Many financial institutions think of multi-core processing as simply a means of increasing the performance, reliability and cost-efficiency of their enterprise applications and databases. But it’s time for them to think again. Multi-core technology is set to revolutionize the world of risk management.

Ken Roller Fellow - Traveler Business Development Manager Intel

In the financial services industry, quad-core technology is synonymous with performance, performance/watt cost-effective databases and high-speed transactional applications. However, few have made the connection between these efficiencies and their risk management solutions. In the past, financial institutions have focused on increasing the number of risk simulations they can perform. But, as the latest market trends reveal, the next generation of risk systems will be focused both on speed and an increase in data volumes.

The past five years has seen risk management climb steadily further up every financial institution’s business agenda. Previously, advanced risk analysis techniques were used by tier 1 banks to achieve competitive advantage. Now, they have become a necessity for financial institutions looking to stay one step ahead of the competition and comply with regulatory change. As a result, risk management systems have undergone rapid development.

At the start of the decade, most financial institutions used proprietary, large symmetric multi-processing systems that could cost anything up to US$1 million. Increases in volume could only be achieved by installing additional systems at great cost. This placed an obvious focus on getting the highest possible volume of simulations out of each system.

Five years on, the industry has shifted towards HPC-based solutions. These new solutions are based on industry standard server platforms. Risk systems are no longer the preserve of tier 1 banks. Small, high-revenue financial institutions such as hedge funds are also adopting and deploying risk management applications.

In the current climate, with issues such as the collapse of subprime mortgage lending looming over the financial services industry, there is an even greater need for competitive financial institutions to find quicker and more accurate ways of forecasting and analyzing long-term risk. Instead of carrying out simulations overnight, financial institutions are looking for fast, reliable systems that will help them run intra-day analyses for quicker, more effective decision-making. The goal is to work toward risk analysis systems that can be relied on to deliver results in minutes – or even seconds.

A New Wave

This shift of perspective means that it is time for risk management applications to take advantage of multi-core, 64-bit and HPC-based technology to handle the increase in data volume so they can run more simulations in less time for less cost.

Many banks have already started to combine Quad-Core Intel® Xeon® 5300 and 7300 series processors with risk management solutions such as SunGard BancWare’s* ALM (Asset & Liability Management application). The Financial Services industry is already recognizing the value of this: Waters recently awarded SunGard first place for “Best Risk Management Provider” in Waters 2007 Rankings as voted by 600 Traders, making special mention of its efforts to incorporate multi-core processors into its risk systems.

There are a number of benefits to this approach. Unlike other areas of banking technology that use applications that are ill-prepared for multi-core servers, risk management is perfectly positioned to take advantage of this technology. By increasing the performance of their high-capacity risk systems, financial institutions can handle even greater volumes of data, helping them to perform the most complex risk calculations. For example, rather than continuing to isolate analyses by risk class, financial institutions can use optimized HPC clusters to combine different risk classes and gain an enterprise-wide view of risk that can be aggregated by customer or asset class.

For tier 1 institutions, this creates the opportunity to run existing HPC risk systems at new levels according to new working models. Additionally, being able to run simulations in a narrow time-frame helps bring an attractive level of stability to next-generation risk systems.

Risk or Opportunity?

The benefits of quad-core technology extend far beyond helping strengthen the risk capabilities of tier 1 financial institutions. There are also new business opportunities. For example, there is considerable scope for organizations to begin offering hosted or managed risk analysis services, charging fees by speed, volume or complexity.

Just as large banks can use a single system to run simulations across multiple risk classes, organizations can also build a HPC cluster to cater for diverse risk analysis needs, and outsource these capabilities to smaller financial institutions. Smaller firms will have access to advanced risk analysis simulations, making it easier for them to take more daring positions in the market. This will help them compete with larger organizations – a development that could bring significant change to today’s financial landscape. It also opens up a whole new market – either for larger institutions that want to maximize the return on investment of their own risk analysis systems, or entrepreneurial firms that want to become dedicated risk analysis providers.

Filed under: Issue 4 - Winter 07