Listen to the Article: Be Better Prepared - 8 Risk Management Trends FX Brokers Need to Know

Forex trading is known for diversifying investment portfolio. It is an all-time market with trading centers operating in different time zones, and that means when trading in one place comes to a halt, the market continues in another. With the highest market liquidity, however, comes the greatest amount of risk, and liquidity-related concerns are only one side of the polygon that an FX broker must deal with.

Just like any other enterprises across the board, a responsible broker always seeks the best Governance, Risk and Compliance (GRC) solution. These three terms used to be practiced separately, but as the financial market evolves, a solution that combines all in one coordinated model becomes increasingly accepted. Come with Fazzaco today and let's take a look at some of the risk management trends that could happen in 2023.

1 - Risk Appetite and Risk Tolerance Gain Importance

Risk appetite refers to the amount of risk a company is ready to take in pursuit of goals. Basically, it is a company's risk capacity, or the greatest level of residual risk that it will accept after controls and other measures have been implemented.

Risk tolerance, on the other hand, is the degree of departure from risk appetite that a company is ready to take in order to achieve a certain goal based on characteristics such as industry and vertical standards.

Making both a part of strategic planning activities is critical for keeping risk-taking actions in check, and more businesses are including both missing parts into their strategy.

2 - Third-Party Risk Management Becomes Even More Crucial

In October 2022, Crypto wallet BitKeep was hacked for over $1 million worth of BNB Chain and Polygon-based tokens​. In December 2022, the US Department of Justice opened a criminal investigation into the alleged hack that made the bankrupt FTX suffer from approximately $400 million loss.

So, as cyber attacks on brokers and other market disruptions become more common, more financial firms will develop a centralized risk management strategy that provides insight into all third-party risks.

3 - An ERM Strategy that Fits is Now Your New Edge in Competition

An increasing number of brokers are implementing ERM (enterprise risk management) solutions to create a more integrated view of risk in order to be better equipped to navigate through possible future adversities as the world recovers from the pandemic economically.

Nevertheless, inappropriate ERM not only leads to potential losses, but also there could be regulatory penalties or lawsuit expenses. In September 2022, Credit Suisse reached a $32.5 million settlement​ to resolve a lawsuit accusing the Swiss bank of misleading shareholders about how well it managed risk.

4 - Business Continuity Planning (BCP) Draws Greater Attention

Business Continuity Planning is in fact the resilience of an organization to bounce back and continue providing services at acceptable levels in the aftermath of a disruptive incident.

The regulatory debate around business continuity will heat up in the coming year. Simultaneously, more brokers should work to develop and reinforce their BCP strategies and solutions.

Or, your company might end up in an awkward situation like TSB Bank last month, when it was fined £48.65M by FCA and Prudential Regulation Authority (PRA) for operational resilience failure.

5 - BCP and ERM Become Better Aligned

Currently, risk management and business continuity at financial institutions are largely works being done separately. Brokers are expected to seek improved alignment between both activities through the use of shared insights from business impact analysis that assesses and prioritizes risks in order to respond to risk occurrences with more confidence.

6 - ESG Reporting Matters

ESG is a framework that offers stakeholders a vision in understanding how an organization manages environmental, social, and governance risks and opportunities. In October 2022, the stock trading platform CMC Invest started to display ESG data​ for stocks, exchange-traded funds (ETFs) and investment trusts in its mobile investing app.

Financial institutions including brokers will need to take a coordinated strategy across business divisions to establish a coherent and compelling ESG story that both investors and regulators are looking for as ESG reporting becomes a critical component of corporate operations.

7 - Don't Be Condescending, Treat Staff with More Respect

This is something that sometimes often ignored by the top management of a company. Especially for brokers, when your frontline employees have to spare no efforts in providing the best trading experience to traders, a responsible broker always takes good care of both their clients and staff, sometimes by setting up a mechanism, such as a staff hotline, that allows staff to report or file complaint when they feel mistreated.

8 - Use AI and ML for Better Risk Visibility

AI and ML, which mean Artificial Intelligence and Machine Learning, are symbols of what today's human technology as a whole is headed. Fazzaco has elaborated on the roles of many financial technologies being used in articles, "Fintech Yearbook 2021 - AI, Automation, Cloud and API", and "How Artificial Intelligence can Help Your Brokerage in 3 Ways"​.

In 2023 and beyond, more brokers will look for quicker and better risk visibility enabled by such technologies. AI and ML are not the only ones, there are numerous other fintech solutions, too, being increasingly adopted by the industry.