everything we missed last time under MiFID have all had to do the heavy lifting to date,
but there is a lot more to do.
Most of the buy-side do not have to deliver a lot of changes this year but should be preparing for a
tsunami of mandatory processing, pricing and analytical changes from 2016 through to 2019 many of
which at this stage are contradictory or undefined.
Then the buy-side will need to hit the ground running with nimble, on-demand derivatives risk
management platforms or services that can help optimize portfolio managers and back offices
decision-making about pricing, cross margining, collateral management, funding and clearing.
Minimum margin requirements will probably increase on non-cleared derivatives but optimized
collateral management and new risk reduction services, such as compression, can help mitigate this.
It is not all bad news as there will be greater market transparency, increased product standardization,
and a broader choice of trading and clearing venues. Bid-ask spreads will tighten for cleared
derivatives and there will be reduced bilateral exposures, credit and counterparty risk as it will be
owned by the CCPs under the new market structure. Pre-trade transparency is expected to enable
more efficient price formation.
24
4.8 Data quality: A key risk success factor

Sharing the same clean, timely enterprise data was seen as the sine qua non for successful investment
decision-support, risk management and operational integrity where the chain is only as strong as its
weakest link. This is closely aligned to the importance of transparency, granularity and getting rid of
black box analytics.
Tier 1 organizations have well established centralized data quality initiatives. These adequately handle
time series, market data, rates, simple curves, securities, indices content, reference data, customer,
counterparty and Legal Entity Identifier (LEI) data. But they can be weak on handling complex
curves, surfaces, correlation matrices and scenarios. There are still significant on-going investments to
sustain as well as keep up with change. All segments of the market use, or are seriously considering,
third party data management service providers. Regulatory bodies are progressively introducing
mandatory LEI standards. The Enterprise Data Management (EDM) Council is pushing for further
standardization. For smaller players and the rest of the market, the quickest and sometimes most
efficient way of ensuring data quality is to use an external service provider or a utility with last mile
application-specific cleaning if necessary.
25
5- Appendix A Survey demographics

Figure 13: Location of surveyed organizations
Regional response (%)

Regional response (%)
15%
15%
47%
38%
APAC
AMERICAS
Regional
EMEA response
AMERICAS(%)
EMEA
38%
APAC
47%
15%
47%
38%
APAC
APAC
AMERICAS
AMERICAS
EMEA
EMEA
EMEA
EMEA
AMERICAS
APAC
AMERICAS
APAC
26
Type of organization: All regions
Figure 14: Type of organization

Sovereign wealth management
3%
Distribution of type of organization was uniform

across the 3 regions.
Pension fund manager
12%
Exception : Wealth Management

Americas (30%), APAC (8%), EMEA (11%)
Hedge fund
13%
Private bank
16%
Wealth management
19%
Institutional asset manager
48%
0%
10%
20%
30%
40%
50%
Size of Organization: Assets Under Management
Figure 15: Size of organization (assets under management: AuM)

50%
39%
40%
30%
30%
41%
29%
29%
24%
21%
20%
17%
9%
10%
15%
14%
13%
9%
7%
3%
0%
More than $100bn
$50bn to $100bn
AMERICAS
$10bn to $50bn
EMEA
$1bn to $10bn
Less than $1bn
APAC
Source: Chartis Research, Key Trends in Buy-side Risk Management 2015,
27
Job Function: All regions
Figure 16: Job function of survey respondents

CEO
2%
Distribution of job functions was uniform
4%
CFO
6%
Other
COO
7%
CIO
7%
Exception : no CEO/CFO response from APAC
13%
CRO
27%
Portfolio Manager
Treasury/ALM
3%
6%
Business Line
9%
Technology & Systems
11%
Credit Risk
17%
Operational Risk
22%
Market Risk
0%
5%
10%
15%
20%
25%
30%
Primary investment strategies: All regions

Figure 17: Primary investment strategies
Equities
75%
Fixed Income
67%
Active management products
34%
Structured products
20%
OTC derivatives
20%
Index products
19%
Private eq, venture cap, other pooled assets
19%
FX overlay
Global Macro
15%
Commodities
14%
Low latency strategies

0%
Distribution of strategies was mostly uniform

18%
Exceptions from average:

Commodities: EMEA 8%, APAC 29%
Equities: AMERICAS 82%, EMEA 69%
4%
10%
20%
30%
40%
50%
60%
70%
80%
28
6- How to use research and services from Chartis

In addition to our flagship industry reports, Chartis also offers customized information and consulting
services. Our in-depth knowledge of the risk technology market and best-practice allows us to provide
high quality and cost-effective advice to our clients. If you found this report informative and useful,
you may be interested in the following services from Chartis.
For risk technology buyers

If you are purchasing risk management software, Chartiss vendor selection service is designed to help
you find the most appropriate risk technology solution for your needs.
We monitor the market to identify the strengths and weaknesses of the different risk technology
solutions, and track the post-sales performance of companies selling and implementing these
systems. Our market intelligence includes key decision criteria such as TCO (total cost of ownership)
comparisons and customer satisfaction ratings.
Our research and advisory services cover a range of risk and compliance management topics such
as credit risk, market risk, operational risk, GRC, financial crime, liquidity risk, asset and liability
management, collateral management, regulatory compliance, risk data aggregation, risk analytics and
risk BI.
Our vendor selection services include:

Buy vs. build decision support
Business and functional requirements gathering
Identification of suitable risk and compliance implementation partners
Review of vendor proposals
Assessment of vendor presentations and demonstrations
Definition and execution of Proof-of-Concept (PoC) projects
Due diligence activities
29
For risk technology vendors

Strategy
Chartis can provide specific strategy advice for risk technology vendors and innovators, with a special
focus on growth strategy, product direction, go-to-market plans, and more. Some of our specific
offerings include:

Market analysis, including market segmentation, market demands, buyer needs, and
competitive forces
Strategy sessions focused on aligning product and company direction based upon analyst
data, research, and market intelligence
Advice on go-to-market positioning, messaging, and lead generation
Advice on pricing strategy, alliance strategy, and licensing/pricing models
Thought leadership
Risk technology vendors can also engage Chartis to provide thought leadership on industry trends
in the form of in-person speeches and webinars, as well as custom research and thought-leadership
reports. Target audiences and objectives range from internal teams to customer and user conferences.
Some recent examples include:

Participation on a Panel of Experts at a global user conference for a leading ERM

(Enterprise Risk Management) software vendor
Custom research and thought-leadership paper on Basel 3 and implications for risk
technology
Webinar on Financial Crime Risk Management
Internal education of sales team on key regulatory and business trends and engaging
C-level decision makers
30
7- Further Reading

Operational Risk Management Systems for Financial Services 2014
Basel 3 Technology Solutions 2013
Data Management and BI for Risk
Enterprise GRC Solutions 2014
Liquidity Risk Solutions 2014
For all of these reports see: www.chartis-research.com
31

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About SunGard Financial Systems

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List of figures and tables

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Improved data granularity and on-demand frequency of risk reporting (87%)

Multi-asset class risk systems (79%)

Data quality (91%)

Risk data aggregation (87%)

Data coverage (81%)

The top three specific types of risk were:

Market risk (78%)

Liquidity risk (62%)

Credit risk (49%)

Copyright Chartis Research Ltd 2015. All Rights Reserved

Asset types that provided the most concerns were:

Fixed income (57%)

OTC derivatives (57%)

Structured products (52%)

Impacts of OTC market structure changes:

Copyright Chartis Research Ltd 2015. All Rights Reserved

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An aspect of investment strategy and

response to investor requirements

response to regulatory requirements

A reporting activity largely driven by outsourcer

investment strategy or portfolio management

Would not accurately

Source: Chartis Research, Key Trends in Buy-side Risk Management 2015

Copyright Chartis Research Ltd 2015. All Rights Reserved

3.2. Top challenges for the buy-side

Figure 2: Top challenges in the risk management area

Improving the granularity or

Multi asset class risk

Improving the granularity

Source: Chartis Research, Key Trends in Buy-side Risk Management 2015

Copyright Chartis Research Ltd 2015. All Rights Reserved

Figure 3: Number of risk systems

Source: Chartis Research, Key Trends in Buy-side Risk Management 2015

Copyright Chartis Research Ltd 2015. All Rights Reserved

3.3. Asset types, risk model concerns and investment strategies

Which asset types and/or investment strategies do you

Private equity, venture capital

Active management products

Low latency strategies 3%

Source: Chartis Research, Key Trends in Buy-side Risk Management 2015

Copyright Chartis Research Ltd 2015. All Rights Reserved

How would you describe the importance of

Figure 5: Important attributes of a multi-asset class risk platform

Asset coverage from a performance analytics perspective

Data coverage (e.g. credit curves, indexes etc.)

Asset coverage from a pricing perspective

Performance of application environment

Delivery model and cost of delivery

Source: Chartis Research, Key Trends in Buy-side Risk Management 2015

Fundamentals and macro analysis

Source: Chartis Research, Key Trends in Buy-side Risk Management 2015

Copyright Chartis Research Ltd 2015. All Rights Reserved

3.4. Data challenges faced