Watching the risk Contract confirmation WHAT'S NhwS Issue 9 September 1996 info exchange 5 As the global financial markets evolve an ever-increasing pace and complexity, powerful tools are needed to assess and prudently manage the considerable risks that the bank assumes every day.The latest addition to the bank's systems' armory is a software program called RiskWatch. Developed by Algorithmics of Canada, RiskWatch makes it possible to constantly stay abreast of the bank's value at risk (VAR). Within the banking community, the Algorithmics system is regarded as being among the most precise presently available. Ironically, for the time being at least, it has yet to replace the considerably less sophisticated assessment models that are promoted by domestic and international regulators for official reporting purposes. BEST PRACTICE IRiskWateh is therefore being implemented on the 'best practice' principle in order to generate an accurate internal picture of global market risk for the network as a whole. The first step is installation at all treasuries where options are traded - which include New York, London, Frankfurt, Rabo Securities, Singapore, and Utrecht. At present, its primary uses are in the securities trading operations and in foreign exchange. Among the systems' important future uses, besides value at risk assessment, is the generation of 'sensitivity reports': the determination of what might happen to the price of a portfolio if the value of its underlying asset changes by (say) 10 to 15 percent while there is a simultaneous and significant shift in market volatility. PROGRAMMING CHALLENGES The new software has two components. The first, RiskWarehouse, is a collection of all historical market data as well as information about the bank's positions. The second, RiskWatch, is the calculating engine. It is designed to filter information Signing up for Provida. (F.l.t.r: top row) Pauline van Leeuwen, Frans Slootman, Ron Dijkstra, (seated) Truls Nielsen, Dagfinn Loen en Erik van den Dungen. Utrecht has finalized an important contract with the Norwegian-based software firnt Provida for a new system xlesigned to automatically confirm Pnancial transactions in foreign exchange, money markets and (eventually) derivatives. 'It seems incredible, but these transactions are nowadays processed by hand and confirmed with letters sent by old-fashioned post,' says Erik van den Dungen, who heads the financial markets back office in Utrecht. 'This can take weeks and there are often misunderstandings about the agreed terms and conditions. By providing near-instant confirmation, and reducing our operational risks, this new software will improve our reliability as a counterparty for clients.' One of the new system's unique selling points is that it can automatically communicate with most others already in use on the market. It also controls the costs of each fee-bearing transaction. In a further stage, it will be mobilized in telebanking to provide near-immediate confirmation for transactions conducted by telephone with small business wholesale clients. Installation is scheduled for mid-September. Once a software bridge is built to the Atlas system, probably by the start of November, it will become operational. Talks are already underway with Provida on extending the software to the Rabobank International network as a whole. extracted in real time from RiskWarehouse, which is in turn fed by such source systems as Devon, Atlas, and others. One of the key programming challenges is to insure that the source systems can quickly and flexibly feed RiskWarehouse. 'If you're applying the software to a financial transaction, you have to very precisely determine which attributes of that transaction have to be fed to RiskWatch if you want to insure that it is evaluated correctly,' says Jan Bos, who is managing the RiskWatch implementation. CALCULATING VAR It is also important to have realistic expectations of what the system can and should not yet do, especially in the early phases of its implementation. For more complex derivatives, with many interlocking variables, a special desk still evaluates risks with its own calculation programs, for example. Moreover, for assessing the risk associated with linear products that are comparatively simpler, such as interest rate swaps and forward rate agreements (FRA's), it is sensible to keep the software complexity to a minimum. Rabobank software experts Elles Jongenelen and Simon van Leeuwen have designed an internal Risk Assessment Model (RAM), which is more spartan and less costly than RiskWatch and which will be used to calculate VAR in all those branches that are still uninvolved in options trading. 'The key to success is to match the appropriate level of program complexity to the level of risk, and to insure that all of these software programs can communicate with each other efficiently,' says Jongenelen. In mission- critical systems like risk assessment, 'you must always remember that a model is only as good as the information that is used to feed it.' looking ahead September 16/18 F&A Account managers meeting 18/20 Tradefinance managers meeting 23/27 Introduction new international staff 22/24 Export finance meeting Studies: World Cotton Market World Beer Sector October 6/8 Conference, Singapore Studies: F&A in East Asia (six parts)

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blad 'What's news' (EN) | 1996 | | pagina 5