The meteoric growth of cloud technology is going to be a game-changer for all kinds of companies worldwide. But Howard Tolman, of Cloud Trading Technologies, believes the impact it will have on banks is going to be greater than any other sector

Cloud technology is undoubtedly set to have a significant influence on the banking sector over the next decade and beyond, partly because banks traditionally feel part of their role is to be heavily involved in information technology (IT). While this is not surprising given the nature of their mainstream business, the conflation of processing requirements and controlling risk has, I believe, had the unexpected effect of dramatically increasing the cost of IT within the banking sector. A recent report put banking IT costs at two and a half times more than other industries with similar demands. Such costs are OK during prosperous times but not with western economies in their current state. One area where banks have been particularly keen to build and maintain their own applications has been in the e-commerce and electronic trading markets. Over the past 15 years or so these markets have advanced considerably and now offer complex derivative calculation, decision support and delivery capability as well as vanilla products. Risk systems have tried to keep up but it has been a very hard slog. Initiatives such as the Credit Support Annexe (CSA) under which counterparty risk is backed up by physical movement of cash collateral on a daily basis means that time is of the essence when making these complex calculations. In addition, innovation tends to be coming from independent software vendors who lean towards a more holistic approach to risk problems, rather than the more silo’d product-based approach favoured by banking institutions.

Cut costs, increase efficiency
So banks need to get a grip of these issues sooner rather than later. But at a time when institutions are seriously under-performing and with restrictions on both head-count and budgets, this might be a difficult nut to crack. On top of this it is not going to get any easier as regulators start to home in on how risk is managed and start insisting that institutions manage their positions in real-time. So the trick will be to reduce costs and at the same time massively increase efficiency.

If these problems are going to be taken seriously then banks should look at embracing cloud technology which by its very nature is perfect for the trading and risk markets. External cloud technology provides significant cost reductions coupled with ease of implementation and massive scalability. On top of this it solves two of the biggest problems inherent in trading systems: those of fault tolerance and high availability. Closely behind comes the problem of maintaining huge amounts of mainly redundant hardware purely to avoid systems falling over when there is a spike in the market. They could also start to abandon the costly and glacially slow practice of internal application building which surely provides them with the worst of all worlds.

Here to stay
I know banks are proud and somewhat monolithic organisations which are conservative by nature. However, cloud technology is here to stay and in the trading risk and derivative space it can seriously reduce cost, enhance risk management and increase efficiency all the way around. There is of course fierce resistance from internal IT to any form of external engagement. There are particular concerns about security which I believe are based more on vested interests rather than real anxiety. Cloud security is extremely robust. Similarly, compliance issues are frequently raised. However, regulators do not generally stand in the way of progress when it is explained to them properly. After all they want the market to function properly and will not object to banks using tools which help them to achieve this objective by being obstructive.

My company has been building complex applications in the risk management area for the past 11 years. Delivery of these systems using Microsoft Windows Azure Cloud Technology is a huge step forward and can help any bank improve its performance and lower its unit costs at the same time. It remains to be seen how quick the take-up will be but I am confident that within the coming year we will see a large number of banks start to recognise the benefit of new technology in this particular market segment.

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