Risk exposure in capital markets – real time

By Mark Moorman, SAS

In the capital markets world, money never really changes hands; it only passes through them, and then only digitally. These markets are fast, immense, complex networks of extremely large amounts of monies or goods. In one single day on the London stock market, more than 700,000 trades may occur at a value of over £4 billion. In this environment, understanding the value at risk (VaR) becomes a complex, timely problem.

Moorman sascom-2013q3-
Mark Moorman, Director of the Financial Services Practice for SAS EMEA and Asia Pacific Operations.

One large UK bank decided it was time to evaluate its risk across all of its trading books. Being able to consolidate this VaR – and get the data within minutes – would give the bank an incredible edge over competitors that continue to trade on individual books and are working from VaR data as much as two days old.

Major challenges

As with any risky, fast-paced environment, the right information at the right time makes all the difference; even if that environment includes thousands of orders every second. Some of the current problems faced by this bank are:

  • Reports are not generally available until one day after the transaction.
  • Inability to readily understand the timeliness of the underlying data being presented.
  • Data from one processing system to the next have no commonly agreed-upon definition.
  • Data is aggregated with no drill-down capability.
  • No commonly agreed-upon official snapshot of trades or reference data for consistent enrichment.
  • No understanding of what input parameters are used for the underlying calculation.
  • Spikes or exceptions in the data are not automatically identified.
  • Users cannot create watch lists of specific trades or subjects of interest.


SOLUTION: High-performance risk

This long list of challenges boils down to a lack of access to relevant data and the inability to analyze the data appropriately. With no standardized view of the day-old data, it was just too hard to make accurate, timely decisions.

It was time for a change, and the bank decided to deliver a high-performance, automated VaR calculation and reporting process for market risk managers. This would allow the managers to spend more of their time evaluating risk rather than investigating data discrepancies. Of course, this was a major undertaking. To do this, they needed to focus on four major issues:

Timeliness   /   Transparency   /   Accuracy   /   Granularity

The bank built a system that would allow them to aggregate the data on the fly into a single repository. So instead of waiting until the following day to get the latest reports, the risk management team can have an up-to-date view of their risk exposures on an intraday basis using the latest blended view of interim and official risk figures to help inform the business decisions in a timelier manner.

It was then possible to use drill-down graphing and analytic tools to make sense of this complex environment – all before the closing bell – and change course if the VaR exceeded their risk appetite.

Making decisions on the fly

To make its goals a reality, the bank needed to use two new technologies. The first is event stream processing (ESP), which allows on-the-fly decisions in milliseconds. The second is a high-performance risk solution, which uses commodity hardware to distribute processing across a grid of computers, allowing access to granular data in seconds.

ESP allows complex business decisions to be made on massive amounts of data in real time. The bank can now evaluate every trade – singularly – before the deal is made, and then accumulate it with other current trades to evaluate trends. Finally, the bank can synchronize this data with the global corporate data.  In fact, this technology means the bank has:

  • Continuous queries on flowing data (with incrementally updated results).
  • Very low (max) event processing latencies (i.e., microseconds or milliseconds).
  • High volumes (>100,000 events per second) of data evaluated.
  • Derived event windows with retention policies.
  • Memory constrained for performance (i.e., bounded state).
  • Predetermined data mining, decision making, alerting, position management, scoring, profiling, etc.
  • Event out-of-order handling to ensure ordered source streams.

But it turns out VaR is no longer an adequate measure of risk. Nor is it capable of informing senior management of the true nature of their market and credit risk exposures.

For full transparency and the level of detail required by the business, many different types of analyses are now required including, but not limited to: economic VaR, sVaR (stressed value at risk), transient concentrations, extreme value, abnormal correlations and stress tests.

Advanced, high-performance analytics lets risk managers quickly and easily explore a wide range of scenarios to help both senior management and the business be better informed about the true nature of the exposures on their trading books.

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