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)