Technology & Securities Accounting Risk Management

Financial management institutions seek to maximize profits and minimize risk. For institutional entities in banking and finance, a strong securities accounting system plays a critical role in ensuring that all parties to a transaction are properly informed, collateralized and protected from costly errors that decrease trade completion, increase risk of penalties and otherwise inhibit the smooth transaction processing necessary for success in today’s fast paced business environment.

There are several non-market risk factors frequently encountered by companies engaged in institutional securities management:

Risk 1: Trade Entry Errors

Frequently, disagreements between trade parties result from errors as simple as mistakenly entered terms or added extra zeros. Risk of erroneous data entry is particularly high when trade terms change several times over a short period of time.

Yet, simple as these errors are, they often go undiscovered until time of settlement. When payment expectations – either out or in – are not in alignment, discovering the root cause of the discrepancy… which could date back several weeks… wastes precious time and labor resources.

Risk 2: Disparate Valuation & Reconciliation Expectations

Valuation is of critical importance in maintaining the integrity of securities trades. Yet, manual entry of trade value calculations can lead to parties having different expectations of returns or outflows over a given period in time.

Discrepancies can result from calculation errors resulting from either mistakenly entered formulae or use of inconsistent pricing data.

Risk 3: Counterparty Risk Exposure

How stable are your transaction partners? How likely are they to complete their end of the transaction? Are their securities maintaining their valuation? Are the assets they pledged as collateral sufficient to mitigate risk, or is further collateralization required? The stability and reliability of trade partners plays a big role in deciding whether to see trades through to completion, or if environmental factors require compromising profit for risk minimization.

Risk 4: Collateralization

Similar to counterparty risk exposure, trade collateralization helps reassure trade partners that agreements are likely to complete, and serve as reassurance against counterparty default. Yet, collateral is only as good as its availability. If collateral is pledged multiple times against various trades, risk mitigation is severely decreased or eliminated altogether.

Failure to adequately collateralize trades weakens not only relations between trade partners, but also the market environment as a whole.

Risk 5: Reporting compliance

While not as high profile as the other risks, failure to report trade valuations increases operational costs. Required by exchanges and governmental regulations, inability to submit valuation of trade activities by mandated deadlines leads to the imposition of fines and penalties, and development of a poor reputation. Yet, each of the other four risks, if unaccounted for, increases the likelihood of missed reporting timeframes. Failure to report accurately and on time leads to expenses that can undercut profitability in a highly competitive environment.

Technology For Risk Mitigation in BFSI

Technology based solutions provide the opportunity to mitigate each of the above mentioned five risks, as well as many others. By combining trade documentation, trade details, 3rd party valuation data, standardized pricing calculations and asset tracking, along with internal and external reporting capabilities, customer account access and audit management, a technology based solution has the opportunity to mitigate both non-trade and trade based risk.

Mitigating Valuation Risk

For example, by integrating 3rd party valuation services and publishing daily position calculation reports, both party and counterparty are notified of anticipated payments over various timeframes, given a particular date and timestamp. This provides both parties, not only with common data from which to make educated decisions regarding trade status and future action, but also the opportunity to recognize disparities. By fixing valuation disparities closer in time to trade origination, organizations prevent payment processing delays and ensure that errors don’t follow forward for significant periods of time.

Moreover, by allowing for the storage of trade documents within the transaction management system, origination documentation can be accessed and evaluated by both parties in near real time, preventing delays related to search efforts caused by inefficient, unshared data management protocols. Unlike document retention facilitated by email and fax, in this system, both parties are assured of looking at the most recent document available, with the same terms and conditions.

Additionally, discovering the source of errors through auditing capabilities… be it clerical, technical or structural… allows for the prevention of future errors, enhancing future productivity and profitability.

This combination of technology fixes to the traditional trade management environment has the potential to reduce discrepancies and resulting delays from 40% to 3 – 4%, while additionally increasing the speed of valuation resolution.

Mitigating Counterparty Risk

Technology can similarly level the playing field between parties, ensuring that counterparty risk is sufficient to ensure comparable exposure for both parties. Real time collateral validation ensures that particular assets haven’t been pledged multiple times for different transactions, and counterparty credit information helps determine whether a true meeting of the minds is possible between parties.

By making these assessments part of an integrated system, rather than parsing them out to another team with different timeframes, priorities and frameworks, transaction time assessments are possible, ensuring that deals are secure at their inception. Further, continuous monitoring – and reporting – of details including collateralization, financial position and stability allow for real time decisions about trading profitability for risk optimization, should conditions surrounding the original trade change.

Technology As Equalizer

The days of managing financial transactions using Excel spreadsheets, email and shared drives is over. Increasing speed of business, smaller opportunities for error and globalization require securities management to look to financial technology to control risks to the greatest extent possible.

By merging multiple disparate, but overlapping functions in one system, deal makers on both sides of a transaction have increased transparency, risk mitigation and business opportunity. A strong securities management system helps control both operational and market factors, promoting business security, reliability and profitability.

Today, financial technology for securities asset trade management is a must. Is your organization ready?

Contact SRI Infotech to learn more about how we can help you improve your financial trade operations today.