A crisis like no other
On March 12th the FTSE 100 lost more than 10% of its value in its worst trading day since 1987. As US markets opened on the same day, circuit-breakers automatically kicked in to suspend trading as indices immediately lost 7%. Many traders navigated this market turbulence from the unfamiliar surrounds of a business continuity site – or even their homes.
Fast forward a month and this unprecedented combination of extreme market volatility and dispersed working arrangements continues to put unique pressure on wholesale market participants. The speed with which this crisis has developed means that many institutions simply do not have their controls appropriately calibrated to current market and operational conditions.
The consequence is that residual conduct risk exposures are materially higher across products, desks and markets, and the threat of a significant risk event is substantially increased, in many cases beyond the stated risk appetite.
Emerging risk factors and control disruption
Firms are finding themselves in the uncomfortable position of having to deal simultaneously with emerging risk factors and significant disruption to their control environment – as summarised in this diagram:
Figure 1: Emerging risk factors and control disruptions contributing to conduct risk exposure
Click here to enlarge the diagram.
Adapting and responding to the ‘new normal’
As firms settle into their ‘new normal’, they should be engaged in a continuous prioritisation assessment to determine the most effective tactical measures to develop a more robust control position. These measures may focus on organisational or technical effectiveness within the control environment, such as:
- Simplify governance protocols to prioritise governance forums that focus on critical conduct risks
- Increase information sharing across asset classes and geographies and ensure you’ve got the right skills pointed at emerging issues
- Increase the frequency of internal conduct communications via e-channels
- Expand conflicts of interest-scenarios to reflect the impact of volatility
- Refine the risk-based assessment of product suitability
- Use pre-trade transaction-reviews to inform the assessment of front-to-back control effectiveness
- Tactically recalibrate scenarios for monitoring and surveillance systems to reduce the number of alerts and false positives
- Streamline the governance process around the recalibration of execution algos
Agility will drive positive outcomes
The current crisis is already a personal and professional challenge unlike anything we have ever experienced. We are all learning and adapting every day. Any crisis brings the opportunity to find innovative solutions to the most challenging problems that may not have appeared feasible in other circumstances. It is this mindset and accompanying operational agility that will be critical in helping control teams overcome the immediate threat that now presents itself from a conduct perspective.
How can Baringa help?
Baringa have been instrumental in developing, reviewing and refining Front Office controls and conduct risk frameworks for multiple global financial institutions in recent years. We have experience and expertise to:
- Conduct rapid, risk-focused control assessments across the Front Office
- Design and deliver tactical control enhancements specific to desks and asset classes
- Support the execution of critical controls, bolstering and complementing the skills of existing teams
- Design and deliver nimble governance forums to drive effective decision-making under stress
- Recalibrate monitoring and surveillance parameters to current market conditions
- Provide tactical support to analyst teams looking to clear surveillance backlogs
Please reach out to Lucine Tatulian, Matt Clay or Greg Pastore if you would like to discuss any of our recommendations further. This is an executive summary of a longer article that was published in Armstrong Wolfe’s COO magazine in April 2020.