Basis Point Group LLC (BPG) is proposing to work with a group of investment management industry participants to evaluate the level and variability of measurable risk posed by all financial process events in an effort to understand the role effective operational processes play in determining overall investment returns.
BPG says its approach is structured to assure the confidentiality of each firm’s performance and requires no client or holdings information to achieve the study results.
“In my role as Director of Information Technology, State Street Research and Management, we found that Basis Point Group had developed a methodology to measure operations performance using the same information that the industry uses to calculate investment performance,” says Peter Duggan. “They achieve the goal of measuring absolute performance by using an innovative approach to aggregating and organizing already available business data. They then present the metrics in an easily understandable framework that provides line managers immediate operational benefits.”
Automation of the investment process allows significant transaction throughput, says BPG. Each financial event creates a potential risk. The timeliness and accuracy of transaction processed determines the risk each firm is taking in handling their clients’ investments. The probability of financial loss or reputational embarrassment is tied directly to the risk each firm accepts in its operations. In addition to measuring processing risk, the study will attempt to assess whether this risk has a measurable impact on investment returns.
“BPG’s approach to measuring operational performance and risk combines the strengths of the common key risk indicator; benchmarking and loss data approaches by monetizing the inherent risk from ‘non-conforming’ financial events and summarizing them into a single index of operations performance,” says Fred Sommers, a Basis Point Group Partner who designed the analytic framework for the study “”Improvements in assessing underlying process risk allow measurement of fluctuations in processing risk while providing full attribution and isolation of individual events that makeup the overall risk.”