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RISK MEASUREMENT ON-DEMAND:Complexity, Volatility and Regulatory UncertaintyModeratorArmita SeyedalikhaniProduct Marketing...
Adam Sussman              Partner, Director of Research               TABB GroupAdam Sussman, Partner and Director of Rese...
Matthew Streeter               Product Manager               FINCADMatthew Streeter has over ten years of experience  in t...
Macro and Capital Markets Specific Issues areDominant Drivers of Technology Issues Today   Macro                 Politics ...
Data Management is the Most PositivelyTrending Issue Among Financial Institutions  HIGH                                   ...
Too Much Data is a Problem but so are  More Fundamental Issues such as Flexible Analytics                                 ...
Too Much Data is a Problem but so areMore Fundamental Issues such as Flexible Analytics    Five Types of Data to Manage   ...
But there is still lots of focus onReporting and Portfolio Analytics  HIGH                                         Reporti...
As Risk and Reporting Grow in Importance, there is a need to be   More Efficient in Compute Time           The demand for...
Major Capital and Collateral Requirements will  Require Significant Increase in Calculation Power         Under Basel III...
Another Significant Driver is Calculating Capital and Margin Requirements Post Dodd FrankSource: BIS, ISDA ,WFE, TABB Group
Determining the Cost of the Various Products versus the Benefits   will Become Critical to Product Selection and Portfolio...
Determining the Cost of the Various Products versus the Benefitswill Become Critical to Product Selection and Portfolio Co...
As a Percentage of the OTCD Cost Structure, IM/VM will Grow as TradingCosts go Down. What is Unclear is the Direction of A...
This Will Need to be Done Across the23 Central Clearing Counterparties Around the Globe                           List of ...
Intelligent Calculation Techniques can helpAlleviate Computational Requirements                                         La...
Increased Reporting and Valuation RequirementsWill Require more Effective and Flexible Calculations   Aggregating data   ...
Risk Management      Portfolio Level Risk Measurement      Risk Considerations in Changing Markets      Regulatory Envi...
Dynamics of Risk Measurement    Business need for aggregate and granular riskModern Approach to Portfolio Level Analytics...
Market Risk    Market data observables    Capturing all reliant dataCredit Risk    Definition of trading entities    M...
Major regulations impacting risk calculations    Basel III, Dodd‐Frank, Solvency II    Implementation timeline: 5+ years...
Risk Management      Portfolio Level Risk Measurement      Risk Considerations in Changing Markets      Regulatory Envi...
 Flexible Product Construction    Primary benefits of a flexible approach    Explanation of product definitions    Ind...
Centrally Cleared Financial Instruments (ex. Futures, Swaps)      Risk scenario based calculation via historical VaR & Mo...
©2012‐ Proprietary and Confidential Information of FINCAD   25
©2012‐ Proprietary and Confidential Information of FINCAD   26
On‐demand Risk (Sensitivity) Calculations    Universal Risk Technology       Methodology for exact first order risk sens...
Curve Bumping vs. F3 Risk Report1                                    ©2012‐ Proprietary and Confidential Information of FI...
©2012‐ Proprietary and Confidential Information of FINCAD   29
Risk Management      Portfolio Level Risk Measurement      Risk Considerations in Changing Markets      Regulatory Envi...
©2012‐ Proprietary and Confidential Information of FINCAD   31
©2012‐ Proprietary and Confidential Information of FINCAD   32
System Deployment Options    Minimal desired resource investment    Flexible implementation Systems Communication    P...
Matthew Streeter            Adam SussmanProduct Manager             Partner, Director of ResearchFINCAD                   ...
Risk Measurement On-Demand, FINCAD & TABB Group Webinar Slide
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Risk Measurement On-Demand, FINCAD & TABB Group Webinar Slide

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This is the slide from the FINCAD & TABB Group Webinar: Risk Measurement On-demand: Addressing Complexity, Volatility and Regulatory Uncertainty.

You will learn from the slide:

- What are the new capital and collateral charges likely to be imposed
- What kind of timeline are we looking at
- What financial and operational risks are regulators going to focus on
- What infrastructure is required to manage these risk and reporting requirements
- What are the design considerations necessary within an analytics software platform
- How to calculate risk on positions and portfolios efficiently and on-demand
- How to set up a risk system that will evolve with changing instruments and conventions

Click http://bit.ly/KaXaDK to watch the webinar recording.

Published in: Business, Economy & Finance
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Transcript of "Risk Measurement On-Demand, FINCAD & TABB Group Webinar Slide"

  1. 1. RISK MEASUREMENT ON-DEMAND:Complexity, Volatility and Regulatory UncertaintyModeratorArmita SeyedalikhaniProduct Marketing Manager, FINCAD ©2012‐ Proprietary and Confidential Information of FINCAD 1
  2. 2. Adam Sussman Partner, Director of Research  TABB GroupAdam Sussman, Partner and Director of Research at TABB Group. Sussman joined the firm in 2004 as a Senior Analyst. Before that, he served as a senior product manager responsible for order‐management systems, routing and next‐generation trading tools focused on the equities and options markets. With his expertise in the global financial markets, Sussman has authored a number of TABB Group research reports. ©2012‐ Proprietary and Confidential Information of FINCAD 2
  3. 3. Matthew Streeter Product Manager FINCADMatthew Streeter has over ten years of experience  in the finance industry in both buy‐side and sell‐side institutions.  He is also a Chartered Financial Analyst (CFA). In his current role, he analyzes market needs and manages the strategic direction of FINCADs F3 product line. ©2012‐ Proprietary and Confidential Information of FINCAD 3
  4. 4. Macro and Capital Markets Specific Issues areDominant Drivers of Technology Issues Today Macro Politics / Anti-Financial Services Global GDP Asset Prices Capital Fund Flows / Investor Regulations Profit Margins Alpha Markets BehaviorIT Initiatives Data Management Lower TCO Latency Mobility Parallel SpecializedTechnology Reference Data Virtualization Private/Public Cloud Encryption Processing Hardware
  5. 5. Data Management is the Most PositivelyTrending Issue Among Financial Institutions HIGH Data Data Management Management Risk Risk Lower TCO Lower TCO INTENSITY Regs Regs Latency Latency Security Security Disaster Disaster Recovery Recovery Mobility LOW TRENDING HIGH
  6. 6. Too Much Data is a Problem but so are More Fundamental Issues such as Flexible Analytics Leading data challenges among Brokers Sell-side Sell-side Inflexible analytics 45.3% Too much data 41.5% Lack of Data 22.6% Hard to Understand 22.5% Ease of analytics 17.0% Data provenance 15.1% Analytics supplier 7.6%Source: TABB Group & Wall Street & Technology
  7. 7. Too Much Data is a Problem but so areMore Fundamental Issues such as Flexible Analytics Five Types of Data to Manage 1. Market Data  Trades, quotes, messages  Exploding growth  Speed rules 2. Reference Data  Client & Indicative product  The basis for most processes 3. Fundamental data  Economic, earnings, etc... 4. Unstructured data  News, etc...  Fast growing  Multiple standards 5. Internally generated  Proprietary focus, unique to institutions
  8. 8. But there is still lots of focus onReporting and Portfolio Analytics HIGH Reporting Reporting Alpha Discovery OTC OTC Clearing Clearing INTENSITY Collateral Collateral Portfolio Analytics Algo Algo Trading Surveillance Surveillance Trading HFT HFT Disaster Recovery Mobility LOW TRENDING HIGH
  9. 9. As Risk and Reporting Grow in Importance, there is a need to be More Efficient in Compute Time  The demand for computational speed is universal  Computational speed is also relevant to middle, back office and non-trading applications, such as enterprise risk management, portfolio re-construction / optimization, and various regulatory / compliance / fraud monitoring requirements. Advantages of Better Run Times 57% 22% 13% 13% Productivity Improved Outcomes Client Satisfaction Little / No ImpactSource: TABB Group
  10. 10. Major Capital and Collateral Requirements will Require Significant Increase in Calculation Power  Under Basel III, new required calculations to include  Liquidity Coverage Ratio: The institution must have enough liquid resources to survive for one month, in the case of a stress event  Incorporate Credit Value Adjustment (CVA) into Credit Counterparty Risk (CCR)  Includes Closeout Risk on any open positions  Stress tests to include credit spread widening and other forms of wrong way risk  Under Dodd-Frank Title VII, margin requirements become more onerous  Uncleared swaps will not only have additional margin but also be subject to charges from Basel IIII  On cleared swaps, calculating initial and variation margin for all client accounts  Must include the potential netting benefits of where current offsetting positions are held  Where a client will clear will be an additional input into the price quoted to the market placeSource: TABB Group
  11. 11. Another Significant Driver is Calculating Capital and Margin Requirements Post Dodd FrankSource: BIS, ISDA ,WFE, TABB Group
  12. 12. Determining the Cost of the Various Products versus the Benefits will Become Critical to Product Selection and Portfolio Construction 18% Sample Initial Margin Levels In some cases, astronomical 16% margin levels for uncleared ETD/OTCD Rates Derivatives Margin, % of Notional 14% and/or long duration risk transfer 12% products could virtually kill off 10% CME Futures (Customer) 8% CME Futures (Member) 6% ERIS Futures 4% CME OTC USD IRS LCH OTC USD IRS 2% Uncleared OTC (Futures Mulitple) 0% Uncleared OTC (Cleared Swaps Multiple) 0 5 10 15 20 25 30 Maturity (years)Source: CME, LCH, ERIS, CFTC, TABB Group
  13. 13. Determining the Cost of the Various Products versus the Benefitswill Become Critical to Product Selection and Portfolio Construction
  14. 14. As a Percentage of the OTCD Cost Structure, IM/VM will Grow as TradingCosts go Down. What is Unclear is the Direction of Absolute Costs. Opportunity Initial Margin & Variation Margin Implied Bid – Ask Spread Transactional Clearing Broker Fees Execution Venue Fees Infrastructure Tech, Legal & Administrative
  15. 15. This Will Need to be Done Across the23 Central Clearing Counterparties Around the Globe List of Global CCPs (23)
  16. 16. Intelligent Calculation Techniques can helpAlleviate Computational Requirements Lazy Evaluation Calculate CVA Model Input Model Input Model Input Model Input Model Inputs New Calculation No Action Changed Static Values Value Static Values New Values Object Re-use New Valuation
  17. 17. Increased Reporting and Valuation RequirementsWill Require more Effective and Flexible Calculations Aggregating data  If data is not centrally stored, there needs to be an index of all the files required for each report  This can become complex since a report for a particular counterparty or client could involve files dispersed throughout the network Handling complex calculations  In order to calculate risk metrics  Everyone needs to use same market and reference data  Eliminate / reduce manual inputs  Minimizes risk of human error / fraud  Better manage internal risk  Better manage counterparty risk Post-trade process  Ideally, trade details are exported to a central database  However, due to uniqueness of some products and complexity in designing database structure, central storage is not always practical  Rather, trade details must be locked down and file only accessed for settlement and valuation.
  18. 18. Risk Management  Portfolio Level Risk Measurement  Risk Considerations in Changing Markets  Regulatory Environment & TransparencyPricing & Risk Calculations  Built‐in Product Flexibility  On‐demand Risk Measurement: Intra‐day vs. Real Time  Portfolio Level Risk Sensitivities & Valuation On‐demandOptimal Architecture & Design  Separation of Concepts  Separation of Functional Roles  Evolving Pricing & Risk Systems ©2012‐ Proprietary and Confidential Information of FINCAD 18
  19. 19. Dynamics of Risk Measurement  Business need for aggregate and granular riskModern Approach to Portfolio Level Analytics  Designing for flexibility  Scalable with minimum IT investmentChallenges in Achieving Holistic Risk  Lack of scalability  Legacy systems  Performance limitations ©2012‐ Proprietary and Confidential Information of FINCAD 19
  20. 20. Market Risk  Market data observables  Capturing all reliant dataCredit Risk  Definition of trading entities  Management of LEI data  Robust data managementModel Risk  Primary drivers of optimal risk:  Transparency, accuracy, independence  Accuracy through a powerful calculation framework ©2012‐ Proprietary and Confidential Information of FINCAD 20
  21. 21. Major regulations impacting risk calculations  Basel III, Dodd‐Frank, Solvency II  Implementation timeline: 5+ yearsHigh level regulatory requirements  Increased clarity in OTC derivatives  Better capitalization  Stronger risk managementChallenges in Current Market Environment  Regulatory ambiguity: requiring core flexibility from  analytics solutions  Significant workload for complying with regulations ©2012‐ Proprietary and Confidential Information of FINCAD 21
  22. 22. Risk Management  Portfolio Level Risk Measurement  Risk Considerations in Changing Markets  Regulatory Environment & TransparencyPricing & Risk Calculations  Built‐in Product Flexibility  On‐demand Risk Measurement: Intra‐day vs. Real Time  Portfolio Level Risk Sensitivities & Valuation On‐demandOptimal Architecture & Design  Separation of Concepts  Separation of Functional Roles  Evolving Pricing & Risk Systems ©2012‐ Proprietary and Confidential Information of FINCAD 22
  23. 23.  Flexible Product Construction  Primary benefits of a flexible approach  Explanation of product definitions  Index expression Language overview Illustration of flexibility & Index Expression Language  Examination of complex product types ©2012‐ Proprietary and Confidential Information of FINCAD 23
  24. 24. Centrally Cleared Financial Instruments (ex. Futures, Swaps)  Risk scenario based calculation via historical VaR & Monte‐Carlo VaR  Volatility based risk measure impacting margin requirementBi‐Lateral OTC Financial Instrument (ex. European Swaptions)  Non‐clearable trades subject to ISDA agreements  Margin call on the net portfolio MTMCapturing portfolio level aggregation for both centrally cleared and bi‐lateral Trades  Capturing portfolio level aggregation for centrally cleared & bi‐lateral trades  How to effectively capture the risk of illiquid instruments with various distribution  shapes ©2012‐ Proprietary and Confidential Information of FINCAD 24
  25. 25. ©2012‐ Proprietary and Confidential Information of FINCAD 25
  26. 26. ©2012‐ Proprietary and Confidential Information of FINCAD 26
  27. 27. On‐demand Risk (Sensitivity) Calculations  Universal Risk Technology  Methodology for exact first order risk sensitivities  Lazy evaluation in concept  Calculated portfolio sensitivitiesUniversal Risk Technology Performance  Key rate during comparison  Measures of calculation performance  Risk sensitivities ©2012‐ Proprietary and Confidential Information of FINCAD 27
  28. 28. Curve Bumping vs. F3 Risk Report1 ©2012‐ Proprietary and Confidential Information of FINCAD 28
  29. 29. ©2012‐ Proprietary and Confidential Information of FINCAD 29
  30. 30. Risk Management  Portfolio Level Risk Measurement  Risk Considerations in Changing Markets  Regulatory Environment & TransparencyPricing & Risk Calculations  Built‐in Product Flexibility  On‐demand Risk Measurement: Intra‐day vs. Real‐Time  Portfolio Level Risk Sensitivities & Valuation On‐demandOptimal Architecture & Design  Separation of Concepts  Separation of Functional Roles  Evolving Pricing & Risk Systems ©2012‐ Proprietary and Confidential Information of FINCAD 30
  31. 31. ©2012‐ Proprietary and Confidential Information of FINCAD 31
  32. 32. ©2012‐ Proprietary and Confidential Information of FINCAD 32
  33. 33. System Deployment Options  Minimal desired resource investment  Flexible implementation Systems Communication  Patchwork of legacy systems  Remove operational risk through automated system communication Technology Investment  IT Expenditure growth rate  Direction of expenditures ©2012‐ Proprietary and Confidential Information of FINCAD 33
  34. 34. Matthew Streeter Adam SussmanProduct Manager  Partner, Director of ResearchFINCAD     TABB Group604.957.1137   646.747.3205 m.streeter@fincad.com asussman@tabbgroup.com Visit our website www.fincad.com ©2012‐ Proprietary and Confidential Information of FINCAD 35

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