Jun 12, 2013

The Rocky Road Ahead: Achieving a Unified View of Risk

Numerix, TabbForum and Microsoft recently teamed up in New York City to sponsor a panel discussion event, focusing on the need for a more timely, accurate and enterprise view of risk in the post-global financial crisis era. But, we all know that nobody likes hearing about problems and challenges without also identifying potential solutions—so, it is no surprise that best practices for achieving this unified view of risk also became a hot topic of the conversation.

The New World of Risk

Keynote remarks, led by panel moderator Paul Rowady, Senior Capital Markets Analyst at TABB Group, highlighted the financial technology challenges du jour. The discussion that followed was centered around The New World of Risk, including the topics of regulation, collateral, funding and counterparty risk. Mr. Rowady also pointed out that ‘the new world of risk’ is expected to be as much of a cultural transformation as a technological one.

The panel of industry experts included Sanjay Sharma, Chief Risk Officer at RBC Capital Markets, Ricardo Martinez, Principal at Deloitte & Touche LLP and Satyam Kancharla, Chief Strategy 2/17/2015.

  TABB_Event_Graphic3

Panelists from left to right:  Satyam Kancharla, Chief Strategy Officer at Numerix, Sanjay Sharma, Chief Risk Officer at RBC Capital Markets and Ricardo Martinez, Principal at Deloitte & Touche LLC

During the panel discussion, centralized analytic libraries—in addition to code, metadata, risk model and basically any and every other type of library—were highlighted as paramount to the achievement of a ‘single source of truth.’ Centralized, or unified, risk analytics keep everyone on the same page, explained Mr. Rowady. A ‘single source of truth’ will provide a foundation for enterprise-level risk analytics, while allowing individual business units and trading desks to parameterize models as needed, creating greater centralized control without giving up too much on the flexibility dimension.

 

 A Complex Tapestry of Disparate Systems

The panel was in agreement regarding the importance of improving operational efficiency and centralizing disparate pieces of workflow, while also meeting transparency and regulatory requirements. Overall, the pressing need for market and credit risk analytics to be brought to the enterprise level was also emphasized during the panel discussion.

Mr. Rowady went on to describe the complex tapestry of systems and capabilities confronting today’s financial institutions, citing an example of one particular bank with approximately 6,000 different applications to support, on the banking side of the business alone. It was clear to see how capability gaps and complexity costs continue, and will continue for some time, to create impediments to the achievement of enterprise analytics.

Significant Exposures Will Remain Uncleared for Years to Come

And, what about the future of credit valuation adjustment (CVA)? Will CVA eventually go the way of the dodo bird—the extinct flightless bird once endemic to the island of Mauritius—as Mr. Rowady once questioned? Not so fast, according to his own careful analysis.  His new report, "The Risk Analytics Library: Time for a Single Source of Truth", details the market drivers and technical complexities behind achieving a unified view of risk. His research, based on data from the DTCC trade repository, showed that despite the transformations underway with the movement toward centralized clearing, significant levels of exposures (about $65.8 trillion as of February 2013) will remain bilateral and uncleared for many years to come. And, along with bilateral exposures—CVA will remain critically important! Mr. Rowady also pointed out specifically that nearly $6 trillion in swaption exposures have durations of 30 years or more.

TABB_Event_Graphic1Source: TABB Group

Regulation: A High Level Snapshot

As the discussion continued, Ricardo Martinez, Principal at Deloitte & Touche LLP, highlighted the current snapshot for Dodd-Frank, Title VII, OTC derivatives reform. He provided a high level landscape of where we are with regulation, pointing out that the transformation in the industry is really just getting started; and, that it’s likely going to be about a ten year period of transformation (all and all from the time of the crisis to the time of completion) with the bigger changes in the market yet to come, and the ‘single source of truth’ becoming more and more important.

So, What’s Keeping You Up at Night?

The panel again emphasized the problems with system fragmentation and legacy systems, and the multitude of systems and libraries existing within most financial institutions. One panelist cited, “There is an emerging profession, called model risk management,” which includes managing the risk of the risk metrics, citing the quintessential example of the JPMorgan ‘Whale.’

Satyam Kancharla, Chief Strategy Officer at Numerix, highlighted what he called the three broad categories of change to address the spectrum of challenges discussed by the panel. The first category he discussed was regulation and market structure changes such as central clearing, swap execution facilities (SEFs), and the like. The other wave he described was the increased focus on operational efficiency as a key area of improvement to help financial institutions meet their Return on Equity (ROE) expectations. He talked about how the source of returns and the source of margins increasingly comes from operational efficiency—including optimization on collateral, optimization on trading venue, and beyond that architecting enterprise systems, so as to not spend as much time and energy in ETL. The third wave he discussed was technology and how Moore’s Law on computing and networking has changed how we solve the problem, creating the capability to do more and take advantage of Cloud computing. With all of this coming together, one of the outcomes is shared, scalable, centralized analytics engines.

He also emphasized another important point: the centralization or rationalization of the enterprise architecture does not mean that the individual desks or business units should be forced to use one set of numbers. It is now possible to create a rational analytics architecture with the security, control and reporting that the enterprise needs while simultaneously providing the flexibility that the individual desks and business units desire.

Cloud Computing and the Title Wave of Data

Microsoft Senior Cloud Evangelist, Mike Opal, brought the event to a resounding closure with a passionate discussion about today’s technology imperative. He referred to the fact that the number of mobile devices had already surpassed the entire human population by the year 2008—and that the number of internet-enabled devices would reach around 50 billion by 2020! He highlighted key drivers for cloud growth and the future of Cloud computing.  Mr. Opal referred to “a title wave of data,” pointing out that in 2009 the amount of data zetabytes (ZB) in the world (1,000,000,000 Terabytes = 1ZB) was 0.8ZB and by 2015 was projected to be 7.9ZB. Moreover, by 2020 this number was projected to grow to 35 ZB. This is going to “swallow some firms whole” in that they will not be able to handle these large amounts of data.

TABB_Event_Graphic2

Microsoft Senior Cloud Evangelist, Mike Opal, talks about the technology imperative and the future of cloud computing.

In fact, when it comes to HPC and the movement toward cloud computing in financial services, he cited some relevant case study examples, including current clients like Westpac and Phoenix using the cloud to address risk calculation and regulatory challenges. 

For example, Mr. Opal talked about how Westpac, the largest and oldest bank in Australia, is using cloud computing to make their Monte Carlo simulations run faster. The pioneering bank was very early to market in its use of the cloud, having  figured out a lot privacy and costumer-facing concerns; and, it’s given the bank a significant competitive advantage.

He also cited how Phoenix, the biggest life insurance firm in the UK, has been using the cloud to help solve their Solvency II reporting requirements—given the massive number of calculations required for quarterly reporting. Leveraging the cloud to run these incredibly large jobs, Phoenix said they were, “…operating in a different universe,” with access to 50,000 processors at the flick of a switch.

Want to Learn More?

Watch our related video blog about the growth of cloud in Asia, in which Mike Opal joins Numerix Chief Marketing Officer, Jim Jockle, to discuss how the Asian banking infrastructure is being transformed by cloud adoption.

Also, you may also find it interesting to watch our recent video blog, “The Tale of the Unclearable Trade”, in which Satyam Kancharla sits down with Alex Tabb, Partner & COO of TABB Group to discuss in detail more on how over $65 trillion in exposures will remain bilateral and uncleared for many years to come. 

Blog Post - Jun 23, 2011

Improving Risk Management and Transparency for Structured Products

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