Overlook the implications of Basle II at your peril, says Garfield Hayes, head of marketing communications at Wall Street Systems. At a conference I attended recently, the analogy used to describe the forthcoming Basle II directives was that of supplying a racing car driver with more information on his dashboard, but at the same time removing his steering wheel. This prompted much discussion as to the real effects of the forthcoming accord, which is deliberately directed at two key areas of risk: credit risk management and operational risk management.As far as the major financial institutions are concerned, Basle II provides significant benefits, and the majority have already put many of the basic requirements of the accord in place - such as sophisticated credit scoring systems to provide internal ratings, including data on customers and their credit lines.Other consultancy projects to implement or update operational processes and systems are ongoing. These projects include the implementation of enterprise-wide risk management systems to deliver a greater understanding of the bank’s global positions and exposures; as well as access to improved real-time internal risk data to allow senior managers to influence trading strategies based on real-time information.However, there are those in the trading community who currently regard Basle II with suspicion - as would a racing driver if presented with the latest car without a steering wheel.But, given that the new accord focuses on those areas that will allow banks to properly evaluate the various risks caused by weaknesses in management control, financial institutions - regardless of their size - can’t afford to wait. They must act now.So, what will be the true implications of Basle II for traders and their managers? From a credit-risk perspective, traders can expect a sharp rise in the controls and charges associated with trading with counterparties that live in the margins. Instead, the implementation of both data gathering and integrity technology will focus the trading community on "premium" customers as the resulting transparency starts to take effect. It is a fact that it is a deliberate ploy of the accord to encourage more direct involvement of risk managers in the daily running of the trading rooms worldwide.From an operational risk perspective the effects are potentially even more dramatic. Recent events have directly pointed to operational losses that have been caused by hazards such as procedural failures or fraudulent activity. Dealing rooms have long been the preserve of strong individuals, who have by force of personality or executive position, been prone to override existing policies and procedures for the sake of higher returns.Basle II makes it necessary for all market participants to be increasingly vigilant in guarding against the more aggressive traders. This can be achieved through the installation and use of more sophisticated risk management technology and processes to protect a bank’s reputation in the ever-changing financial services environment. Going forward, the profile of traders themselves will also change, as a heavier requirement is placed on being able to use and interpret the information at their disposal. Thus, those with the ability to use the systems to assist in the decision-making process will be the survivors.The advancement of technology and systems has been a critical factor in allowing Basle II to specify these principal areas of additional control. The increasing use of electronic dealing platforms, with real-time positional information available on a worldwide basis and with sophisticated risk management algorithms, have given the regulators confidence that greater regulation is not only possible but absolutely necessary. To support this, technology providers today must address the greater challenge of tackling integration across the enterprise.But, while the focus may be on the methodology for implementation of the directives when they come into being, it would be a mistake to overlook the key market driver that is currently affecting the dealing room community. The underlying costs of market participation ensure that the focus of operational management is on the systems and processes that currently exist. We are already starting to see research that is suggesting that the status quo will not allow those on the margin to realistically maintain a market presence using their current systems. The subsequent requirement for significant investment in systems and associated consultancy will force executives to look at alternatives. One such alternative is the rise in the role of operational outsourcing. An STP-based outsourcing model provides managers with much greater transparency, enabling them to track which transactions are executed straight through, and relate any charges - for errors in the trade data - back to individual dealers.To return to the racing car analogy, the effects of Basel II on the dealing community are probably not directly linked with the driver, or the machinery that they are given. The analogy should probably refer to the fact that the landscape in which the driver now finds himself is significantly different and that his success is based on whether he can navigate that change. The key thing is that he should begin preparing now - in close cooperation with his technical team.Wall Street Systems is a New York-based provider of treasury systems.Trading Technology Week...
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