Risk grids for VaR calculation

Background

The Market Risk function of the Financial Markets business unit of a major Australian bank had implemented Algorithmics for calculating and managing VaR. The VaR models were customized to the specifications defined by the bank’s quantitative team. While this gave the risk managers granular control it was also a bottleneck for introducing new products because of the process for compliance and model review which could take up to 8 weeks before configuration of the solution even started.

Net result was a lead time of 26 weeks for introducing new product to the institutional market and a limitation on the range of products that could be offered.

Complications

In order to address the bottleneck, the bank’s quant team was looking at implementing risk grids for VaR calculation. While this was a possible solution given the complexity of extracting the transactional data from Murex and integration with other systems in the technology landscape the project had failed twice.

Approach

Janak Mistry took on the accountability for delivering the project and started with an agnostic approach collaborating with the broader business and technology teams to understand and resolve the issues. Solution options explored were:

• Process re-design – this was not acceptable to the business even if it resulted in reduced time to market because of the need to maintain the process and ongoing system configurations.
• Risk grids – this is the solution that was required by the business but had failed twice before due to application and integration complexity.

Upon gaining insights Janak Mistry led and worked closely with the broader business and technology teams to ensure:

• Risk grids modeling approach was clearly articulated, tested and data requirements defined.
• Data extract requirements were fine tuned to ensure that existing Murex technology infrastructure was able to support and sustain them.
• Right module within Algorithmics suite identified and tested to avoid custom development.
• Holistic solution architecture and specifications were defined before starting implementation to minimize risks and surprises.

Outcome

• Ability to offer structured products to institutional clients enabled and all restrictions on the range of products that could be offered removed.
• Speed to market for new products reduced to under six weeks from over 26 weeks.
• Operational savings of $775,000.00 achieved annually as a result of process deprecation.