Financial Risk Management
The Technology of Risk Following P. Jorion, Value at Risk, McGraw-Hill, Chapter 18
Daniel HERLEMONT
System range from simple spreadsheets to complex Enterprise Wide Risk Management Systems More than 120 Software providers Implementing a global Risk Management System can be a major challenge
Daniel HERLEMONT
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Software for Financial Institutions 3 types of systems: Trading Systems Back Office Systems Risk Control Systems (also called middle-office systems)
Systems operates on different plateforms, with different requirements, ... The $1.1 billion loss incurred by Daiwa has been partly blamed on an inadequate back office system taht prevented the bank from getting a complete overview of its positions Daniel HERLEMONT
Compoenents of a risk management system
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The Need for Integration Too disparate systems for risk management Challenge: Integrate Front, Middle and Back offices automation adequate technologies (Object/Relational Databases, JAVA, ...) Use of Standards reference data repository that contains all positions single source for price quotes
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Basic decisions
Goal of Risk Management Base currency Time horizon (embedded options) Economic or Accounting approach Admissible risk Stop losses or other actions Daniel HERLEMONT
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Risk Management System Can NOT Predict future Identify business opportunities Be always right! Risk Management System Can
Predict loss, given event Identify most dangerous scenarios Recommend how to change risk profile
Daniel HERLEMONT
Use of Standards Is your order management system compatible with the FIX standard? Country Yes No No, but it will be soon (within 6 months) No answer
France 0% 88% 13% 0%
Germany UK 25% 25% 50% 0%
27% 27% 27% 18%
Others Europe 31% 22% 23% 39% 23% 25% 23% 14%
Does your company plan to implement a single message standard as part of an STP strategy? Country Yes, based on ISO 15022 Yes, based on ISO 15022, XML version Yes, but during a fairly long transition period, we will continue to handle the Swift ISO 7775 standards in addition to ISO 15022 Yes, but certain operations with third parties are subject to proprietary protocols that we cannot control No, because we think that the existence of distinct standards is the natural consequence of the development of new technologies Don't know No answer
France 0% 25%
Germany UK 25% 25%
18% 9%
Others Europe 23% 17% 0% 11%
0%
0%
0%
0%
0%
25%
0%
27%
15%
19%
0% 50% 0%
0% 25% 25%
0% 45% 0%
15% 15% 31%
6% 33% 14%
In the area of financial information, do you think that the MDDL language (Market Data Definition language) will be widely and quickly adopted? Country Yes No Not familiar with that language No answer
France Germany UK 13% 0% 13% 0% 50% 100% 25% 0%
Others 0% 27% 64% 9%
8% 23% 62% 8%
Europe 6% 19% 64% 11%
source EDHEC
Daniel HERLEMONT
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Technologies Developments langages - main choices
Servers
11% 3% DB2
Mainframe
28%
SQL Server
6%
Sybase
7% Unix (HP)
Unix (IBM)
Unix (Sun)
Windows 2000
14%
33%
Oracle
40% 30% 20% 10% 0%
37% 14%
6%
RDBMS
55%
Windows NT
60% 50% 40% 30% 20% 10% 0%
6%
ASP
6%
AWCobol
C++
6%
Powerbuilder
8%
Dot Net
8%
Business Object
17%
java
19%
SQL
19%
Visual Basic
20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
source EDHEC
Daniel HERLEMONT
Risk Management Industry
In house systems Outside/Outsourced Systems Has your company completely outsourced the valuation, administration and accounting functions for the mutual funds that it manages? Europe Country yes, to a group subsidiary 25% Yes, to an independent external service provider 17% No, we handle those functions ourselves 53% No answer 6% source EDHEC
Daniel HERLEMONT
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Off the Shelves Systeems
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The Need for integration
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Risk Management Systems
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Measurement Tools CATS, CARMA
$400K/yr
Algorithmics, Risk Watch
>$1M
Infinity
>$1M
J.P. Morgan, FourFifteen
$25K/yr
FEA, Outlook
$18K
Risk Manager, RMG
$30K/yr
Theoretics, TARGA
$75K
Bankers Trust, RAROC
$50K/run
INSSINC, Orchestra
$25-75K
Daniel HERLEMONT
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VAR Reports VAR reports should be easy to interpret by their intended users Senior Managers firm wide P&L global VAR
Risk Managers + VAR Limits Daily VAR Backtesting results ....
Traders real time information Daniel HERLEMONT
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