High-performance risk management: Is the infrastructure ready?
Now firms can access near real-time decision making that will transform the financial industry
The painful economic shocks and their lingering repercussions in the past three years have made the truth inescapably clear: Financial markets have lacked the speed and agility they need to assess their various risk exposures to catastrophic changes – so-called "black swan" events. The International Monetary Fund (IMF) estimates that total bank write-downs for the period could exceed a shocking $2 trillion.
As the past few years have shown us, many firms still can't complete the critical stress-testing scenarios they need to revise when market conditions swing dramatically. They can't perform the pre-trade analytics to assess projected risk/reward – before the opportunity disappears. And they can't recalculate fund valuations and strategies on the fly. The firm gets relegated to a second-tier player, unable to keep pace with the speed and volatility of today's markets, and unable to seize short-lived opportunities to compete more effectively. These shortcomings create major difficulties, including:
The fact is, sophisticated models and technology have fundamentally transformed how financial services markets operate. In bygone days, market risk was a day-end event. In a 24/7 trading world, portfolio diversification no longer protects against catastrophic market failures. Assets become highly correlated and markets move downward in tandem.
Today, firms must assess market risk in time frames approaching the microsecond. A trader has less than a second to know what a proposed trade will do to the risk profile of the portfolio. Just 25 years ago, fund managers boasted of computer systems that could handle 1 million trades a minute. Today, the new standard is 1 million trades per second. It's an arms race – and firms need extremely low-latency trading to quickly assess aggregated levels of exposure across counterparties, markets and instrument types using stress-testing scenarios, pre-trade analytics, funding strategies and valuations. Without the ability to handle both business-as-usual and extreme cases when assessing risk, the firm faces a soon-to-be insurmountable competitive obstacle and possible severe trading lossses.
FROM 18 HOURS TO REAL TIME
To grasp the power of high-performance risk analysis and understand its impact on financial services, consider a simple portfolio re-pricing. In a recent public demonstration, a complex portfolio of 44,583 financial instruments – bonds, foreign exchange contracts and more – was valued over 100,000 market states and two time horizons. Computing portfolio value at risk (VaR) typically takes 18 hours or more on a single server.
SAS High-Performance Risk completed the 8.8 billion VaR computations in less than three minutes using in-memory analytics. From there, portfolio stress testing on the effects of interest and foreign exchange rate changes could be done in real time, helping bank analysts and executives better predict and manage risk exposure and fine-tune their responses to changing market conditions.
Applying high-performance computing to risk management
The global economy is based on $100 trillion of investable assets, a figure that is expected to be five times as large in the next 15 years. What's more, the number and complexity of vehicles to manage and invest that capital will become increasingly intricate and broad – from private equity to statistically driven arbitrage across multiple product lines – all to create a more efficient market that spreads wealth and prosperity to every corner of the earth. But it also means that the stakes are higher and the challenges are greater than ever before.
The requirements to comply with increased regulation – while still adding value, delivering a more complete view of a firm's risk/reward profile to meet stakeholder needs and supporting the decision-making process – present a significant challenge to all firms. Efficiency and transparency are now nonnegotiable. The risks are so critical that properly managing them and controlling them is the new imperative for financial services. We will see leaders move ahead with new infrastructure that not only offers the ability to manage change but also better understand and then respond to micro and macro financial markets shocks. Firms will have a more complete view of the risks that underpin the senior management's strategic appetite for operational risk across business units. Collaboration and a firmwide risk management culture must be supported by a common framework powered by high-performance analytics architectures. This improves the position of financial services firms to respond to the stiff challenges that await, learn the lessons of predecessors, and avoid these and other pitfalls in the future.
Bio: James Wolstenholme is Hewlett Packard's Global Director of Capital Markets. He is a seasoned financial services industry professional with more than 25 years of banking and capital markets business and technology experience.
This story appears in the First Quarter 2011 issue of