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December 15, 2008

Risky traders to be benchmarked at big banks

System to improve transparency for banks and their auditors

By Jason Stamper

New technology that monitors the risks being taken by traders at large investment banks — and benchmarks that risk against industry or regulatory metrics — could help to bring more transparency to the activities of unruly traders and even tie their remuneration to risk metrics rather than profits alone.

CBR has learned that business intelligence and analytics vendor SAS has teamed with Coalition, a company that offers financial risk benchmarking, to develop the new technology. It is due to be formally unveiled at the Finexpo Risk and Transaction Management show in London on February 5th 2009.

The remuneration of traders at the large investment banks is under exceptional scrutiny, as those firms are forced to justify salaries at a time when many are going cap in hand to investors and governments in search of bail-out funds.

According to the recruitment firm Armstrong International, three-quarters of City bankers can expect a bonus this year – albeit one that is 50% to 70% below last year’s level. Only around 25% will get no payout, the researchers believe.

But as well as being forced to justify bonuses to regulators and indeed governments themselves, the banks are looking for ways to tie trader remuneration not just to revenue or profits but also to the risk to which a trader is exposing the organisation.

Christoph Jelliffe, capital markets manager, SAS UK, said: “Aligning compensation with risk is on the banks’ wish lists. We’re working with a partner, Coalition, to do just that.”

“Coalition maps human capital at the large investment banks, and we’ll be able to combine that with our technology to give a more human-centric view of risk,” said Jelliffe. “It will help the banks revise their approach to risk, as well as counter-party risk. Coalition will help us from a taxonomy perspective and enable organisations to benchmark individual traders against industry averages and so on.”

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“Risk will always be there but this should help the banks monitor it and manage it better,” said Jelliffe. “It could help banks or their auditors discover if individuals are taking higher risk than they should or need to, and balance that with what that trader is being paid: are traders being paid to take unnecessary risks?”

Asked whether companies would be obliged to turn such data over to auditors or regulators, Jelliffe said: “If the regulators demand it, then yes, they would have to provide such information.”

Over 40% of SAS’ revenue comes from the financial services sector. It specialises in reporting, analytics, performance management and related business intelligence disciplines. It is the largest privately held software company in the world, and posted revenue of over $2bn in fiscal 2007.

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