Numerix Blog

Risk and CVA for Exotic Derivatives: The Universal Modeling

 
 

This year’s 9th annual Quant Congress USA, hosted by Risk Magazine in New York City, revealed some of the most cutting-edge research and innovations across the quantitative analysis, trading, risk management and investment markets. Numerix’s own Dr. Alexander Antonov, SVP of Quantitative Research, presented “Risk and CVA for Exotic Derivatives: the Universal Modeling” on July 13^th at The Westin, Times Square.

In his presentation, Dr. Antonov addressed the following key issues:

1. Calculation of the portfolio exposure in a self-consistent way using arbitrage-free model calibrated to both implied market and real-world projections
2. A new automatic method of exposure calculations (at the same time as pricing) especially attractive for exotic portfolios avoiding cumbersome exercise aggregation
3. Efficient CVA calculation using the simulated information

The following graph illustrates a callable swap exposure profile in different measures (including the risk-neutral one).

 

 Download the presentation "Risk and CVA for Exotic Derivatives: the Universal Modeling” now.

Numerix Co-hosts Executive Forum in Mexico City on Risk Management for OTC Derivatives

On June 15^th, Numerix co-hosted with Sybase, an SAP company and MIT Club its first Financial Services Executive Forum in Mexico City. The event, entitled “Risk Management for OTC Derivatives: Changes, Challenges and Best Practices”, drew an audience of nearly a hundred senior executives and industry experts from leading financial services institutions and fund managers.

Photo from left to right: Neil McGovern (Director of Financial Services Product Management, Sybase), Satyam Kancharla (Senior Vice President Global Solutions, Numerix) and Dr. Esteban Martina Boggetto (MIT Alumnus) and finally Fernando Diarte (President of MIT Club of Mexico)

 

Following a brief welcome address by Fernando Diarte, President of MIT Club of Mexico, three industry speakers each presented risk management from their perspective:

Valuation and Risk Models- Actual and Future Paradigms, presented by Dr. Esteban Martina Boggetto, MIT Alumnus

Risk Management Best Practices: Establishing Analytics Transparency and Consistency from Front to Back-Office, presented by Satyam Kancharla, Senior Vice President, Global Solutions, Numerix

The Role of Data Management Technologies to Achieve Enterprise-wide, Cross-asset Risk Management, presented by Neil McGovern, Director of Financial Services Product Management, Sybase, an SAP Company

First, Dr. Martina Boggetto, an MIT Alumnus and specialist in Risk and Quantitative Analytics and Management for PRO Consulting Partners, shared insights on current valuation and risk model approaches. He went on to discuss how industry trends and regulations may impact these approaches and thereby affect many organizations’ future risk management requirements.

Next, Satyam Kancharla from Numerix explored the challenges and trends in risk management due to changes in regulation in the wake of the recent financial crisis. He underscored that as a result of these new challenges, the siloed approach of the past with different analytics for front, middle and back offices and for different desks, will no longer work. What is needed for sound enterprise risk management, he surmised, is complete analytic consistency enterprise-wide.

The last speaker was Neil McGovern from Sybase, an SAP company. Neil’s presentation described a few practical examples of how organizations are leveraging advanced data management technologies, such as in-memory databases, to improve risk management across all asset classes.

While each speaker spoke from different perspectives on risk management, it was crystal clear they all agreed on one key point: effective risk management now mandates organizations evolve towards a centralized, consistent analytics platform. Towards this end, Numerix and Sybase have worked together to embed Numerix pricing and risk analytics deeper into the systems fabric of larger organizations, via integration to cutting-edge software systems like Sybase RAP (Real Time Market Analytics Platform).

For more information, contact sales@numerix.com.

Improving Risk Management and Transparency for Structured Products, Exchange-Traded and OTC Derivatives through Effective Data Management & Innovative Analytic Models: A Recap from SIFMA’s Risk Management Thought Leader’s Panel, June 15th, 2011

 Risk Management Thought Leader’s Panelists Photo from Left to Right: Panel Moderator: Ben Narey, Managing Director, Banking and Capital Markets, Microsoft; Panelists: Ted Pendleton, SVP, Global Business Development, Numerix and Tim Lind, Global Head of Strategy, Enterprise Content, Thomson Reuters

“It’s going to be a Renaissance from an analytics perspective”—Tim Lind, Global Head of Strategy, Enterprise Content, Thomson Reuters

On June 15^th, partners Microsoft, Numerix and Thomson Reuters teamed up for an engaging panel discussion about how organizations are striking a balance between innovation and transparency--in both the data management and analytic models areas--to embed risk management effectiveness into their companies’ culture.

Information has outpaced our ability to understand and manage it. Even before the financial crisis, enterprise-wide risk management was among the next big initiatives for Financial Services firms.

According to Panel Moderator, Ben Narey, Managing Director, Banking and Capital Markets at Microsoft, companies are finding major challenges in the areas of data management and analytics modeling.  The lack of relevant and/or timely data, coupled with greater demand for complex analysis scenarios, such as VaR and counterparty risk, hampers  today’s organizations’ ability to deliver a holistic and, in some instances, real-time view of their firms’ risk profile.

Tim Lind, Global Head of Strategy, Enterprise Content at Thomson Reuters, underscored how regulatory pressures exacerbate the data management challenge.   “We need to gear-up for massive regulatory reform,” he added. Mr. Lind also passionately warned about the ‘demonization’ of Wall Street and the potentially adverse impact of over-regulation, stating that politicians, “never waste a good crisis.”

On the horizon, all the panelists agreed that the regulatory impact for the OTC industry needs to be seriously evaluated by financial institutions, in relation to the following:

• European Securities and Markets Authority (ESMA) & European Reform
• Dodd Frank and Office of Financial Research (OFR)
• Hedge Fund Registration & Compliance
• Pension Benefits Standard Act
• Global Harmonization of Regulations
• Basel 3, Capital Adequacy, Topic 820 (formerly FAS 157)
  
  While the industry does clearly need to make changes in the way it handles risk management for OTC derivatives going forward, “…with massive legislation often comes bad legislation,”  added Mr. Lind.

 Speaking out on Industry Best Practices

 “Americans know the price of everything and the value of nothing”-- Oscar Wilde

 As the panel discussion continued, Ted Pendleton, SVP, Global Business Development at Numerix cleverly referenced Oscar Wilde and the parallels on the OTC derivatives market and lack of understanding behind OTC valuation practices.

Mr. Pendleton also addressed the following challenges when it comes to developing risk management best practices for OTC Derivatives and Structured Products:

• Consistent valuation of all trades and portfolios – from Vanilla to Exotic derivatives and structured products

• Access to information, as needed—getting data to the right people at the right time:
  • Data delivery process takes too long
  • Risk systems need direct, timely front office links

• Data Accuracy vs. Performance
• Transparency (data, models, historical, future)
• Correlated risk (RORAC)
• Efficiencies in business and technology operations
  
  • Internally, with counterparties, administrators and regulators

When it comes to risk management and consistent valuations, “…we are grappling with legacy technology,” added Mr. Pendleton.  “What’s needed is a single version of the truth when it comes to OTC valuation—enterprise-wide from front-to-back-office, and we are seeing an uptick in model validation and advanced modeling for risk.”

For more information about Numerix real-time pricing and risk analytic solutions, contact sales@numerix.com.

Numerix and Sybase Team-up at SIFMA to Address Risk Management and IT Best Practices

Technology solutions for Risk Management were in full bloom at this spring’s SIFMA Financial Services Technology Expo and Leader’s Forum conference, hosted in New York City from June 14^th-16^th.

Numerix and Sybase, an SAP company, co-hosted an informative breakout session on Tuesday, June 14^th entitled: Risk Management and IT Best Practices: Centralize Portfolio Pricing Enterprise-wide to Mitigate Risk and Improve Efficiency.

With traders, quants and risk managers demanding better proximity and more efficient access to market data, deal terms and cross-asset pricing for derivatives and structured products-- the two companies have teamed-up to offer the financial industry an innovative solution to some of its most pressing pain points.

The session kicked-off with an introduction from Sybase’s David Hess, Channel Development Manager, followed by Alex Kriger, Vice President of Business Development, Americas at Numerix--and later concluded with comments from Kutay Kilic, Chief Solutions Architect, Global FSI Group Sybase, An SAP Company.

Mr. Kriger spoke passionately about the industry’s current pain points, as a result of so many disparate systems--even in the smallest organizations--and how this has and continues to cause colossal problems with consistency. One Numerix client (a large financial institution) has approximately 30 different systems producing different valuations. Ouch!

 Mr. Kriger summarized some of the most pressing risk management challenges for the OTC Derivatives and Structured Products industry as follows:

• Different systems producing inconsistent valuations
• Stale reporting
• Lack of unified view for Risk Management
• No unified trade representation
• Instrument implementation challenges: time-to-market.

What’s needed is a ‘single version of the truth’--from front-to-back office, he added.  He recommended a ‘Best Practices’ approach that includes centralized portfolio pricing and risk analytics, and then proceeded to demonstrate the value of the Numerix Sybase RAP Integration. Highlights of the Numerix Sybase RAP Workflow are outlined below:

• Provides consistent implementation across enterprise(one implementation, one upgrade/update location)
  • Standard invocation mechanism
  • Market data and deal terms are “close” (reduced latency)

The many benefits of database-level integration also include:

• Consistent pricing through processes
• Consistent instrument coverage regardless of system
• Increased operational workflow efficiencies
• Reduced total cost of ownership through reduced development and maintenance cycles
• Reduced operational risks
• Unified risk
• Complete OTC coverage including newest deals

At the end of the lecture, Mr. Kilic, Chief Solutions Architect at Sybase, demonstrated more clearly the benefits of the database level integration solution, using a complex snowball derivative as an example on his laptop.

In conclusion, the bottom line when seeking consistent pricing, enterprise-wide is to remember that:

Consistent Market Data + Consistent Analytics = Consistent Pricing

Contact sales@numerix.com for more information about database level integration solutions, and the Numerix-Sybase partnership.

Highlights from SIFMA, New York City 2011: Numerix Speaks Out about IT Best Practices-Valuation and Risk Management Approaches for OTC Derivatives & Structured Products

At New York City’s recent SIFMA Financial Services Technology Expo and Leader’s Forum, Numerix’s own Larry Mitchell, Numerix Consultant and Former Financial Services Managing Director & CIO, talked about IT Best Practices: Valuation and Risk Management approaches for OTC Derivatives and Structured Products in a room filled with industry professionals looking to resolve today’s most pressing Valuation and Risk Management IT challenges. This event was co-hosted by Numerix’s partner, Microsoft. Numerix continues to work closely with Microsoft’s experts to offer new ways of developing analytics on the grid.

In today’s market, a prerequisite to success in risk management is all about managing data more effectively. However, as the demand for data increases, there are certain questions which arise, such as: Firstly, how do we aggregate all the data we need? Secondly, how do we get the data fast enough to keep up with the pace of this market? Thirdly, once we have all the right data intact, then how do we calculate risk measures quickly enough to make smarter decisions?

As we all know, the market risk regulations have been seriously impacted by the development and future implementation of Basel III, including: market capital requirements, additional risk factors and stress and back testing. If you look at standard industry practices, the risk numbers are often stale and can only be provided on a next-day basis.

For those of you who had a chance to attend Mr. Mitchell’s compelling lecture last week, the message was straight forward that the demand for improved risk management and increased productivity in the middle-office continues to grow. This has put IT organizations under pressure to automate and accelerate cross-asset pricing, valuation and risk management of complex derivatives and structured products. Mr. Mitchell also emphasized the important role of high performance computing risk servers and advanced GUIs for analytics in the future.

Numerix’s goal is to provide the industry with a more centralized approach, including a combined pricing and risk solution. According to Mr. Mitchell, the risk management benefits for the OTC Derivatives and Structured Products industry include:

• Consistent pricing, valuation and risk measures for all trades and portfolios:
  • From Vanilla to Exotic derivatives instruments and structured products
  • Risk is not additive
  • This approach avoids reconciliation differences between front office pricing and risk measures
• Access to information on demand
• Data accuracy and performance
• Transparency (data, models, historical, future):
  
  • Internally, with counterparties, administrators and regulators
• Correlated risk across asset classes with Hybrid model framework
• Ease of integrating new financial products with XL workbench, allowing change management controls through product control groups and related committees

Hence, Numerix’s main goal is to support a more centralized approach, which would appropriately include both vanilla and complex products into a single pricing, valuation, counterparty and market risk calculation framework. Many financial institutions are launching major initiatives to upgrade their risk infrastructure. With the new focus on risk metrics post the Global Financial Crisis, the industry is seeing a renewed investment focused on emerging best practices.