Capital markets firms must leverage RiskTech to address emerging risks

Industries

Capital markets: Firms lead in the use of RiskTech

Digitalization has impacted every aspect of the capital markets industry. It has created a new operating environment, with emerging risks such as cyber and IT demanding increased attention from firms.

With operational resilience dependent on third party service providers, a variety of risks are emerging, making it difficult for capital markets firms to analyze and understand IT, cyber, and operational risks. Firms have responded by implementing RiskTech in a big way but adoption is not uniform across emerging risks.

This report examines RiskTech adoption in capital markets and offers direction to tackle next steps as firms continue on their journey.

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Key Findings: Capital Markets

Emerging risks

86% view IT and cyber as ‘highly significant’ emerging risks

RiskTech

All firms surveyed use emerging tech in some form

Spends

95% expect spends on emerging tech to increase or remain the same next year

Strategic risks

68% view industry, tech, and business model disruption as ‘significant’

Resilience

Operational resilience is heavily dependent on third-party infrastructures

A changing risk environment

Capital markets firms operate with a simpler technical architecture compared to banks. However, their integration with market infrastructure institutions coupled with substantial outsourcing of operating infrastructure means that their operational resilience is dependent on third party infrastructures. Interconnections with external players in combination with digitalization have intensified IT and cyber risks (nearly nine in ten regard them as ‘highly significant’) as well as supply chain risk.

Evolving risks

Risk factor

50% view supply chain risk as a ‘highly significant’ emerging risk

Third-party risks

Rising regulatory focus on software risk, especially open-source software

Strategic risks

68% regard industry, tech, and business model risks as ‘significant’

Crypto risks

49% cite cryptocurrency as a ‘significant’ emerging risk

Obstacles in managing emerging risks

Capital markets firms contend with a plethora of challenges in addressing emerging risks. As with other sub-sectors in the BFSI sector, legacy technology modernization tops the chart followed by operating model challenges related with mutualized infrastructure as well as issues around integrating risk functions with operations.

Top Challenges

Technology

73% cite tech as a top-three challenge, 34% consider it the biggest

Operating model

Second biggest barrier—78% view it as a major challenge

Data

Integrating diverse emerging risk data demands advanced capabilities

RiskTech: now and future

Capital markets firms struggle with the quantification of emerging risks primarily due to multiple methodologies and vendors. Combined with regulatory ambiguity, this has resulted in a failure to incorporate emerging risk data into operations. While successfully quantifying risks will empower capital markets firms to deal with a variety of strategic problems, there is a dearth of precise direction on post quantification steps.

Despite the above stumbling blocks, capital markets firms are ahead in the usage of RiskTech, relative to other sub-sectors in the BFSI industry. Except for 2% of firms, all the survey respondents report deployment of the major emerging technologies in some form.

70% use HPC for risk-modeling
52% leverage ML and AI for risk detection and AML
46% utilize biometrics and behavioral analytics
41% cite ‘high’ adoption of cognitive automation and semantic tech
41% report ‘high’ adoption of GenAI/LLMs

Notwithstanding overall high usage of RiskTech, adoption is inconsistent and fragmented across risk types—according to our survey, only 36% of firms can be categorized as ‘mature’ adopters. Universal adoption of RiskTech is thus still a distant reality.

About the research

TCS and Chartis Research jointly conducted a study of banking, financial services, and insurance (BFSI) organizations on emerging risk types and the role of RiskTech. We surveyed 152 BFSI firms, predominantly large and mid-sized firms, of which 56 were capital markets firms. Our interview respondents included CEOs, board members, chief risk officers (CROs), heads of IT risk and a range of other risk and regulatory leads.

To support our quantitative survey, we also conducted more in-depth qualitative interviews of 54 institutions spread across banking, capital markets, and insurance. These institutions are distributed across Europe, North America, and Asia.

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Industries

Capital markets: Firms lead in the use of RiskTech

Key Findings: Capital Markets

Emerging risks

RiskTech

Spends

Strategic risks

Resilience

A changing risk environment

Evolving risks

Risk factor

Third-party risks

Strategic risks

Crypto risks

Obstacles in managing emerging risks

Top Challenges

Technology

Operating model

Data

RiskTech: now and future

About the research

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