Excerpt from SunGard-EIU research on volatility in financial services
The EIU, on behalf of SunGard, conducted a global survey of more than 500 senior executives from the financial-services sector and the finance division of non-financial corporations to assess the impact of volatility risk on firms and their ability to cope with it.
According to the survey, many firms around the world may be vulnerable to sudden swings in volatility. More than half the respondents in our survey say their company conducts stress tests or scenario analysis to check their ability to cope with volatility just once a year or once in six months at best, leaving most organisations that do not conduct frequent stress tests exposed to fast-moving developments. Furthermore, a significant number of the firms surveyed seem to be under-investing in their ability to cope with volatility: more than two in five respondents (41 per cent) in our survey think their company has not allocated adequate resources to key risk management tools such as research, forecasting and data analytics.
The research also suggests that a significant number of organisations may not have business models robust enough to cope with unexpected levels of volatility. On the whole, four in ten executives express confidence in their company's business model but a significant proportion of financial firms do not appear to have a strategy in place to protect their clients from volatility risk. Forty three per cent of respondents say their company regularly checks their clients’ exposure to volatility risk and advises them on risk mitigation. A further 17 per cent say they proactively take measures to protect their clients from volatility risk. But nearly a third of respondents say they either wait for instruction from their clients, or they do not have any system in place to specifically shield their clients.
According to Dr Laurence Wormald, Head of Research for SunGard’s APT solution, asset managers need to provide a holistic view of risk. “In my opinion, the best practice approach is to develop a more robust scenario analysis framework alongside conventional risk reporting” he says. “The most useful scenario tool for fund managers is reverse stress testing – asking the question ‘what could hurt me the most?’ ”
Compared to their peers in other regions, executives in North America are much less confident about the ability of their organisations to cope with volatility risk. Just under one half of respondents from the US and Canada think their company is either inadequately prepared or not prepared at all to deal with the consequences of unpredictable changes in the operating environment. Less than half of North American respondents (47 per cent) think their company’s business model is good enough to cope with unexpected level of volatility and 53 per cent say it is hindering their company’s ability to plan and invest for the long term. In addition, one in two respondents from this region believe their company is not investing enough in risk management.
