Introduction

Risk management and trading systems have come under attack over the past 12 months. As the first investigations into the causes of the subprime credit crisis started to emerge earlier this year, model failure was identified as one of the key faults.

However, much of the blame centres on how models were used and the data entered into them, rather on the systems themselves. Banks relied too heavily on defective or incomplete pricing models, without challenging the outputs rigorously enough. The data entered into the models was also flawed or based on a limited history. Where historical information did not exist, some banks used volatility data from other, less complex instruments for risk management purposes.

That's not to say the models covered all the bases, or that vendors can afford to be complacent in any way. More attention needs to be paid to the areas now at the forefront of risk managers' minds: liquidity risk and counterparty risk management. The crisis has also exposed the need for technology solutions to enable financial institutions to rapidly track the rights and obligations specified under the terms of their contracts. Some firms have already embarked on finding solutions for these issues (see pages 66-67).

Nonetheless, the feedback from dealers and risk managers on the performance of their systems over the crisis period has been surprisingly positive. Many report their pricing, analytics, trading and risk management systems held up relatively well, even during the extreme turbulence of the weeks following the collapse of Lehman Brothers.

To some extent, this can be gleaned from the responses to the 2008 Risk technology rankings. A record 2,655 dealers, risk managers, investors and corporate treasurers responded to this year's poll - significantly up from last year (see pages 80-89).

The derivatives landscape is widely expected to shift in 2009, with a greater emphasis on disclosure, transparency and regulatory oversight. The challenge for technology vendors is to respond quickly to what will inevitably be new requirements by their customers.

- Nick Sawyer, Editor.