Data Quality and Integration the Biggest Challenge Faced by Firms for Managing Liquidity Risk

August 15, 2017

​London and New York, 15th August 2017 - Quantifi, a provider of risk, analytics and trading solutions, OTC Partners, a boutique consultancy firm and BlackRock, a global investment management firm hosted a webinar on ‘Identifying liquidity Risk for Financial Stability’. The 108 delegates took part in a survey on their risk management practices and the IT/operational challenges associated with managing liquidity risk.

The global financial crisis highlighted the importance of liquidity in functioning financial markets. Pre-2008, market participants received easy access to readily available funding and were ill-prepared for events that transpired during the credit crisis. Failure to adequately assess and manage liquidity underpinned major market turmoil, triggering unprecedented liquidity events and the ultimate demise of financial institutions previously thought too big to fail. Regulation in the form of Basel lll and MiFID have been introduced to strengthen a firm’s ability to withstand financial and economic stress.

Key findings from the survey:

  • 50% of firms consider their approach to managing liquidity risk operationally as ‘comprehensive’
  • 43% of respondents consider their firm to have strong liquidity management practices to meet the requirements of current market and investment environment. 17% stated their practices were weak
  • Accurately monitoring liquidity risk positions has increased the emphasis on automation and timeliness of data integration.  40% of firms highlight data quality and integration as the most significant IT/operational challenge with managing liquidity risk
  • 80% plan to have a shared or single market data feed across front office and risk. This confirms the need for a unified set of front-to-back aligned risk models, calibrations and data capabilities to achieve optimal trading, risk-aligned pricing, enhanced performance and cost-efficiency
  • Portfolio optimisation process (20%), compliance: limits setting and breaches (20%) and risk reporting (13%) are the top three areas where firms are currently incorporating liquidity risk considerations
  • In the mid/longer term, the stronger focus to incorporate liquidity factors into aspects such as risk appetite (13%), stress testing (13%) and risk reporting (20%) suggests more concerted effort amongst some, perhaps more sophisticated,  firms to quantify and characterise at a more granular level liquidity profiles associated with broader economic factors, investor characteristics and assets/liabilities.

“Ignorance of liquidity risk is dangerous. Sourcing and transferring risk in the secondary market has, consequently, become difficult. This should be a concern to all market participants. Credible analysis of transaction liquidity and associated cost is difficult, but not impossible,” comments Rahul Patel, Senior Business Consultant, Quantifi. “New technologies offer a deeper understanding of liquidity drivers in the market and, in turn, can help improve market activity. Firms are increasingly relying on technology providers like Quantifi that can provide sophisticated solutions that incorporate reporting, scenario modelling to support stress testing, advanced data management and accurate analytics.” continues Rahul.