The role of technology in financial and risk management

By Kyriba September 6, 2013

In today’s global market, we need to make intelligent, sound, and quick decisions. Having the access and visibility into the required information achieves that objective. There is the continuous debate of SaaS vs. ASP vs. client/server, however we need to keep in mind that this aspect of technology is just the delivery mechanism. All have their pros and cons, but the ability for SaaS to be more flexible and dynamic with regulatory changes bodes well with the financial sector and we do see more and more companies adopting SaaS based products for short and long term needs.

Wait a minute… isn’t this an article on financial and risk management? Yes it is. However, without the technology, we would have no need for proactive cash management and the financial markets we know today and many of the great software products would not exist that are leveraged by C-level executives.

The two variables that impact a public organization are government/advisory board regulation coupled with economic volatility can present many challenges for today’s C-suite. What has made the difference? Technology. What is the best tool? Technology. How can executive management keep up with the changing regulations and mitigate the financial and operating risk? Technology. I for one am biased, as you can see. Agreed, nothing beats the good old pen and paper, but we all know the downside to operating in the dark ages.

Keeping in mind regulatory change and economic factors, I want to break down the correlation from a technology perspective and how the C-suite can create more value to the organizations business strategy through the use of… you guessed it, technology.

The main structure of a sound technology platform is the following:

1.       Environment variables

2.       Configuration details

3.       Capture and storage of data elements

4.       Processing of data elements

5.       Reporting and re-distribution

Environment variables

From a technical perspective, setting up or knowing your environment is crucial as it sets the landscape on what resources are available to accomplish your objective. Similar to risk management, one would need to identify and understand what you are working with or against.  For example, an existing regulation such as  ASC 8151,  IFRS 92, or a new regulation which we all know as Dodd-Frank3. Economically, what risks affect your business? Regulatory, Operational? Financial? Sovereign? Knowing your environment and what is available highlights the constraints that you may encounter and what is needed to address your risks.

Configuration details

The configuration gets down to the specific. This is where you fine tune a granular requirement and tie it together with your economic influences. For instance, fulfilling the Dodd-Frank requirement of reporting OTC swaps, specifically, interest rate, FX, and even commodity. Breaking it down even further, one would need to configure if there is an exemption to reporting. In certain instances, the exemption could be a characteristic of a transaction, such as an intercompany trade or loan. Granted, this is still being debated in Congress, however technology could be configured to determine whether a transaction qualifies for an exemption as well as configured to handle those that must be reported; without a congressman or senator trying to figure out the definition of a derivative and delaying the process… Sorry, I had to go there.

Capture and storage of data elements

Once the organization knows what they are dealing with and what it needs or is required to do, the next phase is to capture and store the required information to adhere to the requirements. Every organization needs to produce an output based on the input. Seems simple, however, if the data captured does not make sense and is not relevant, how can the report or the numbers make any relevant sense? Most often, the quality of the input is directly dependent on knowing the environment variables and the configuration that affects what one is trying to capture. It does not matter if the  data to be captured is CRM, derivative, or healthcare. If the data elements are incorrect, the whole system will be wrong; therefore the output will be useless. GIGO – garbage in, garbage out.

Processing of data elements

Almost done… this is where all the magic happens, the business rules and requirements morphing together with your configuration and data elements. Not all data needs to be processed and can be a straight pass through, but at some point the data will be used to produce a report, a graph, an accounting entry, or even a Key Performance Indicator (KPI). The resulting output is crucial to all C-Level executives internally and externally. The ever changing market coupled with economic volatility requires the technology platforms and systems to be ready for the changes while also maintaining stability within a corporate organization. Good Data, makes good decisions, Bad data, well you know. 

Reporting and re-distribution

Now that you have the information post processing, what do you do with it? There are a host of technical issues, but that is handled by your IT department. I like to think of reporting and re-distribution as a linear process. You need to get the data from point A to point B without losing the integrity. The shortest distance between two points is a straight line and technology has played an important role by shortening the time and effort to disseminate the vast amounts of information.  In the past and present, this was handled by Information BUS’s, such as TCPIP, DMQ and TIBCO. Today, the information highway has evolved with XML and Web Services.  Why not leverage the technology and improve your operations and visibility?

So, what does this all mean?

I would like to summarize in a several bullets:

  • Technology and software are tools, not the panacea
  • The information is used to formulate strategies, gain insight to the risks, and support the process of making decisions
  • Without the technology we would be in the dark, literally

Let us face the reality. Regulations and economic factors are in constant state of change and adjustment. In order to keep up and ahead of the changes, we need tools that can identify the environment, help us configure the changes, store and process our data, and finally, distribute and report the results.  Managing the risks through the use of proper and effective tools help us strategize and optimize our processes for any of our global endeavors.

References

1. ASC 815 overview

2. IFRS 9 overview

3. Dodd-Frank overview

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