The key to a sturdy OMS and risk management ecosystem

Order and execution management systems (OMS/EMS) enable buy-side and sell-side firms to connect to global markets, create more efficient workflows, lower total cost of ownership, and meet increasingly stringent regulatory compliance obligations.

Integration of third-party systems has become common among firms, but the benefits can be multiplied by linking the order and execution streams into a single system—increasing efficiency while decreasing the risk associated with integration. Going one step further, integrating OMS/EMS with risk systems to create a single processing platform can streamline communication and workflow, putting traders, salespeople and risk managers onto the same, integrated trading system.

“Adoption of a seamlessly integrated risk management system is critical for any institution looking to make accurate decisions in a timely manner. An integrated risk system aligns the Market Risk, Compliance and Trading functions in real-time, providing common oversight to all stakeholders,” says Phil McCabe, Global Head of Bloomberg Trade Order Management Solutions (TOMS).

In the absence of such a single, integrated system, firms become susceptible to a number of hazards that can hinder their ability to accurately assess risk. There is a greater possibility of violating internal policies and limits, thus increasing legal risks; a potential failure to report on time, which may attract fines; breaks in trades and fractured workflows due to errors in inputting data from one system to the other; and a lack of risk-based, pre-trade analytics.

While OMS/EMS have come a long way in helping firms to improve execution, integrating these systems with risk functions to create a single platform can help firms avoid these pitfalls and deliver best execution in real time, across asset classes. These are the five dangers to look out for:

1. Reporting obligations

As regulators continue to increase the reporting requirements of financial firms, it is imperative there is no deviation in the data held on OMS and risk systems. When processes are integrated, firms can comply with regulation in a more efficient and cost-effective way by ensuring full reconciliation between systems. Without integration, full reconciliation can be time consuming and costly—particularly if a third party is operating the OMS or risk systems. And given that many firms are supporting multiple OMS/EMS for different asset classes, reconciliation with risk models becomes even more complex.

2. Legal risks

In a highly regulated environment traders must observe stringent rules, both externally and internally, on reporting and limits—or face fines from regulators and censure from clients. With a single-system offering trade breaks are less likely as data flows between different systems. If, as is often the case, one part of a firm employs a particular method of trading while a counterpart uses another, it can not only cause problems for compliance and monitoring teams, but also lead to fractured workflows, trade breaks, fines, and legal action.

Integrating risk management into OMS/EMS enables firms to ensure traders possess a better understanding of the firm’s holdings at any given point in time. Traders have access to the correct risks and representations of their portfolios, enabling them to make more informed, real-time decisions and improve execution for clients.

3. Operational risk

Typically, firms must access different systems to achieve best execution. This fragmentation heightens the risk of operational or technological failures. When trading complex derivatives, for example, mistakes can be made when terms are misheard or misinterpreted. Data normalization and integration of workflows can help firms avoid breaks in trades and the errors inherent in inputting data from one system to another. “A single system enables multiple stakeholders within a firm to work from the same processing platform, which streamlines communication and helps to reduce the operational risk that arises from mistakes,” says Mark Flatman, Bloomberg’s Global Head of Sell Side Product.

4. Pre-trade analytics

Risk considerations should guide trading decisions, but in fragmented environments traders cannot benefit from pre-trade analytics. With an OMS/EMS system that offers high quality risk capabilities, traders can leverage risk analytics to boost and hone idea generation. “Imagine a pre-trade scenario where a trader can immediately assess the real impact a trade may have to the book’s risk profile, running the same calculations used by the risk management team. And now, a sales person can do exactly the same based on the client’s portfolio.” says Jose Ribas, Bloomberg’s Global Head of Pricing & Risk. Moreover, the sales force and traders are supported in one framework.

5. Breaking down silos

Since the 2008 financial crisis, risk practitioners and regulators alike have emphasized the importance of breaking down silos, whether between front and middle office risk, end-of-day and intraday risk data and modelling, or other areas. For example, the Basel Committee’s BCBS 239 directive establishes principles such as accuracy and integrity, encouraging automated data integration and discouraging manual work-arounds. Basel’s Fundamental Review of the Trading Book (FRTB) encourages alignment of front and middle office models and data for both its standardized (Greeks-based) and its internal models (pricing models used for revaluation) approaches. In fact, FRTB includes specific attribution tests of front and middle office risk model alignment that any firm must pass to be allowed to use internal models.

By integrating now, firms lay the foundations needed to meet these regulatory requirements. In a multi-asset class environment this has the potential to significantly enhance decision-making through the exposure of all types of risk and to empower both traders and risk managers.

To be competitive, traders need real-time access to the correct risk data, trades, and representations of their portfolios. A system able to capture trades, update in real time, and seamlessly access an advanced risk engine can accelerate the trading lifecycle and enable traders to make better informed decisions, more often.