From end-of-day to real-time risk management

Mikael Sörböen, BNP Paribas 12th September 2014

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Explain the title “risk management”, “end-of-day”, “real-time”

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capital markets trading activities

“risk management” market risk

counterparty risk “end-of-day”

“real-time”

E-o-D Risk Management Functional Architecture

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Risk indicators 10+ source systems 100k daily feeds 800m rows per day

Static data Counterparties Underlyings Mappings

Calibration Correlation Volatility Norms

Market data Spot, volatility levels All assets (50k+ simulated assets) Values, curves, surfaces

Deals 10+ source systems 2m stock / 100k per day 100+ attributes “Smart deal” representation

Monte-Carlo internal models for capital VAR / Stress VAR (8k nodes, 90k calculations) Counterparty exposure (38k c’parts)

Limit monitoring Automatic monitoring of all market risk limits (900k) Market risk limit management Counterparty excess management

Risk analysis & reporting Multi-dimensional drill-down capabilities Excel add-in to produce reports Rapid time to market for new views User-defined views “Position age” to help users

Stress testing 10+ daily counterparty stress scenarios Full-reval and “greeks” based market risk stress Market risk stress per counterparty

P&L items CVA calculation Market risk reserves

All business lines

COUNTERPARTY & MARKET

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E-o-D Risk Management “Position Age”

E-o-D Risk Management Technical Architecture

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“big-ish data-base”

GET DATA 10+ sources 100k feeds

500 GB

2E-o-D

Data roll

1

“data management”

TINY 3 days

MIDDLE 50 days

HISTO 1250 days

0

pos (800m) 3 aggregates date split multiplex

40 TB

LOAD + AGG

4

“Monte Carlo calculations”

TRANSFORM 3

SCRIPT ENGINE

business logic 50k jobs 250 types

MATCH ENGINE

id matching build DB file

90k jobs

CALCULATION TRIGGERING 5

EXTRACT – CALCULATE

Value-at-risk

Limits Reserves

150k extracts

6COUNTERPARTY

EXPOSURE

1m PV per deal 1.5m deals

10+ scenarios From 6000 cores

to 25 GPUs

7

MRfleXTM – besoke BI layer DEPENDENCY MANAGEMENT

5

USER INTERFACES

2000 users, 40 sites 50k requests

On-demand services Excel add-in

8

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E-o-D Risk Management Drill-down analysis

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E-o-D Risk Management “Nodes and Risk Factors”

“leaf node”

“risk factor”

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E-o-D Risk Management Zoom on calculation triggering

VaR calc [Leaf node, risk factor]

Exposure calc [Counterparty,

risk site]

CALCULATION TRIGGERING

Data Tracker

Event Engine

Sims (E-o-D)

Mapper (E-o-D)

Risk feeds (Load + Agg)

Deal static (11pm-9am)

due to agg

FO PV (Match)

due to agg

Sims (E-o-D)

Credit params (E-o-D)

Counterparty static

(2am – T or 11pm for T-1)

MA / CSA coverage

(2am – T or 11pm for T-1)

assign deals to counterparty

assign deals to MA / CSA

Real-time Risk Management What’s the story?

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compliance & control Pre-trade checks against counterparty risk lines Compliance with trading mandates Detection and prevention of abnormal trading patterns (market risk) Incremental initial margin requirements from CCPs Control of market risk exposures per counterparty net of collateral resource management

Funding impact – initial margin Cost of capital, allocation Risk reduction strategies

Cost of CVA (and DVA) client service & transparency Inform clients ex-ante on risk exposures - Per transaction or full portfolios including stress What-if scenarios, marginal impact on IM not just a technology challenge …

Mandate check Can the trader make this trade?

Client position Greeks and stress for overall portfolio and per trade

Market risk limit check Does trade respect intra-day limit?

Counterparty checks Is a limit available for this trade? Compute incremental CVA / DVA Compute incremental capital

Funding Liquidity impact Incremental initial margin

real-time risk platform

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Real-time Risk Management Some of the challenges…

deal details greeks,

stress

pricing request

OK / NOK CVA, K

Client position

Clean static data Product, portfolio, currency, counterparty, MA, CSA, pricing representation, credit parameters

Market data What market data to use for real-time calculations? Consistency with “stock” positions Periodic recalculation of whole perimeter?

Which risks? Try to compute all E-o-D risks? If not which subset?

Timing and completeness Synchronisation of trade and hedge Capture all trades and events

latency –

µs, ms, s, m? Pre-trade?

Really? Electronic?

From end-of-day to real-time risk management Key reflections

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sharpen up the requirements, get buy-in not simple

extension, different architecture

clarify who does what? seize the

opportunity to simplify

Questions?

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