While the term risk orchestration may be relatively new to many people, it is a critical concept regarding the cost and efficiency of services such as transaction reporting and risk management. In simple terms, this is a strategic approach integrating various activities, processes, data and teams across a company. In layperson’s terms, if you have a team of superstars, but they don’t work together, then your returns will be limited. Risk orchestration ensures that the team are all sing from the same hymn sheet and, above all, cooperating.
In this article, we will look at the different elements of risk orchestration, relate them to transaction reporting and reflect on the long-term benefits. We’ll also seek to include how we feel this will have to flex to incorporate T+1 settlement, which is topical.
What is risk orchestration, and how does it work?
It is essential to appreciate the various elements of risk orchestration, the combined benefits and how they will impact your business in the future. These are the main elements of risk orchestration:
Collaboration and communication
As we touched on above, even if you have a team of high performers, but they aren’t communicating or working together, your successes will be limited. While our transaction reporting services are based on the latest cutting-edge technology, there still needs to be an element of collaboration and communication between intra-company departments and outside connections.
Integration of systems and data
Using market-leading technology, we have integrated global reporting systems, depositories, and local regulatory nuances. This allows us to create detailed transaction reports, highlighting areas of concern which will need further investigation. We will cover costs later in the article, but there are significant savings in the short, medium and long term when using highly-skilled third parties such as eflow.
Risk identification and assessment
In order to maximise risk identification and assessment, all data needs to be formatted on a constant basis to be able to compare and contrast. This is critical with risk identification because, for example, the rating agencies have different scales. So if one of your internal/external systems is using Moody’s and one is using S&P for a risk credit assessment, they have different classifications for the same risk groups. Mapping is critical.
Automation and use of dynamic, modern technology
Speed is obviously of the essence across the investment world, as are regulatory and transaction reporting obligations. However, with enhanced speed, using the latest automated cutting-edge technology comes even greater demands for accuracy and timely transfer of data. Risk orchestration will become an even more critical element of everyday transaction reporting when the US markets move to T+1 settlement, and their European counterparts eventually follow suit.
Monitoring and responding
Ultimately, using non-siloed, third-party regulatory technology with transaction reporting has a clear end goal; the ability to monitor and respond to ongoing risk assessments quickly and with coordination across the business.
The speed at which these potential risks can be mitigated or managed is critical to the long-term success of any business, especially those operating in the investment industry. On one side, introducing T+1 settlement will reduce market and company risk. However, it places a considerable onus on the numerous elements of the reporting chain to deliver the data and assessments on time.
One break in the chain could have significant consequences for all parties.
Transaction reporting
Without timely, accurate transaction reporting, market confidence and integrity would quickly disappear. Then there is the ongoing issue of detecting and preventing market abuse by monitoring not only individual trade details but also internal company communications and those with clients. Creating a virtual “paper trail”, which will routinely involve many different parties, allows all the essential data to be combined in one concise report. Then, for the risk assessment!
If we look at the European market, there are three primary transaction reporting bodies which are:-
- MiFIR - focused on the detection of market abuse
- EMIR - the control of systemic risk protection to protect financial markets
- SFTR - also focused on systemic risk and supporting financial markets
While these three bodies monitor and report on different risk elements, they must work together to create a broader picture. At eflow, we work with many regulatory bodies, depositories and market operators to accumulate and collate vast amounts of data. Due to the flexibility of our systems, we can manage risk orchestration in a timely and accurate manner.
Working with multiple vendors
A recent report by LexisNexis highlighted the fact that, on average, financial services providers depend on five external data vendors/solutions to carry out their risk compliance obligations. Creating a real-time connection with these parties and delivering data in the correct format and reviewed as part of a broader process is challenging.
This is where eflow can add significant value to your operations, working with external parties behind the scenes to create one continuous flow of data. Rather than continually investing in your platform, using third-party services like ours allows you to benefit from our investment in new technology and innovation. No interruptions, no formatting issues and no need to adjust your systems when the vendors make any changes - we will look after that. Risk orchestration at its best is seamless.
This brings us to the next question; self-building your own platform or using the cutting-edge plug-and-play solutions available today.
Should you be looking at a self-build platform or a plug-and-play solution?
Plug-and-play solutions, by definition, are flexible and able to adapt to existing systems, creating an overlay which brings all information channels and data together. Historically, many companies in the world of finance have been reluctant to use outside services, instead often deciding to self-build what can be complex solutions.
There are many issues to consider, such as:
- Compatibility
- Annual running costs
- Build costs
- Onward maintenance
- Onward development
Some reports have put the difference between a self-build and buy-in at as much as £4 million over an initial three-year period. While this will depend upon the services required and the complexity, it does give you an idea of the difference. The benefits of using third-party technology for transaction reporting and risk management include:-
- Benefiting from third-party investment spread amongst all clients
- One central focal point, with companies such as eflow able to plan ahead
- Expertise and focus on specific processes and solutions
- Ongoing support means that issues are usually resolved very quickly
- Reduced in-house investment in technicians and maintenance staff
The opportunity to utilise cutting-edge third-party services also has potentially substantial efficiency benefits, allowing you to focus on what you do best, i.e. financial services. In practice, by using eflow reporting services, your clients won’t see a difference in the services you offer - however, the internal benefits, both practical and monetary, are there.
Keeping up with changing regulations and obligations
Looking back to the 1980s, there were some ground-breaking regulatory changes, but the pace and number of changes was nowhere near that of recent years. As mentioned above, the US authorities are moving towards T+1 settlement in the first half of 2024, with UK and European markets likely to switch in 2025.
It is not difficult to see potential reporting/settlement issues with counterparties attempting to deal with different settlement timings. Whether parties in foreign markets will need to run dual transaction reporting systems remains to be seen, but there will be challenges ahead. Therefore, risk orchestration will become standard practice across the industry, effectively outsourcing elements of risk management to outside parties.
As a provider of regulatory compliance solutions for the financial services industry, eflow is at the vanguard of new technology. We take away the pressure of adjusting internal systems for new regulations, maintaining transaction reporting even during times of change. We are in constant contact with regulators, allowing us to plan concerning potential and confirmed changes. It is critical that we are one step ahead so that we can maintain a competitive edge for clients.
What is the primary role of eflow?
When it comes to risk orchestration, our position is akin to the leader of the band, the person with the baton, controlling the show and bringing in different parts of the team as and when required. We know how to combine the various strands of our technology and risk management platform to create the perfect note, i.e. seamless service. Constantly seeking to improve, evolve and look to the future, we appreciate the challenges of our clients, their business and regulatory obligations.
Our ongoing investment in personnel and technology, together with our in-depth understanding of markets, regulations and transaction reporting, has seen us become essential partners for many clients.
While the regulatory and reporting element of the financial services industry is essential to the efficiency and integrity of markets, the ever-growing burden has diverted the attention of many clients from what they do best, financial services. There is a high cost in terms of funding, time and staffing for those determined to build their own in-house risk assessment platform. As the regulatory goalposts continue to move, these are not one-off costs; they are constant and, in many cases, growing.
If you would like to discuss the benefits of risk orchestration in terms of transaction reporting and other elements of your regulatory obligations, we welcome the chance to discuss your circumstances in more detail. Contact us today, and let’s see how we can improve your transaction reporting and risk management.
