A centralised database which reduces the time lag between the trading of an exotic derivative and its reconciliation, and gives a clearer picture of how that derivative is impacting an institution’s entire investment spectrum, will be crucial in the stricter regulatory environment ahead writes PETER HILL, the managing director of SimCorp Asia.

The current economic environment is extremely volatile. An early victim was the 85-year-old American investment bank, Bear Stearns. Signs of Bear’s troubles were visible early when some of their hedge funds, once regarded as ‘innovative’, were shut down due to huge losses from piles of debt assets with incomprehensible values.

Even though the warning signs were evident the damage had been done, the debts could not be unloaded and the once-venerable institution was on an unstoppable downward spiral. But Bear Stearns’ collapse, along with the devaluation of financial institutions worldwide, has brought to light the importance of evaluating and mitigating risk. As investment opportunities become more complex, so do the risk associated with them, and methods for accounting for such risk.