Enterprise-wide risk management & Internal auditing:How can technology help?Rik van de Weerthof
Program Manager Risk Management
SAS Europe, Middle East and Africa
Copyright © 2000 , SAS Institute Inc. All rights reserved.
Agenda Determination of topic, goals and challenges How can technology help?:
success criteria practical implications and advantages
Agenda Determination of topic, goals and challenges How can technology help?:
success criteria practical implications and advantages
Topic:Enterprise wide risk management
ERM is the process of identifying, measuring and controlling the effect of internal and external factors that (can) negatively affect the value of a company.
Goal:Managing the ERM Process
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Goal:Managing the ERM Process
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Challenges:The 6 biggest issuesCombining different risk typesTimeliness of figuresGuaranteeing accuracy of figuresInterpreting the analytical resultsRunning out of (computer) steamQualified personnel
Combining different risk types
Different risk types:•credit risk•market risk
•FX risk•IR risk
•legal risk•operational risk•etc.
Different risk factors:•counter party default•market risk
•FX rates•Interest rates
•legal structure •fraud, human errors
?Different risk measures:•Credit VaR•Market VaR
Total risk < sum of all risk types
Timeliness of figuresMain Entry: time·lyPronunciation: 'tIm-lEFunction: adjectiveInflected Form(s): time·li·er; -est1 : coming early or at the right time2 : especially suitable for the time <a timely book>
- time·li·ness noun
Guaranteeing accuracy of figures
VaR = 150 Mln with 95% confidence
VaR = 400 Mln with 98% confidence
Guaranteeing accuracy of figures
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
Confidence level
VaR
95,0% 99,9%
Interpreting the analytical results“ Dear CEO:
Our Value at Risk is USD 5,000,000!”
“ Dear Auditor:
What the !@&*# does that mean for my company?”
Running out of (computer) steam 5,000 trades per day 100 positions 100 risk factors Suppose you want to do a Monte Carlo simulation
with 100,000 replications 100 * 100 * 100,000 = 1,000,000,000 calculations
Challenges:the 6 biggest issuesCombining different risk typesTimeliness of figuresGuaranteeing accuracy of figuresInterpreting the analytical resultsRunning out of (computer) steamQualified personnel
Agenda Determination of topic, goals and challenges How can technology help?:
success criteria practical implications and advantages
How can technology help?:Success criteria All major analytical techniques, within a single
environment Full parametrisation of analysis attributes Portfolio-driven data model Full Repricing Incorporate new instruments and pricing models Create and adapt instrument and model attributes Analyses integrate different risk types Traceable calculation processes with user intervention Market modeling Clear and concise drill-down reporting Web reports / GUI Data Management
Design specifications All major analytical techniques, within a single environment No need to jump between specialist packages..
Any number of different analyses can be
performed in a single run.
Design specifications Full parametrisation of analysis attributes Users must be able to customize the
specifications of the various parts of the risk analysis process.
Users must be able to mix and match different
specifications as needed for different analysis
projects.
Design specifications
Portfolio-driven data model
No fixed data model.
Ability to configure data model from an existing
database schema.
Ability to process data “as is”.
Ability to pull data together from numerous
heterogeneous data stores.
Design specifications
Incorporate new instruments and pricing models
New instrument types configured easily.
User selects and installs pricing models.
No restrictions on pricing models.
Any number of vendor supplied or user written
pricing libraries can be installed.
Design specifications
Analyses integrate different risk types
Market risk and credit exposure handled
within the same framework.
A unified and logical architecture:
Consistent use of data definitions, calculation
methods, representation of figures, …
(Un)conditional risk measures
Design specifications
Trackable calculation processes with user intervention
Not a black box.
User can define and control key calculations.
Intermediate calculations can be stored and
examined for additional processing or validation
checks.
Design specifications
Market Modeling
Powerful nonlinear statistical modeling features
can be used to specify and fit models of market
dynamics.
Design specifications Clear and concise drill-down reporting All analytical results can be broken down or
aggregated.
You can slice and dice the risk measures for a
portfolio across any set of dimensions that you
choose to define (by region, counter-party,
instrument type, …).
Marginal and Conditional risk measures.
Design specifications
Data Management A true risk management solution has extensive
possibilities for data access and data processing. Must include extensive back-end data
warehousing software.
True differentiators...Openness, extensibility, flexibilityData management Clear and concise reportsState of the art risk engineMarket modeling
leading to true business advantages
Agenda Determination of topic, goals and challenges How can technology help?:
success criteria practical implications and advantages
“To manage a business well is to manage its future; and to manage its future is to manage information.” Marion Harper
“Managing risk is managing the future.”Rik van de Weerthof
+
=
“Managing risk = Managing information.”
Some quotes...
time-oriented data coming from multiple applications according to subjects meaningful to the
business driven by the need to inform decision
makers
Technology helps organising
Operational Systems
Get data IN
Large volume of Simple transactions
Static applications
Automates Routine Tasks
Business Intelligence Systems
Get information OUT
Small number of Complex queries
Dynamic applications
Enables Creativity
Technology can fulfill an operational or a business intelligence role
Product
Distribution
Credit rating
Geographical
Time (to maturity)
Counter party Type
Loans portfolio
Option book
Equity book
Ctpty
Ctpty Type
All Ctpty
>A
B-A
C-B
Junk
<1 yr
3-5 yr
Office Country Region Enterprise
Daughter
Enterprise
1-3 yr
5-10 yr>10 yr
Technology organises the information dimensions
Technology supplies insight required for taking appropriate RR decisions
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The Power to Know™