Regulatory action and market conditions will force banks and hedge funds to tighten EDM controls on sensitive files

Facing extreme market conditions and imminent regulatory changes, banks and hedge funds need to adapt to changes in transparency, risk management and diffusion. According to new research from TABB Group, The Enterprise Spreadsheet: Pushing towards Transparency, transparency will come in the form of additional regulatory reporting requirements and the need to make improvements in their enterprise data management (EDM) efforts. Risk management will focus on gaining a better understanding of market risk, operational controls and the need to if not "know your client," "know your counterparty better".

"As academics bicker about the validity of Value-at-Risk (VaR), said Adam Sussman, director of research and author of the report, in a press release, "measurable improvements must be made to operational controls to detect frauds like the Madoff Ponzi scheme and prevent rogue employees like Jerome Kerviel from jeopardizing a firm's bottom line."

Drawing on recent TABB research, nearly 60% of the buy-side participants interviewed said counterparty risk is now an important part of trade-allocation decisions. Despite waves of consolidation and contraction as firms collapse or, to survive, merge, there is an undercurrent of diffusion as firms mitigate their reliance on counterparties, spreading their business among more companies. As a client request becomes a trade and a single trade becomes a steady revenue stream, said Sussman, banks must imbue this new product with regulatory, compliance, operations and risk safeguards.

"We've moved from the sandbox to the stadium," he explains, "where tension between flexibility and control begins to sprout. Moving from the front to the back office, the types of requirements lurch from flexibility and openness to standardizations and control, from spreadsheets and desktops to applications and servers. But this is a false duality," he said.

Armed with high expectations and wide jurisdiction, Sussman says the eventual creation of a risk regulator will bring demands for an in-depth look at the instruments on the books of banks, hedge funds and anyone else trading OTC derivatives and other unregistered securities. However, according to TABB research, with customization driving 60% of the OTC derivatives market's participants, implementing a more tightly managed environment should not impede innovation.

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