Market forces can bring severe risks to any financial institution or company operating in volatile sectors. The 2024 FINRA Regulatory Examination Report focuses on adaptation as a necessary area of focus for any compliance program seeking to address emerging threats.
“The first step is acceptance. Unless you accept the fact that there is inherent uncertainty in markets and your business is exposed to external risks, you can’t even begin to address them,” said Warren Buffett. Market risk can come from unexpected turns in economic events, geopolitical events, supply chain disruptions, etc.
The article will walk one in creating the key components that must be in place in a market risk monitoring program.
Understand Market Risk
Different organizations are exposed to various market risk factors contingent upon the nature of their operations. Building a taxonomy of your potential market risks is the most critical task before putting in place a risk monitoring program. This will ensure that all relevant metrics can be tracked by your risk-based monitoring and chosen risk monitoring software.
Elements of an Effective Risk Monitoring Framework
The written risk policies, in a monitoring framework of risk, are the basic or core elements, but it also includes risk limits provided through risk appetite and a defined team. Define risk metrics that will be tracked continuously with your risk monitoring program. This may include definitions for items such as volume, volume at risk, loss scenarios associated with adverse market movements, and concentration levels.
Be concerned more about the holistic risk profile rather than single risks. Its framework should include risk reporting procedures and oversight of a risk committee, offering seamless integration of your overall AML risk monitoring and compliance programs. According to a survey by Deloitte, over 60% of financial institutions now have dedicated risk teams responsible for integrating risk management practices across the organization.
Establish Risk Monitoring Policies and Procedures
Without a formal underpinning policy and process, it would become impossible to run an organizational risk monitoring program effectively. Upon the completion of the risk taxonomy and working out the framework structure, formal policies and procedures have to be laid down to undertake the effective monitoring of risks.
It provides consistency, specifically when the period used in monitoring risks is long. It should spell out what is prohibited and what kind of risks are allowed to be taken by organizations. 95% of high-performing companies have risk policies and processes documented in writing. It reduces compliance violations and operational risks efficiently.
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Select the Right Risk Monitoring Tools and Technology
Businesses that have advanced analytics and automation in their risk management systems witness 30% fewer significant incidents year over year. Once the framework and processes are agreed upon, it is time to choose the enabling technology.
While selecting the tools, you need to consider sources of risk data, data volume, reporting needs, and integration with existing systems. Go for platforms that will relate efficiently to collecting risk data according to your documented procedures for collecting data. In that respect, you are going to have automated ongoing risk monitoring processes with a centralized view of risk.
Collect and Analyze Relevant Market Risk Data
This require feed integration from front office systems or manual data uploads. Pay particular attention to data granularity, timeliness, and completeness.
In a 2023 survey conducted for the Risk Management Association, companies that adopted proactive strategies for monitoring risk were able to slice up to 30% of their exposure to critical risks. Only through constant vigil will it be possible to remain alert to and take mitigating action against impending dangers in an increasingly dynamic economic environment.
Detect Emerging Risks and Red Flags
Monitor key risk indicators defined at framework set-up—trigger alerts when predefined thresholds are breached during the process of risk monitoring. Continuously monitor macroeconomic and geopolitical developments that bear the potential to have effects on your risk exposures.
Take Action to Mitigate Identified Market Risk
A Cybersecurity Ventures study estimates that by 2025, financial losses from cyber incidents could amount to as much as almost $10.5 trillion annually. After risks are identified through the monitoring cycle of risk, action at the right time is viewed as very important for containment and mitigation. Predefined response playbooks and clear escalation paths must be documented as part of the risk monitoring services.
The team responsible for risk monitoring services is supposed to track responses and assess their effectiveness continuously.
