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Application Of Automated Financial Risk Management Procedures

Risk management is a crucial issue for the financial survival of institutions. Poor portfolio risk management continues to be a significant pain point for financial institutions large and small. Unpredictable nature of the markets calls for risk to be assessed and managed in the most efficient manner and on an ongoing basis. Major financial and economic risk drivers include shareholders, regulators, FASB, SEC as well as rating agencies. Legislation such as the Basel Capital Accord II, the Patriot Act, and the Sarbanes/Oxley Act has made it even more essential for money managers to be able to deliberately understand, manage and assess risk.

Assessing risk in connection with managing diverse and complex financial assets is a very complicated process, which requires sophisticated tools. Automating financial risk management procedures is a great way to establish an ongoing system that is capable of accessing numerous data points, thus providing a thorough analysis.

While some risks can not be mitigated such as a natural disaster happening or another random event, we can make sure to prepare our portfolios and businesses as best as we can to handle those events and save our assets.

Market and operational risks revolve around how the markets behave and the ability of the fund manager to respond in a timely fashion, or better yet to anticipate these events.  A lot of up and coming fund managers are starting to recognize VaR monitoring, Stress Testing and Exposure analysis as relevant risk management techniques and yet many fail to perform them in a consistent fashion, due to lack of resources and capable people to perform the analysis. At the same time, when a negative event does occur in the market, they are faced with redemption pressure and general distractions from their investor pool asking about performance, positions, losses and other data. This kind of a nuisance only distracts the portfolio managers even further instead of giving them the space and peace they need to focus on the market and managing their portfolio.

In order to combat these distractions, a lot of the time a fund manager will have a junior analyst perform some of this very basic analysis and reporting, without having the time to check or interpret the work and to an extent throwing the money out the window so that they can say “me too” to their investors, but what happens when there is a typo, or a mistake?

In the asset management space, mistakes are unacceptable and fund managers fight for their reputation, track record and P&L. Therefore we strongly encourage automating manual processes, streamlining reporting and decision making systems (where possible) and outsourcing risk management work to qualified professionals, so that instead of saying “me too” the fund manager can say “custom, proprietary system with our own experts”.

While negative market events do happen, the risk of loss resulting from inadequate or failed internal processes, procedures, people and technology is heavily penalized. Operational risk is easier understood as the risk arising from an incident, such as a break-down in transactional processing or compliance issues, due to system or procedural failures, human errors, disasters or illegal activity. Erroneous trades and processing errors also pose an important source of operational risk. Automated systems and robust  risk management procedures are indispensable  for management of operational and market  risk.

Automating risk management and development risk and reporting systems allows for  accumulating of all available information that may be helpful to a financial institution in assessing and reporting risks in an optimized way. They tie together data sources and evaluate such data in a way that is meaningful for assessing the full picture of risk. Automated risk management systems can facilitate financial institutions in decreasing their potential losses, meeting statutory and legislative reporting requirements.
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Acute volatility in the market should pose a great opportunity for fund managers to blow away their expected numbers, rather than cause additional stress associated with market risks and the daily nagging from their investors. Here, at Bluefront Capital, LLC, we provide a full array of risk management services for financial institutions, including risk management, automated system development and risk reporting.

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