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Investment Banks Can’t Afford Not to MIND the Front Office Risk GAP

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By Oliver Blower, CEO of VoxSmart.

A phrase heard by so many only to be listened to by so few. “Mind the gap”, synonymous with the mundane morning commuter grind, currently takes on a far greater significance for City traders travelling to work.

Not dissimilar to the cost conundrum facing the rail industry recently, when it comes to plugging gaps between when the trade was executed vs when it was booked, it is fair to say investment banks have been struggling. For too long now, trading desks have fallen foul of Prudential Regulatory Authority (PRA) requirements to book tickets within 15 minutes of executing their trades. Consequently, investment banks have been left paying in excess of £50 million per annum in fines.

Therefore, in these cost-conscious times, how and why have so many of the biggest financial institutions found themselves in this situation? The answer to this question lies in the daily interactions that take place between traders. As a case in point, a trader at say Morgan Stanley may well call up a counterparty at Citi to buy half a yard of dollar/yen, before then heading down the pub and subsequently forgetting to book the trade for three days. While the Citi trader may have booked the trade, the Morgan Stanley risk department has no clue because their trader is already three pints in down the Red Lion. The point is that no investment bank throughout this year can afford to be in a position where they are brushing this issue under the sticky pub carpet.

After years of seeing the PRA fines as a necessary evil, banks know they need to have a better grasp of their cost base. Today, a head of desks profit and loss (P&L) is coming under intense scrutiny from the business to reduce gross revenues to net revenues where possible. As a result, the days of absorbing these costs are long gone. From FX and rate to credit and equity derivatives, every single desk is under the microscope right now. The numbers that banks can recuperate from fines are now in the tens of millions – which is a significant percentage of any desks P&L.

The good news is that investment banks can turn to tech to close the front office risk gap. Certain firms are already deploying tools that enable them to become much more efficient in terms of their execution and booking capabilities. Ultimately, if banks are going to thrive in these bottom line conscious and compliance heavy times, identifying pivotal issues surrounding trade booking and execution times is one major way to shave a few million off the cost base.

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