Canada: Risk Infrastructure: Lessons from the Trenches

Last Updated: August 19 2010
Article by Mark Smith and Brian Hart

It's more than just pipes

Like monetary policy, risk infrastructure has become a sexy topic. Three stories from large North American banks indicate why.

One institution sought to grow its business through increasing its volume of trades in credit instruments, equity derivatives, and foreign exchange. The regulator surprised them by throwing up a stop sign, saying no to the increased volume of business. Why? The regulator was not confident that the institution had the risk management models, processes, and infrastructure in place to safely trade higher volumes of these financial instruments.

Another institution had put out the fires of excessive risk and wanted to concentrate again on growth. Management developed a trading strategy that sought to balance return, capital, and risk. However, they found that they had insufficient real-time information to know which trades to make in the short term, or which markets to stay in for the medium term. Attempts to grow would be fruitless until they solved this problem.

A third institution had recently acquired one of their largest competitors with a very large business in the capital markets arena—much larger than their own. Overnight, this organization migrated from a small, predominately North American trading business, to one of the largest global trading businesses in the world. They quickly realized that they were not set up to manage the risk. Risk and regulatory reporting became slow and riddled with errors, which attracted unwelcome regulatory attention and oversight. Searching for a way out, their solution was to completely revamp everything that went on behind the scenes.

KPMG is involved in each of these stories and numerous similar situations. What are we learning?

Simply, many banks are hampered in their business objectives by inadequate risk infrastructure, and by this, we do not mean just technology, but equally data, analytics, workflow, organization, and reporting the total package.

Before the financial crisis, a dollar spent on risk management was often considered a dollar that could not be bonused to people or traded for profit. Risk management was more of an afterthought, focused on basic risk reporting, meeting minimum regulatory standards, keeping pace (or trying) with the business to bring a measure of control, all the while using systems and approaches that required huge amounts of data management, one-off spreadsheets, and tons of reconciliation, only to produce information that was either late to the table or only somewhat relevant. The financial crisis exposed this house of cards. Many banks found serious problems around risk, systems and information that they and their regulators are now becoming aggressive about solving. For example, many risks, such as liquidity risks, "fat tail" events, or credit in the structured products arena, are not reported against. Governance for them is either poorly defined or not defined at all. Systems being used grew up in "stovepipes" that do not communicate with one another and thus ignore the inter-connected nature of risks. There is data but not information; the "why," "so what," and decision implications are missing. Measurement rarely addresses success or failure. What is the benchmark? What is "good"? Risk management staff spend half their time or more on data production, reconciliation, and reporting—not on analysis and decision support.

And the solutions in the current marketplace are only somewhat helpful. The vendor marketplace is one serviced by multiple providers with overlapping and not consistent services. The right application or more typically the set of applications is dependent on each bank's product/service suite and its overall business objectives. To show the variety and the complexity, here is one overview of the systems solutions marketplace. It captures only some of the various solution providers.

Our experience teaches that the leading risk systems struggle to meet the clients' endto- end needs. The following risk management capabilities are often lacking in off-the-shelf solutions:

1. Limit breaches: leading market solutions are not necessarily designed as workflow engines:

a. The limits are often rigidly defined and may not be flexible enough to meet the unique needs of different trading businesses.

b. Intra-day reallocation of limits and limit breach exception processing are not enabled and often need to be custom built.

2. Risk reporting: packaged reporting capabilities often meet the minimum reporting requirements, but not management's needs for a more robust capability:

a. Applications do not allow the frequent access, exploration, and analysis of data

b. Additional reporting needs typically require customization

c. Reporting does not integrate risk, performance, and capital into a single information framework.

3. Measurement methods often no longer meet basic regulatory needs, as the approaches are devised to meet a broad range of needs, and not the specific complexity of any one given organization. Further, the emphasis is on broadly used analytics, rather than analytics devised for use to manage a specific universe of risk and financial characteristics.

4. Data is not managed in a way to support risk management work flow; rather, it is modelled and optimized to support a specific analytic framework, which means the focus is on the measurement of risk, not the management of risk.

The way forward

So what is the way forward? KPMG has recently interviewed both banking clients and non-clients to ascertain their needs and their requirements. We found their needs are straight-forward and in fact a bit "motherhood and apple pie." Banks want electronic delivery of forward-looking, robust, integrated measures and information that are timely, easy to analyze, and useful for what-if scenarios. Easy to say, but much harder to do. Their resulting must-have requirements for technology investments are the following:

  • Robust technology is essential for risk managers to move into proactive, analytical roles, instead of being forced to focus only on reporting, reconciliation, and data management
  • Systems need exception reporting and/ or management alerts to focus attention on problem areas
  • Technology must apply a formal "process and policy execution" framework to trading floor activities
  • Old stovepipe systems must be migrated to more holistic risk architectures
  • Systems must ensure the quality, transparency, and traceability of data
  • Information should be electronically produced and delivered.

Meeting these requirements demands first a holistic framework, such as the following:

The goal is improved risk management performance. Technology addresses the sources of data, its transportation, its transformation, and its storage. Equally important, we are stressing, are the work flow processes and organization structures, the choice of measures and analytics, and the reporting and presentation. Finally, what are too often ignored are the governance structures and processes that bind it all together. Failure to address clear accountabilities, the governance hierarchy, and transparent dispute and exception escalation procedures, always results in serious breakdown.

A Case Study

In one instance, a top five trading institution found that as the crisis unfolded, they did not have a good command of the risk being taken by the traders, whether they were being paid adequately for that risk, and how that risk might behave under various scenarios of importance to different management levels in the organization. Further, the risk management organization was predominately a producer of information, as opposed to an analytic support and active control function—an issue that management believed must be addressed. All of the basic regulatory minimum standards for risk management had been met, yet it was still not enough.

Our team was engaged to quickly identify and decompose the risk in the trading book, then frame a robust risk and performance management framework that provided actionable business insight and information with clear connectivity into risk/ regulatory reporting and capital. Once the work had been completed, we were asked to devise a practical strategy to implement what amounted to a fundamental revamp of the information used by risk management, executive management, and the trading organization. The revamp needed to leverage to the extent possible the legacy environment to enhance the speed of deployment while minimizing the cost to implement. The objectives were not to just implement new analytics, but to design a capability that shifted human focus from data management, reconcilement, and reporting, to analysis, investigation, advisory, and oversight.

One of the most interesting aspects of improvements to risk infrastructure is that many projects can be paid for with the savings they create. When the reconciliation and data management burden is cut in half, cost reductions of 10 to 25 percent can be achieved. Time for risk analysis and oversight can be increased by up to 250 percent in our experience, and the quality of oversight is enhanced by automation, management alerts, and new risk views.

Also, a better risk infrastructure doesn't just make for better risk managers; it can make for better front office performance too. Faster access to information and enhanced analytics can increase speed to deploy by 35 percent—with better control. Valuation can be 30 to 50 percent faster, with greater transparency around the migration of key assumptions, all while helping to reduce the work effort required to complete a reliable mark to focus on other essential elements of risk management.


Before the financial crisis, trading organizations let the front office limit the intrusion of risk infrastructure on their activities. Risk managers concentrated on reporting, reconciliation, and data management, and had little time for truly value-added activity in conjunction with their front office peers. Even the front office didn't realize they were sacrificing performance by avoiding these investments and not embracing enhanced risk management capabilities.

Now, after the financial crisis, regulators are keenly interested in risk infrastructure from the point of view of analytics, information, process, technology, and governance. Although the concepts involved are relatively simple, and the benefits tangible, many financial institutions are not yet moving quickly in this direction. Risk infrastructure is, realistically, a post-rebound project that requires longer-term strategy, planning, and execution. However, it is where regulators and the banks should go. The benefits should also make it a place where banks want to be.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.