This report updates Chartis’ view1 of the landscape for sell-side enterprise risk management technology2. After summarizing key market trends, we analyze two areas where there has been considerable activity, and in which key challenges are emerging: margin valuation adjustment (MVA) and initial margin (IM) requirements.
Several trends have been developing since we last covered this market, creating new challenges for sell-side financial institutions (FIs). As firms’ stress- testing obligations increase, demand for good quality, timely data is also rising, pushing many FIs to supplement their existing data with that from other sources. At least their regulatory response has largely stabilized – with the exception of the Fundamental Review of the Trading Book (FRTB), which is introducing new factors to consider. Other challenges facing sell-side firms include more complex capital management, and a blurring of risk-related responsibilities across the business, which is making it harder to define what the CRO actually owns.
Driving many of these changes are two influencing factors. Now that the final update to FRTB has been issued, many FIs have been encouraged to consider the internal models approach (IMA) to FRTB compliance, with the data and processing implications that come with it. Firms are also looking to consolidate their risk systems to boost efficiency, and many are now looking for software components they can integrate, and for the expertise to help them do it.
One major development emerging from many of these shifts is the need for more sophisticated computational technology to handle the growing complexity of sell-side risk management. This is especially true in the areas of IM and MVA calculations. These developments have helped to trigger an unprecedented increase in the computational challenge facing sell-side firms, and changed the nature of that challenge.
To upgrade their systems to address the issues, sell-side firms have two options: handle the increased burden themselves, or look for help elsewhere. It’s a crucial choice to make: MVA will continue to grow in importance as a wider variety of firms fall under the remit of IM regulations, and as more derivatives require IM calculations.
As we highlighted in our previous report, no sell- side vendor offers a single solution that can deliver all the required functionality. Nevertheless, some vendors now cover a wider range of firms and requirements, resulting in a growing convergence among vendors’ functionality, business models and approaches to implementation.
As sell-side firms are more interested in buying ‘modular’ components, packaged solutions are in decline. Most sell-side risk management vendors now employ a ‘generalist’ strategy, growing their offerings horizontally, and covering more valuation adjustments (especially MVA capabilities).
To explain the structure of the market this report uses Chartis’ RiskTech Quadrant®. The RiskTech Quadrant® uses a comprehensive methodology of in-depth independent research and a clear scoring system to explain which technology solutions meet an organization’s needs. The RiskTech Quadrant® does not simply describe one technology solution as the best risk-management solution; it has a sophisticated ranking methodology to explain which solutions would be best for buyers, depending on their implementation strategies.
Building on the thinking outlined in our 2017 sell-side risk management report, in this report we focus on vendors that address risk analytics and trading systems. These cover infrastructure, tools and libraries, as well as key calculations such as xVA. The vendors featured in this report are: Bloomberg, Calypso, Finastra, FIS, IBM, IHS Markit, Imagine Software, Intellect Design, MSCI, Murex, Numerix, Oracle, Quantifi, and TriOptima3.
We aim to provide as comprehensive a view of the vendor landscape as possible within the context of our research. Note, however, that not all vendors we approached responded to our requests for briefings, and some declined to participate in this research.
1 For our previous analysis of this market, see ‘Sell-Side Risk Management Technology; Market Update 2017’.
2 For this report we focused our analysis on vendors’ enterprise risk offerings for the sell-side, rather than broader sell-side functionality that may include front-office risk management (FORM) systems. Those solutions are covered in our forthcoming FORM Market Update and Vendor Landscape report.
3 Note that references to specific vendors within the text of this report do not constitute endorsements of their products by Chartis.