 Marianne Brown
President and Chief Executive Officer
December 21, 2009
2009 was undoubtedly a landmark year when looking at operations within the financial services industry. Faced with some of the lowest points of market performance and then the beginnings of a turn-around, the entire industry has approached a cross-roads.
The events over the last year and a half between credit issues and market turmoil serve as reminders that the industry has traditionally underinvested in risk management capabilities, with extremely negative ramifications.
While it is easy to look with a gloomy eye at the year behind us, there were some positive changes in ’09 when considering the industry’s overall attitude toward transparency and risk mitigation. We in the middle and back office have been waving our arms for years trying to get the attention of those in the front office and board room and in 2009, we have finally seen the spotlight turned toward what we’ve always deemed a vital component of the success of the global markets.
If there is one lesson to be learned from all the turbulence, it has to be to both expect the unexpected and to plan for it. We all must challenge the depth of every single business assumption – and the quality of every dollar of revenue versus worst case scenarios. No one could have predicted the speed and the scale with which the financial systems unraveled as a result of the credit crunch. Likewise, we have never before seen the scale of global cooperation being undertaken by market participants, industry associations and policymakers to fix the woes of the global financial systems.
Today more than ever, operations is an extremely exciting area to be in! From the back room to the board room, the inherent value of a sound operational infrastructure is being touted as critical to the success of a firm’s overall strategy.
There have been many changes in the middle and back office in 2009, and no doubt more are on the horizon. There are several trends that I see as tremendously positive for all of us here today:
- There is greater collaboration amongst our client community and a marked behavior shift toward greater cooperation. Internally at any given firm, it makes more sense to find points of connectivity across the franchise to leverage buying decisions.
- When looking at firm-to-firm interaction, there is greater value placed on how investment managers and brokers can PARTNER to navigate risk mitigation. Today more than ever, counterparties want to identify a mutual goal and the specific ways such goals can be achieved together.
- The role of operations is changing in the industry. The front office is more vested in middle office activities than ever before and looks to operations experts to be a firm’s eyes and ears for risk management.
- Operations professionals are seen as stewards of critical data and processes that feed all downstream systems. There is heightened concern of counterparty risk across firms, and from the back office straight up to the board room, there is a mandate to identify and mitigate risks early on in the trade lifecycle.
- The industry is demanding and leveraging processes that enable transparency across asset classes and across borders.
Looking ahead
In 2010, we can expect continued increase in due diligence among investors. The financial downturn has heightened the need for transparency into and understanding of proper operational processes in the eyes of investors everywhere. Today more than ever, those investors want to know what they’re investing in, have a more robust understanding of the asset class that make up their portfolios, as well as all the relevant features and operational processes that are in place before investing.
While speculation around upcoming regulation has been occurring almost since Day 1 of the credit crunch, it’s very likely we will start to see the rubber meeting the road in terms of regulatory reform in 2010. Such legislation will enable more globally-aligned, industry-wide regulations. Additionally, we are likely to continue see a movement toward using central clearing facilities for complex securities like derivatives, and more of an effort from investors to mitigate organizational and counterparty risk at investment management firms. On a similar note, hedge funds will likely be required to register with the appropriate industry entities around the globe, and if they’re deemed systemically important, more oversight may be required by the appropriate regulatory agencies.
Volatility and volumes continue to take us for a wild ride, and as we continue to weather the storms, no one will debate that this is a tremendous opportunity to learn which best practices are invaluable, and which areas still have gaps that need to be addressed.
Traditional investment strategies, traditional counterparties, traditional means of operating have all morphed into new means to achieve alpha, new market participants and new areas of efficiency to be addressed.
We can be proud of what we’ve achieved in certain areas, but we cannot yet relax by any means. For even where we suspect we’ve gained every efficiency, there are undoubtedly more to be achieved.
Lessons learned over the past several years take on new meaning when we look to apply them to less-mature areas of the market.
Looking ahead, in coming months and years, such gaps in the effectiveness of risk management initiatives across all areas of the trading cycle will be a top priority, not only for operations professional, but throughout the entire community.
If the current market conditions are testament to anything it’s that a lack of appreciation for risk can have a dramatic impact in times of difficulty. Likewise, if the turmoil experienced by the global financial markets this year has taught us anything, it’s that industry efforts towards market stability and reliability should be paramount.
2010 must be a time for the industry to continue and strengthen its commitment to making operations and risk mitigation a top priority. Otherwise it won’t be a question of “if” history will repeat itself, but “when.”
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