Smooth Transactions

The dynamic between front office and risk management, though harmonious in the regular, can fracture quickly when risk folks across the house push back against the business – from CROs influencing CEOs on major strategy to junior risk analysts enforcing pre-agreed exposure limits upon traders. Equally, ill-feeling towards the front office festers among risk officers if preventable losses occur because of belligerent trading/lending strategies or general intransigence on the side of the business. As such, the ability to forge strong relationships with traders and relationship managers is emerging as a non-negotiable skill requirement for risk analysts, as institutions look to be agile but firm with their risk management approach.

From our unique vantage point as a risk specialist search firm, we have delineated the two most common sticking points encountered in the relationship between risk and the busines and have set out solutions that help to foster more positive dynamics between the divisions, below.

Appetite

This remains the most fundamental area of contention between risk and the business. Traders want flexibility to push limits in pursuit of profit, while risk teams seek to uphold firm-wide exposure constraints. A key frustration point occurs when the broader firm’s risk exposure and an individual trader’s exposure/appetite intrude upon each other. Risk may look to intervene during a profitable trade that, while lower-risk on an individual basis, breaches firm-wide exposure thresholds to one counterparty or product. This can be very frustrating from a PnL perspective for the individual trader, which can cause fractures in relationships over the long run.

The divide is particularly stark within banks engaged in commodities trading, where opacity around counterparties can cloud risk assessments but designated risk management groups err towards conservativism and risk appetite is sternly managed. In commodity trading houses, this opacity is managed nimbly - risk are challenged to be flexible and enable the business where possible. Often this comes down to reporting lines, smaller institutions organise their risk analysts to report up to business, allowing risk management to be a guiding force rather than a rigid constraint, whereas larger institutions typically manage risk separately from business – those holding the pen sit in the 2LOD.

However, this is slowly changing. We see an emerging number of embedded 1LOD risk teams within bigger institutions, where the business is encouraged to own its exposure to risk. This set up fosters greater mutual understanding and ultimately forges stronger relationships between traders and risk, providing greater visibility of risk limits firm wide. Equally, 1LOD embedded risk teams help to ease tensions in the event of credit defaults or other adverse credit occurrences. Typically, traders prioritize swiftly unwinding positions and freeing up capital to be redeployed, while risk managers focus on mitigating overall losses. This fundamental misalignment can be a real issue, but with thoroughly predefined crisis protocols and a risk appetite arrived at through compromise and shared understanding, team morale remains strong and ??

Time

Getting comfortable with counterparty risk or trading limits, particularly from a credit perspective, demands time and thoroughness. A credit paper might perhaps take 4/5 hours uninterrupted to pull together. Issues arise when a credit risk team is overloaded with counterparty onboarding, delaying report turnaround times for the front office. Moreover, by the time a risk team gets comfortable with a trade or counterparty, the opportunity may have moved, making the trade less profitable or obsolete. Equally, frequent trading requests can interrupt the flow of a credit paper, slowing the stream of work further.

As a solution, some institutions divide and distribute credit responsibilities through separate teams: commercial risk who face off to traders and back-office risk who churn core credit work around counterparty onboarding. This workflow can be very successful from the perspective of the firm, but discontent can spread among analysts who are only utilising and developing one half of their credit skillset. A more sustainable method to address and improve the time deficiencies is automation. Nascent solutions like Inia AI are showing promise in streamlining core credit work, allowing teams to refocus on real-time trade approvals. We will be introducing Inia AI in more detail in articles to come – so watch this space!

Additionally, technological advancement can be leveraged from an operational risk perspective. Settlement delays stemming from best-practice operational risk management can frustrate traders, preventing them from redeploying capital swiftly and causing missed arbitrage opportunities. While ensuring proper controls remain in place, there is room to enhance the efficiency of settlement processes to strike a balance between risk mitigation and trading agility. Ops risk teams equipped with real-time dashboard analytics that provide immediate clarity on exposures and issues will operate more efficiently, enabling higher trading volumes and a clearer firm-wide risk picture.

Eversearch provides executive search and modern talent solutions exclusively to the risk and finance sectors.

We are true sector specialists and partner with a select group of core financial services clients that demand best-in-class talent. Many of our clients have partnered with us over several years. We are an extension of their in-house talent strategy and are trusted advisors. We know their operations well and have great instincts on how to navigate challenging talent pools to deliver consistent results.

Risk has emerged as one of the most important business functions across complex financial services institutions. While many of our competitors now cover the sector, our differentiators are our depth of experience, thorough insights, and proven ability to deliver on otherwise hard-to-find talent.