Sell Side Firms Increase Investment in Market Risk: Survey

Sell side firms are increasing headcount and investing in market risk to meet new regulatory and operational challenges, a study by Acuiti has found.

The study, which was commissioned by KRM22, surveyed sell side market risk executives and found that half of respondents had increased staffing levels over the last 18 months with 7% reporting a significant increase.

At the same time, the importance of technology is growing, the survey finds, driven by a desire for greater automation and nearer real-time views of risk exposures. This trend is boosted by the ongoing implementation of the Fundamental Review of the Trading Book (FRTB), which requires a significantly more holistic view of risk, Acuiti says.

The firm adds that 2022 is set to be one of significant change for how market risk is managed across the sell-side. Only 14% of respondents expected their approach to market risk management to remain the same over the next 12 months with 41% planning a significant overhaul.

According to the survey, the desire for change is being fueled by loss prevention and the anticipation of a major risk event. Regulatory pressure is also 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,” says Dave Zurkowski, head of market risk at KRM22. “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.

“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,” he adds.

The study found that senior market risk executives at the sell-side are expecting to invest in both headcount and technology in market risk over the next 12 months. Reflecting the drive towards greater automation, 35% of firms are expecting to increase headcount while 86% are planning 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,” says 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.”