Effective Risk Management: Maximising Profits & Minimising Risk

This article was written by Jeff Wilkins, Managing Director of IS Risk, part of ISAM Capital Markets.

I am often asked ‘What is the holy grail of risk management?’ The reality is, there is no such thing. One model does not work for everyone and you need to be able to adapt according to changes in the market. However, having worked in risk management advisory for over 15 years – and with IS Risk overseeing $2 trillion of monthly notional trade volume - I certainly have a list of ‘do’s and don’ts’ relating to the most effective way for FX brokers to manage risk.

Top of the list for what not to do, is to not have an overcomplicated risk model. We see this far too often and it certainly does not generate the best results or enable a client to act quickly when market conditions suddenly change.

My other ‘pet hate’, which happens with alarming frequency in some parts of the world, is a CEO or business owner making their risk team focus on client drop. This always end up pulling the risk team down the wrong path, and they are therefore unable to deliver optimum results.

In my view, the best way to ensure consistent results is to have foundations that are simple, effective and scalable. Here are my top 5 tips for maximising profits and minimizing risk.

1) Deploy technology that can systematically alert you to what’s happening in the market and can help you to respond accordingly. With the right automated system in place, if your business doubles tomorrow you don’t have to suddenly employ a number of new employees. You will have the technology in place to enable you to scale and manage your risk effectively as the business grows.

2) Monetize flow on a consistent basis. The way to do this is by taking an informed approach to risk management and adapting your business models accordingly. We are able to help clients with this through our risk advisory service as, from our vantage point, we can spot trends, regionally and globally, which brokers (no matter how large they are) are unable to see.

3) Employ a good risk manager - which I know can be a challenge in the current climate but it makes all the difference. We often work with our clients to help them to select their in-house risk managers because from a risk advisory perspective, it makes a huge difference to have someone experienced within the brokerage who really understands your business. The ideal in-house risk manager is a quick thinker who doesn’t make snap decisions. I think of a good risk manager in terms of a Venn diagram – one circle is smart, one circle is experienced and one is trustworthy. Not many people genuinely fit right in the middle. If you have a good risk manager in your firm, lock them in!

4) Select your risk management technology partner very carefully – many companies offering risk solutions are pure technology providers. They don’t have a team of risk management experts in their businesses who have worked in risk teams within the industry. This limits the support and expertise they can provide to you.

5) Make sure the risk team has final sign off on any commercial offering. Far too often we see sales leading the charge with upside down commercial offerings that lock risk desks into managing flow with their arms tied behind their backs. A great example of this right now is certain brokers marking down from the spreads they receive from the LP. There seems to be an artificial race to zero and this leaves brokers with little options on how to handle risk. This commercial strategy will backfire soon.

With simple processes and procedures, a good understanding of your clients, a scalable model and the right people in place, you will not only be able to manage your risk effectively in today’s environment but you will also have set yourself up for future success.

IS Risk provides risk management, technology, hosting, and optimization. The US-based firm, part of ISAM Capital Markets, works with brokers all over the globe and is the only regulated risk advisor in the retail FX industry.