Market risk sees increased sell-side investment, finds study

Survey found that 41% of respondents are already expecting a significant overhaul in their approach to managing market risk over the next 12 months.

A new study by Acuiti has found that sell-side firms are increasing headcount and investing in market risk to meet new regulatory and operational challenges.

Commissioned by KRM22, the study surveyed market risk executives from various sell-side firms and found that over the last 18 months, around 50% of respondents had increased staffing levels, with 7% reporting a significant increase.

Simultaneously, a desire for increased automation and nearer real-time views of risk exposures has seen growth in the importance of technology. The ongoing implementation of the Fundamental Review of the Trading Book (FRTB), which requires a considerably more holistic view of risk, has caused this trend to increase.

The way in which market risk is managed is expected to see significant change across the sell-side in 2022. The survey found that only 14% of respondents believed their approach to managing market risk would stay the same over the next 12 months, with 41% already expecting a significant overhaul.

The survey also found that loss prevention and the anticipation of a major risk event is fueling the desire for change. In addition, regulatory pressure is driving change reflecting the introduction of FRTB.

“For the last 10 years firms have channeled investment into Compliance functions to address increased regulation following the Financial Crisis. More recently, with major events such as the COVID-19 pandemic, firms are recognising the need to shift some of this focus toward Market Risk, moving away from legacy platforms and disparate processes,” said Dave Zurkowski, head of market risk at KRM22.

“Firms are seeking to deploy technology solutions that perform during times of high stress and bring together risk metrics across business units, providing insights that ultimately improve the customer experience.”

Over the next 12 months, investments will be made in both the headcount and technology in market risk by senior market risk executives across the sell-side, according to the study.

In light of the drive towards increased automation, 35% of firms are planning to increase headcount while 86% are looking to deploy new systems to support their changing approach.

“Expectations of volatility throughout 2022 are high as multiple factors from international politics to localised inflation in major markets raise the prospect of major shocks to equity and fixed income markets,” noted Will Mitting, managing director of Acuiti.

“Following a period that has seen several high-profile defaults and unprecedented market volatility, market risk has shot up the agenda for the sell-side. This was shown in the KRM22 Capital Markets Risk Sentiment Index, released in Q4 2021, which found that market risk was the highest priority for banks and the second highest priority overall.”