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Bad call ref - let's use the monitoring technology available

Once again, some of the best football teams in the world have just bombed out of the World Cup – I’m referring to the USA... As an aside, England is gone too – in part due to FIFA’s technological ignorance and monitoring from the dark ages. The technology exists to help the ref make better judgement calls – why are they not using it? This is a common scenario in many financial institutions (see what I did there?), who are not using technology effectively with their own credit and limit monitoring – and as a result, are trading over-conservatively.


With shrinking margins and a more competitive business environment, agility and accuracy are increasingly important when trading financial products. Now, more than ever, institutions want to trade right up to their limits, to ensure that they are utilising their assets as completely as possible. But ever increasing trading volumes are making it more and more difficult to ensure that risk is mitigated while trading potential is maximised.


Further to this, algorithmic and electronic trading are fuelling the existing surge in trading volumes. Analyst house, Celent, expects average daily FX volumes to rise from US$2.9 trillion in early 2009 to US$4 trillion this year.


It isn’t surprising that in too many cases, the forwards are out-playing the midfielders, i.e. limit monitoring and credit risk operations simply can’t keep up with the front office – resulting in institutions often not finding out what their exposures until after the trading event. Rising trade levels will only add to this issue. Throw in the fact that many institutions are operating multiple, disparate, legacy systems across disjointed business lines, with geographically-siloed data streams, and you have quite a challenge. The real result of all this is that traders and managers lose agility and run the risk of being too conservative – yielding significant opportunity cost.


Institutions are now turning to a real-time approach, which gives them the ability to roll up through multiple hierarchies of data, managing credit limits by trader/asset class/counterparty – identifying the players who are offside. Most importantly, treasurers need to be able to step back to see the global credit overview of the entire institution, without losing granularity of more specific data.


Rather than waiting for the post-match analysis, with up-to-date credit information consistently available, traders and compliance officers have the tools to deal with data on a real-time basis. This continuous view of exposure moves limit and position monitoring to an earlier point in the game – increasing effectiveness and decreasing the likelihood of trading limits breaches and penalties.


More effective credit and limit monitoring has the further effect of ensuring regulatory requirements are met and no red cards are drawn. It also demonstrates a more sophisticated and calculated approach to trading, helping to allay fears over recklessness. Essentially teams that implement real-time solutions will better manage credit, exposures and, importantly, their reputations. Gaining these benefits in today’s high volume, low margin environment is paramount if financial institutions are to retain business, win business, maintain high client satisfaction, and score.


Comments: (8)

A Finextra member
A Finextra member 30 June, 2010, 11:36Be the first to give this comment the thumbs up 0 likes

Bearing in mind the financial crash we've witnessed, and the fact that we're going to be wrestling with the outcome for many years to come, I think I'd rather have institutions 'trading conservatively'.

Personally, I don't trust financial models completely - I think there should always be a degree of slack built in (i.e. institutions NOT trading to the max).  Many of the financial models that were being used to support trading, etc. before the crash were believed to be correct when they turned out to not be - this is partly because few if any models cannot account for the inevitable human behaviour that will always come into play - somewhere.

We really need to be careful that the financial world doesn't get ahead of itself and ignore the lessons past.   A personal view, of course.

And as for the football analogy...why is it unacceptable for a ref to make a mistake, when players do so every second of a game?  If nobody made mistakes, then nothing would happen in a game, because everyone's positioning, tackling, acceleration, passing, shooting, saving, etc. would be perfect every time and therefore it would all cancel out.

A Finextra member
A Finextra member 30 June, 2010, 11:53Be the first to give this comment the thumbs up 0 likes

Chris, a nice play on the World Cup theme and its sad that both of our nations are out, but hey ho that is football and at least it gives us Brits something to talk about for the next 40+ years!

Regarding the finance aspect of your posting, what you are really saying is that for a Bank to be 'Well Managed' technology has a role to play in leveraging its core assets of staff, capital and customers, right?

A Finextra member
A Finextra member 30 June, 2010, 14:33Be the first to give this comment the thumbs up 0 likes

Thanks for your comments. My main point here is that banks need to be able to monitor limits and calculate credit exposure in real-time – not the next day. This will make them more risk-averse because it massively reduces the chances of breaching trading limits. At the same time, it means they remain competitive in their trading operations.


And back on the football angle, I for one was pleased to see today that Fifa are planning to review their use of video replay technology.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 02 July, 2010, 09:46Be the first to give this comment the thumbs up 0 likes

From Michael Lewis's book on the recent crisis, "The Big Short", it would appear that the required technology was in place, the red flags were raised by the risk management people, but traders were still allowed to - at least not prevented from - doing CDO trades that resulted in huge losses for their companies.  Was this because traders - and their bosses - earn bonus only if they put through trades and not when they refrain from doing so? IMHO, presence or absence of technology won't play any role in preventing or precipitating future crises - only deferrment of bonus and other similar measures can help. 

A Finextra member
A Finextra member 02 July, 2010, 11:20Be the first to give this comment the thumbs up 0 likes

Michael Lewis presented a Q&A style keynote at an event I attended in New York last week. 

Here's a link to the video of that session:

His new book, The Big Short: Inside the Doomsday Machine, is certainly an interesting insight.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 02 July, 2010, 12:14Be the first to give this comment the thumbs up 0 likes

Colin: Would love to watch your video, but it asks for logon details. Can you please have it published in YouTube or some such place on the public domain?

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 02 July, 2010, 13:07Be the first to give this comment the thumbs up 0 likes

Thanks Colin. Interesting video.

In hindsight, the bulk of the problem lies in the fact that the risk side of the risk-reward equation is borne by the financial institution's shareholders whereas the reward side is reaped by the trader and his bosses. Like Michael Lewis says in this video, no amount of policing - I take that to include technology - can prevent such a crisis. Only a change in the incentive structure can.

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