However, significant gaps remain, especially in terms of the “when” and “how” of risk management best practice. While various tier-one institutions are able to compute and monitor intra-day risk, many market participants still rely on end of day batch systems to perform their analytics. In the context of COVID-19, such delays can prove disastrous.
The main problem is that COVID-19 renders end of day pricing and risk analytics if not obsolete, then at least ineffectual. Extreme volatility and unprecedented daily swings in market activity, together with fundamental changes in market structure, have left some risk managers and risk takers running blind, unable to make informed decisions. Waiting for an overnight batch or even the next day to act is valuable time lost, and can come at a financial loss for the organization.
Examples of unprecedented activity are abound. We’ve seen massive sell- off across various markets, and a significant increase in volatility with the VIX reaching 82. WTI futures went negative for the first time in history. Then, in equity markets, there have been rallies followed by drawdowns followed by rallies within the same day.
1. Unprecedented activity as a result of the COVID-19 outbreak – COVID timeline and year-to-date performance. Click image to expand.
Although COVID-19 has created a turbulent environment for financial markets, some clear lessons have already begun to emerge.
Firstly, it has brought the “when” of risk management to the center stage. The reality is that in extremely volatile markets, understanding your risk exposure in real time means that you will be better equipped to take well-informed actions to mitigate them and ultimately protect the interests of your organization. Relying on an overnight batch or the next day is no longer a tenable business model.
Agility is also essential. Firms need to be able to deploy features and fixes to deal with the issues sparked by these huge market structure changes. They need access to the right information at the right time to know where they stand. They also need to build relationships with the right vendor. Some vendors can be slow to deliver updates. Other vendors are more agile and can provide new features and fixes in a timely manner.
Bloomberg’s Multi-Asset Risk System (MARS) offers comprehensive suite of risk management tools that delivers consistent, consolidated results powered by state of the art models and cross-asset pricing libraries. Intraday and end of day risk analytics sit side-by-side within MARS. Sensitive to the huge structural changes of recent months, Bloomberg is able to respond quickly and update models in an appropriate and timely manner.
MARS offers a flexible and transparent scenario and risk engine that encompasses not only historical market moves but also customized shocks. Bloomberg MARS provides transparency, scale and agility to customers in an ever-changing market environment.
The seamless integration of diverse but related tools means that a single system takes care of pre-trade, idea generation, market moves, trading work flow, as well as risk management.
COVID-19 has shown market participants that their systems need to be agile and provide intraday and robust analytics. Being complacent with what you have already won’t prepare you for the unexpected. Visibility is the first step towards informed action. If you can see the present clearly, you can also prepare for the future.
