ACM
Transactions on

Reconfigurable
Technology and
Systems

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This quarterly publication is a peer-reviewed and archival journal that covers reconfigurable technology, systems, and applications on reconfigurable computers. Topics include all levels of reconfigurable system abstractions and all aspects of reconfigurable technology including platforms, programming environments and application successes.

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Data exchange standardization

IT specialists might be surprised to learn that there are no standardized data exchange formats for traded asset classes. Some financial experts say it is difficult or even impossible to develop data exchange standards that cover all elements needed for sound risk assessments. The financial market is highly product driven, with extremely short development cycles. Standardization of data exchange formats might never catch up with what is being traded. But, as every seasoned IT professional realizes, such standardization must be part of the product. Otherwise, functions that require standardization, such as real-time counterparty credit risk calculation, might never catch up with the risks being taken. Legislators and regulators seeking to tame the financial markets must look at these matters systematically. Mandatory standardization of data exchange formats based on emerging schemes (for example, Financial product Markup Language, FpML) might have to be developed for different asset classes so that a common understanding of offerings and risks is possible with sufficient speed to accompany financial product offerings.

At present, financial firms cannot assess risk exposure in real time. They collect the necessary data and do the math during nighttime batch processing operations that can last hours. It would be a huge improvement if there were nothing more than systems to support initial heuristic risk assessment, but this might not be enough to avoid problems such as those of 2008. It might be necessary to slow transactions down until risk assessment can occur at the same speed the transactions occur.

Former chairman of the U.S. Federal Reserve Alan Greenspan has said that bank risk managers are more knowledgeable than government bank regulators, and that regulators cannot “lean against the wind” to dampen economic swings. This might be correct, but bank risk managers need the right systems to do their jobs. The I T systems used to support assessment of counterparty credit risk are not as mature as transaction systems, especially for integrated assessment of operational, credit, and market risks. Individual desks at an institu-

it might be necessary
to slow transactions
down until risk
assessment can
occur at the
same speed the
transactions occur.

tion might do a good job at evaluating risks for their department, but they lack the global enterprise perspective that is vital to a global financial industry. This must change. Financial institutions are looking for improvements to data management, risk evaluation algorithms, and simulation systems, not because they are forced to do so by regulation, but because these are essential to their survival. The crisis has shaken confidence in the ability of IT systems to support the risk assessment at the heart of financial system operation, regulation, and market transparency. However, only by improving IT systems to support such assessment can the global financial industry move forward.

Perhaps financial regulators should not lean against the wind, but improved IT systems might play a vital role by helping bank risk managers do their jobs more effectively. IT professionals, working closely with colleagues from other business departments, can create industrywide, canonical data exchange standards to help with management of risk by improving data quality across organizations and borders. In this way, IT might lean against the wind of threats to global financial markets by enabling mature and embedded analytics that must influence decisions in financial institutions. Pulling the plug was a poor response to the crisis of 2008; the next time it might not work at all.

 

Roman Beck ( [e-mail]) is an assistant professor with the e-finance laboratory in the department for economics and business administration at goethe university frankfurt, germany.