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Third-party vendors put Asset Management at risk

by Frank Caccio | May 6, 2020 | Operational Risk Management
the role of third-party risk in asset management

All asset management firms use some form of third-party vendor services. Bloomberg provides market data. A proprietary software designer sells a risk control module. Trading platforms interact with banks and custodians. All of these components are critical needs, but they also need to be accountable for the strict regulation requirements that a firm needs for today’s compliance, risk control, and trading execution.

When a firm thinks of its risk control, it cannot stop at its own doors. Any third-party platform, any outside data flow, and any outside security measures must be seen as the firm’s own because they are. When regulators come knocking, the firm does not get to blame anyone else for failures in any aspect of its asset management process.

Third Party services inherently increase risk

Every firm uses some kind of third-party service. For some, it is a cost issue. They cannot afford to hire and build their own system. For others, they might not have the required expertise inhouse to produce what they need on a short or long-term basis. Still, others are interested in a proprietary system module that does something great, so that particular wheel does not need to be invented. Data is another third-party service. Firms need live feeds of stock pricing and indices.

All vendor services are required to follow regulatory and security needs for their products. The downside for the firm, however, is they do not control that process. The risk control for the vendor might not be the same or as high as the firm’s needs. Security measures such as data integrity, client data security all have to be maintained. Every time a firm interacts outside its own internal systems, the possibility for risk exposure increases.

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