Spurred by integration of the world’s capital markets and growing anxiety over effects of the U.S. subprime crisis, Asian firms are increasing their investment in risk management technology.

Financial firms in more-developed Asian countries are upgrading their systems because of potential exposure to the credit downturn in the U.S., or as a proactive step to avoid such problems in the future. In emerging countries, many firms are only now getting their hands on risk technology through partnerships with international players.

At Hong Kong-based CLSA Asia-Pacific Markets, a brokerage subsidiary of Credit Agricole Group, counterparty risk has been the focus of growing attention. “Any time a major hedge fund goes down, it raises a specter,” said Fraser Howie, CLSA’s head of structured products. “We say, that could have been my client.’”

Sydney-based hedge fund Basis Capital Fund Management, for example, suspended redemptions of its Basis Yield fund in July 2007 after losing more than 80 percent of its assets as a result of subprime exposure. “They were also investing in Asian stocks,” said Howie, adding that many Asian firms have exposure to other markets. “And there’s a domino effect. If they’re using money in the U.S., it could have an effect in Asia as well.”

CLSA has stepped up its risk monitoring procedures. “There’s a greater focus on what terms we’re extending to counterparties–are we monitoring that as best as we can?” said Howie. “In discussions we have with other houses, it’s quite clear: The issue of credit is stricter now than it has been for some time.”

Lessons From the West

Japan was the Asian country hit hardest by the subprime situation, according to Wade Deffenbaugh, head of the financial services practice in the Hong Kong office of Deloitte & Touche, which counts 18 of the 20 largest securities firms in Asia among its clients. “You’ve seen some of those banks [in Japan] take their lumps as much as anyone else,” he said.

While risk management officers throughout the region are trying to “learn from what didn’t work in the West as they shape their risk management” approaches, Deffenbaugh noted that developed markets like Japan already have access to sophisticated tools.

And foreign securities firms moving into younger Asian markets are bringing the latest risk management technologies and policies, often deploying the same platforms throughout all their locations. For those firms, better technology–and the larger variety of products the systems can support–is a competitive advantage against local firms that may not have the same expertise.

In countries like Malaysia, Indonesia and Vietnam, where the markets are just opening up, securities firms are often amenable to joint ventures or acquisitions in part because of the technology that international partners give them access to, said Deffenbaugh.

For foreign firms, there are often additional pressures to maintain high standards in Asian ventures. “You generally find that the international firms are more careful in applying certain rules than local firms would be,” said CLSA’s Howie. For example, “in Korea, the rules are more strictly enforced on foreigners than locals–or that’s the perception. So the foreign firms tend to be more risk averse.”

Though large brokerages in Korea and Japan have risk management systems in place, they are often a generation behind those of the biggest global firms, said Neil Katkov, head of Asia research at Boston-based Celent. Those firms tend to have “first-generation financial audit systems and perhaps risk management in some areas–for example, portfolio risk management in the capital markets–but not the types of second-generation risk management solutions that involve very sophisticated analytics and very thoroughgoing enterprisewide data feeds.”

For the past three years, the Japanese securities industry has slowly been enhancing its risk technology. “The subprime crisis may push them forward in that direction,” said Katkov. The pressure will probably be internal, he added, based on profitability considerations. Regulatory mandates are less likely: Though Japan suffered worse than its neighbors, he estimates that subprime-related losses are around $17 billion, compared to $150 billion at Western brokerages. “It’s a whole different level,” said Katkov.

According to Gordon Russell, managing director for capital markets at SunGard Data Systems in Singapore, the Japanese and Korean markets are moving from a traditional cash brokerage model into more structured equities. That means more options, warrants and equity-linked products, he said, and new risks such as valuation difficulties.

In Asia, Wayne, Pa.-based SunGard has focused on top-tier financial institutions. The technology vendor has more than 20 customers in the region, most of whom are big names in Japan and Korea. Currently, SunGard is targeting mid-tier brokerages in those countries–and the top brokerages in smaller markets.

Slow Going in China

After a two-year hiatus, China resumed granting joint-venture licenses to foreign firms last month, but the oft-delayed Shanghai Financial Futures Exchange still hasn’t opened its doors. Once the exchange is operational, Chinese brokers will finally be able to trade financial derivatives, and will need risk management tools capable of handling the products.

“The opening of the financial futures exchange is going to help grow the market for risk management products and solutions,” observed Bonnie Girard, president of China Channel, a Petersburg, Va.-based consulting firm that focuses on due-diligence and risk management in China.

However, many Chinese companies view risk as something that can be fixed with the right political connections, noted Girard. “Law enforcement in the securities industry is still weak, but there are some exceptions,” she said. Earlier this year, Shanghai-based Guotai Junan Securities announced that IBM Corp., in collaboration with Algorithmics, a Toronto-based provider of enterprise risk solutions, is building a risk management system for the firm. “It is a sign of Guotai Junan’s seriousness about risk management,” said Girard.

Risk offerings are helping to break down Chinese resistance to foreign software, which is generally viewed as too expensive, she added. “Risk management solutions are helping to change those attitudes among some Chinese professionals who see the value of these subtle yet sophisticated applications that help them to manage and predict future behavior in ways not easily replicated by other means.”

Although Deloitte’s Chinese clients want to benchmark against global players, “with the credit crunch, they understand that they can’t just copy the risk management tools, but have to understand the risk behind it,” said Norman Sze, Shanghai-based risk management leader for financial services “It’s a change of mindset–much healthier than just thinking that they can copy one or more of the risk management tools and solve everything.”

Still, local firms have a ways to go, said Sinan Baskan, director of business development at Dublin, Calif.-based Sybase, a database and analytics software provider that counts Citigroup, T. Rowe Price and Mitsubishi Investments among its clients. “When we talk to local institutions, we’re having conversations that we had ten to 15 years ago with Western clients,” said Baskan.

This article first appeared in Securities Industry News. (Paid subscription required.)