The coronavirus pandemic has caused many challenges, as well as highlighted weaknesses across the board - whether that be within health systems, company policies and more. In terms of the financial space, one thing that the virus has highlighted is the importance of Risk Management .
To speak about how important risk management is, especially in this new environment, Finance Magnates caught up with Fabian Chui, the Global Head of Front Office and Risk, ADSS, a foreign exchange (forex) broker.
Influence on ADSS risk management strategies
Fabian Chui, the Global Head of Front Office and Risk, ADSS
When asked how the pandemic has influenced the risk management strategies at ADSS, Chui explained: “The term ‘the new norm’ has been used much lately, and in the context of risk management, the new norm is living for an extended period of time in tail risk stress test scenarios.
“We are also seeing the confluence of risks, which are all materialising at once. The COVID-19 pandemic is an operational risk, and as such is mitigated by business continuity planning (BCP) and disaster recovery (DR), but it is so much more, when businesses across the world also start seeing other risks such as financial risks materialise.
“With an office in Hong Kong, we understood the various protocols from an early stage. Even with the speed and severity at which COVID-19 spread across the rest of the world, we were able to adjust our risk management strategy rather quickly. That being said, I certainly couldn’t have predicted that this was a scenario I’d be planning for at the start of 2020.”
Living in an extended phase of BCP
As pointed out by Chui of ADSS, we are currently living in an extended phase of BCP - staff are working from home and remotely, and teams who would have traditionally be moved to a DR site for their safety, have been split.
“Without a doubt, the safety of our employees is paramount, and this has been achieved swiftly and seamlessly through the planning, testing and adaptability of our BCP/DR processes and teams,” Chui said.
“As a brokerage and asset management company, we have also been on the front end of the unprecedented impact on the global financial markets. Financial risk measurements tend to model from the past and look to mitigate any weakness with forward looking scenarios.
“But you would have to go far back in history to see the market moves experienced throughout this pandemic and so never seen before such as inverse oil prices. At ADSS, we had to react fast to protect our clients and companies from adverse outcomes. Flexibility and a solid understanding of what levers to move and when to move them is key to act efficiently under such a stressed scenario. The volatility shift was extreme, we acted fast to cut leverage and risk limits to protect our clients and us, as a firm.”
Lessons learnt
Looking ahead, how has the global pandemic influenced the BCP of ADSS? According to Chui, the virus has influenced the broker’s strategy in several ways.
“Firstly, employee and client safety are paramount, and at least until a vaccine is developed and administered, these will be a top priority. To ensure this, we need to have sustainable measures and protocols in place, including simple things like ensuring cleanliness, efficient identification, adhering to social distancing, and having enough sanitizer!
“Fortunately, we are mainly an electronic business, so moving to servicing our clients remotely was seamless. BCP now means extended periods of working from home, so connectivity is key in achieving continuity.
“Can you operate a company with all your workforce at home? Absolutely. Was it easy? Not straight away, but now it’s the default business continuity scenario. Staff require computers, screens and high-speed internet, all whilst the company is protected from cybersecurity risks and has high demands on its infrastructure and networks.
“Scenario planning now includes ‘what if…’ scenarios such as ‘what if 25% of our workforce are sick, what then?” Can we continue? The answer has to be yes, so we make every endeavour to get there.”
Surprises along the way
It’s fair to say that the pandemic caught everyone off guard, but once everyone became aware of the issue, was there anything else that was particularly surprising? When asked this question, Chui from ADSS said the magnitude of the virus caught everyone off-guard.
“I would have loved to say that we saw a scenario like this coming, but as a business you have to be resilient to the unexpected and that means effective risk management.
“By ‘magnitude’, I mean the combination of trading from home with the internet bandwidth straining as the markets are more volatile than most have ever seen in their career; our employees being at home for weeks, software for virtual meetings being over extended, probably running out of some essentials because of panic buying in some regions; everyone working extra-long days, in isolation, concerned for loved ones; and seeing economies humbled and unemployment rising.
“It’s a testament to the planning, preparation and robustness of businesses, including ours, that operations continued, allowing us to serve our clients during this crisis. Additionally, really thinking about the physical and mental health of our employees continues to be critical.”
Is volatility here to stay?
As Finance Magnates reported, volatility peaked in March, with many trading providers recording historical trading volumes, as new traders flock to the markets. However, since hitting its peak in March, volatility has lessened, and as a result, trading volumes have lowered.
Although volatility still remains higher than normal, can we count on it for much longer? According to ADSS, we can count on more prolonged volatility than we have in previous years.
“You have big question marks over the longevity of the virus, on the speed of recovery of the economies around the world. You have unprecedented Central Bank actions which have backstopped the markets, and this may have consequences later on,” he continued.
“The unemployment and society changes around the new norm can change consumer behaviour or how they see politics. How will this change Brexit ? How will the US elections evolve? Will there be inflation or deflation? To me, all of this change and uncertainty will result in volatility. As a risk manager you have to be robust against multiple outcomes and not just against one particular outcome.”
Are emerging currencies FX’s saving grace?
In the foreign exchange (forex) markets, the COVID-19 pandemic has caused large currency swings, with volatility picking up steam in the last week of February and peaking in March.
Although activity has since quietened down in the major currency pairs - emerging currencies are still showing lots of activity. As Finance Magnates reported, Turkey’s currency has been struggling as rising inflation, slow economic growth, and growing unemployment have been weighing heavily on the country, in addition to extra pressures from the COVID-19 global pandemic.
Since Turkey’s BDDK bank regulator lifted the trading ban imposed in May on UBS, Citigroup, and BNP Paribas, the TRY has made up some ground against the USD. With all of this volatility continuing in emerging currencies - could they be the saving grace for FX trading?
“I think the markets have discounted the COVID-19 risk, and they expect a good recovery and central banks have played their part. This has led to risk on assets being bid, meaning that as volatility lessens and more certainty returns, emerging markets may outperform in inverse fashion to its collapse at the height of the financial markets’ response to COVID-19.
“It also depends which emerging markets – where on the COVID-19 curve they are and how well they and their economies will come out of it. Do you look to Asia or Latin America? Both regions had a very different experience of handling the virus.”
