Sell-side risk management involves the reduction of risks and also seeks to optimize liquidity. It also deals with monitoring and identifying risks that potentially harm sellers. Some sell-side risk management consultations are based on reducing the adverse impact of volatility and averting additional market risks. While comparing buy-side risks and sell-side risks, it is true that the former is more prominent and gets more attention. However, this too requires a holistic framework to manage and minimize risks as far as possible.
Statistical facts on Sell-side Risks
A 2022 survey found that contrary to public opinion, sell-side risks are a major problem. These are some of the findings of the survey.
- 73% of the survey’s respondents were aware of and used risk systems due to legacy issues in their firms.
- 78% of respondents of the survey also believed that margin policy and dynamic risk management will give firms an edge.
- 64% of respondents took weeks (usually more than 1 week) to implement risk and margin policy changes.
- The real-time demands of current markets do not align with the changes of the risk committee.
Risks That Need Sell-side Risk Management
The risks that need this type of management are mostly unique for sellers, but a few are common for all dealers and traders. Therefore, it is important to discuss both kinds of risks.
Regulatory Risks
The sellers may face substantial regulatory risks in countries where laws and jurisdictions are ambiguous. Sometimes, the KYC and AML requirements can lead to challenges in operating a website. Additionally, some regulations may lead to problems dealing with fiat currency.
Operational and Infrastructural Risks
Operational risks originate from systems and processes. Sometimes, flawed security and rogue traders are responsible for this kind of risk. Unless managed, this risk can lead to loss of money and result in cyber theft. Moreover, since it may lead to losses and crimes, it is not diversifiable. Therefore, robust sell-side risk management is necessary to deal with these.
Security Risks
The security risks can be harmful to businesses and cause enormous financial losses. Therefore, to mitigate this risk, sell-side risk management involves proper software applications and updates. It may also involve monitoring by system administrators to check for any unusual activity. Two-factor authentication currently is the most common technique for reducing this risk.
How Does Sell-side Risk Management Help?
It helps in the following ways.
- It uses real-time risk engines to track potential areas of risk.
- Improves transparency and stops the waste of resources
- Market operations become scalable
Also Read- Bitcoin’s Superpower Status in the US and Its Impact on India
Conclusion
Sell-side risk management is as important as any other type of risk management. Therefore, to assure sellers, protect their interests, and adhere to regulatory requirements, this form of risk management is vital. The survey report also reveals the same. It is necessary that companies dealing with financial products must give emphasis to the interests of sellers and offer viable solutions to neutralize or reduce risks.
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