Fintech Insights

A sliding doors moment: How Covid-19 set capital markets firms on a new path for risk operations

Tony Warren | EVP head of Strategy and Solutions Management, FIS

September 14, 2020

The COVID-19 pandemic has been the ultimate test of resilience for capital markets firms. New research from FIS, surveying 250 industry executives, reveals how it has accelerated the race towards a new operating model for risk management.

At the height of the market disruption triggered by COVID-19, capital markets firms were dealing with 3x trading volumes, 5x post-trade volumes, and extreme volatility — all while transitioning to a remote working model.

Despite this pressure, the industry was able to respond, quickly expanding capacity by drawing on new technologies and an ecosystem of partners. For many buy- and sell-side firms, this will represent a sliding doors moment for their approach to operations.

In our latest research, we found that 62 percent of the capital markets companies we surveyed have increased their appetite for cloud as a result of the business disruption caused by COVID-19. And 43 percent have increased their demand for managed services.

Given increased cost and capacity pressures, and the proven efficacy of cloud and managed services models at the height of the market disruption, more firms are now exploring these operating models in areas that were previously less attractive, such as risk management.

At an aggregate level, firms in our research struggled most to adapt to new demands on their risk functions. But some fared better than others.

Those that were using managed services models for risk management found it easier to adapt their risk processes and operations when Covid-19 struck: half (49 percent) of those managing risk systems in-house said it was highly challenging to respond to the new pressures on the function, while only 38 percent of those using managed services models experienced the same difficulty.

This has contributed to a change in mindset about the future operating model for risk management, with managed services and cloud coming to the fore.

Our pre- and post-COVID-19 survey results highlight this shift: in our pre-COVID-19 Readiness survey, the most widespread reluctance to adopt a cloud-based model was in relation to risk management systems, where 42 percent were hesitant. Yet post-Covid-19, half of respondents say appetite to manage risk systems in the cloud has increased, which is higher than for any other business function.

The case is hard to ignore. As complexity mounts across market, credit and liquidity risk, the risk function must increasingly be integrated into front office decision-making, drawing on a single source of data and providing visibility across asset classes. Organizations must be capable of running complex risk calculations at scale and of providing real-time analytics to those making trading and investment decisions.

The use of cloud-based systems with open microservices makes all of this more easily achievable, as well as providing the agility to rapidly adapt to fast changing business needs, at a time of prolonged uncertainty.

Further, by outsourcing the management of non-differentiating, newly commoditized risk calculation processes, firms are realizing opportunities to achieve economies of scale, and to enable stretched risk teams to perform complex calculations with greater efficiency.

In many areas of capital markets activity, the COVID-19 pandemic has either reinforced executives’ convictions about technology models for the future — or urged them to accelerate existing plans. For the risk management function, where modernization plans were perhaps less radical for many firms, the pandemic has been a real Janus moment. It has helped to demonstrate that moving to cloud and outsourcing the management of commoditized risk processes is not just a viable option, it is fast-becoming integral for future success.