This white paper outlines a systems architecture for market risk managers that provides for speed, scale and operational integrity, without prejudice to its capacity for flexibility and change.

Download complete A Platform for Effective Risk Management white paper PDF. (This document requires the free Adobe/Acrobat Reader.) 14 pages, 200KB

Introduction

Effective risk management is impossible without effective information technology. The IT industry has responded accordingly with risk management conferences crowded with salesmen demonstrating risk management systems.

But are these technologies truly effective? For many real-life risk managers, whose job it is to identify and to quantify the rapidly changing risks facing their companies, risk management systems are not facilitators but are at best a constraint, and are at worst a cause for concern. For many trading desks developing new business, the inflexibility of risk management systems is one of their greatest impediments. Given the billions of dollars of recent investment in risk management information technology, these results are disturbing.

The purpose of this paper is to suggest that risk management information technology has become divorced from risk managers and their daily needs, whose mundane reality is often a million miles away from the ‘advanced risk analytics and scenario capabilities’ which risk management IT vendors may seek to deliver. This rift is the most important reason for the IT profession’s failure to deliver value.

We seek to heal the rift by re-stating the real technology requirements of risk managers and by outlining the key features that risk IT must provide if it is to be effective. We will then compare these features with well-known risk management offerings.

The approach proposed by this paper is based on three principles.

Breadth. Our scope spans all the functions of a market risk management group without exception. Breadth of coverage is crucial to the effectiveness of any risk management IT system. Otherwise, risk managers have to expend a disproportionate amount of valuable manpower on relatively unskilled activities – such as investigating and reporting instrument or reference data problems - activities that are not addressed by the sophisticated risk analytics and scenario functionality provided within vendor risk management systems.

Use of tight and/or loose coupling. One the biggest sources of tension in the risk management IT world is the conflict between the need traders and risk managers have for innovation and flexibility and their equally-important requirement for mature, well-tested risk systems with rich audit trails. Risk managers require an architecture in which inputs and outputs can be tightly-coupled where appropriate (e.g. when interfacing to market data sources or transaction systems which are stable and permanent) or loosely-coupled if required (e.g. when providing ad hoc computational results to risk managers via Excel functions).

Promiscuity. No real-life risk manager can solve all his or her problems with a single data vendor or a single analytics provider: they require the capability to be flexible, pragmatic and promiscuous. The “glue” with which they integrate different data sources and different analytical tools under a unified umbrella is therefore just as important to them as the individual components.

Having set out the three guiding principles, we will now explore the IT needs of a typical market risk management group, the key elements required to meet those needs and how mainstream risk management solutions match up.

Contents

• Introduction
• IT Requirements of a Typical Market Risk Management
  • Key questions risk managers need to answer
  • Answering the questions
  • Using the computation results
  • Summary and review
• Key Elements of the Market Risk IT Architecture
  • Market Reference Data Database
  • Historic Market Data Database
  • Market Data Update Service
  • OTC Reference Data Database
  • Position Database
  • Market Data Scenario Generation Service
  • Valuation Model Library
  • Pricing Service
  • Risk Calculation Service
  • Risk Management Database
  • Reporting Service
  • Task Orchestration Service
• Implications for Providers of Risk Management IT

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Download A Platform for Effective Risk Management white paper PDF. (This document requires the free Adobe/Acrobat Reader.) 14 pages, 200KB